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Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 08:06 AM   #1
 
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Cashed in my IBonds today - as rate sink sets in.

I cashed my IBonds out today as I had collected the last of the 6.5% or so interest rate. My average rate for the 1 2/3 years I owned them was about 4.2% - Not too bad, but it will soon be getting some of that Emigrant 5.15%
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 08:07 AM   #2
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Re: Cashed in my IBonds today - as rate sink sets in.

Quote:
Originally Posted by Cut-Throat
I cashed my IBonds out today as I had collected the last of the 6.5% or so interest rate. My average rate for the 1 2/3 years I owned them was about 4.2% - Not to bad, but it will soon be getting some of that Emigrant 5.15%
CT, if you are still interested in inflation-adjusted bonds, check out OSM and ISM. I think whichever is cheaper (dollar price) is a good way to go.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 08:58 AM   #3
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Re: Cashed in my IBonds today - as rate sink sets in.

What are the downside risks of OSM and ISM? I havent looked at them much, arent they mortgage based bonds? Arent there some decent risks associated with these and what conditions would trigger them?

I just ask because you've bought them for some time but I havent heard about the downside aspects.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 09:23 AM   #4
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Re: Cashed in my IBonds today - as rate sink sets in.

They are not MBS. These are senior unsecured debt issued by Sallie Mae. They pay interest monthly equal to YOY change in CPI-U plus a margin (2% for OSM, 2.05% for ISM) and they mature in early 2017 (OSM) and early 2018 (ISM). They are not callable prior to maturity.

The main risks to these bonds are:

- Changes in real interest rates on debt of similar maturities. The best benchmark is probably 10 year TIPS.
- Credit exposure to Sallie Mae. No question, there is credit exposure here, but it is to a an A rated financial institution that is highly unlikely (IMO) to experience any financial difficulties.
- It is possible for there to be no coupon in any given month, but it would require an annual YOY CPI-U change of -2%. Coupons are paid monthly, so this would likely be a short-lived issue.

In return for the (very minor, IMO) credit risk, you get a YTM of about 3.5% over CPI at current prices. If these things start scraping against 22 again, YTM approaches 4% over CPI.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 09:38 AM   #5
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Re: Cashed in my IBonds today - as rate sink sets in.

So if rates drop, they'd take a ding like a 10 year tips. If there were massive student loan defaults, that could be bad. Sounds like deflation also eats your lunch.

Sounds not so bad, unless you're a believer in upcoming deflation.

Whats the tax situation on them?

Whats the difference between the two?
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 09:42 AM   #6
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Re: Cashed in my IBonds today - as rate sink sets in.

Taxable as any corporate bond. Differences as follows:

OSM
- 3/2017 maturity
- 2% spread over CPI
- $200MM outstanding

ISM
- 1/2018 maturity
- 2.05% spread over CPI
- $75MM outstanding
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 09:52 AM   #7
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Re: Cashed in my IBonds today - as rate sink sets in.

Oddball question. Any funds that hold these (and their ilk) for better diversity and simplicity?
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 10:04 AM   #8
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Re: Cashed in my IBonds today - as rate sink sets in.

Not that I am aware. Closest thing would be a TIPS fund, I guess.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 10:05 AM   #9
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Re: Cashed in my IBonds today - as rate sink sets in.

Hmmm...sounds like a great opportunity for someone looking to open up an inflation indexed bond fund, with tips and corporates mixed together. Juicier yield, more diversity.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 10:10 AM   #10
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Re: Cashed in my IBonds today - as rate sink sets in.

Quote:
Originally Posted by Cute Fuzzy Bunny
Hmmm...sounds like a great opportunity for someone looking to open up an inflation indexed bond fund, with tips and corporates mixed together.* Juicier yield, more diversity.
That'd be fine, except there aren't many inflation-indexed corporates out there. I suppose you could do TIPS plus credit default swaps, but that ould be awfully hard to explain to retail investors.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 10:15 AM   #11
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Re: Cashed in my IBonds today - as rate sink sets in.

Just received a tasty check from ISM the other day. It's up in value a little bit as well. * *Brewer, not to get off track with the thread but what do you think about ACAS? It certainly is not a substitute for i-bonds but if one is willing to take on more risk, what do you think? It's yielding around 9.3% and standard & poors has it rated at a strong buy. I own a little.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 10:29 AM   #12
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Re: Cashed in my IBonds today - as rate sink sets in.

ACAS and its brethren can be a great choice, but it is the sort of thing I prefer to buy when the blood is running in the streets. They own what amounts to an illiquid portfolio of junk bonds. Not something I am eager to buy given the complacency and low spreads in the junk market.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 02:21 PM   #13
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Re: Cashed in my IBonds today - as rate sink sets in.

Quote:
Originally Posted by Cut-Throat
I cashed my IBonds out today as I had collected the last of the 6.5% or so interest rate.
Me too!

After visiting 5 bank branches I finally found one who would give me the signature guarantee if I opened a CD with them. Funny thing is that the same bank (different branch) told me that I had to have the account open for 6 months. So much for policies and procedure.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-01-2006, 08:47 PM   #14
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Re: Cashed in my IBonds today - as rate sink sets in.

What are the advantages of ISM over ishares TIP?
Currently
ISM yield is 6.0%
TIP yield is 6.7% (average coupon is 2.56)
What am I missing?

Mike
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-02-2006, 07:56 AM   #15
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Re: Cashed in my IBonds today - as rate sink sets in.

Quote:
Originally Posted by brewer12345
Taxable as any corporate bond. Differences as follows:

OSM
- 3/2017 maturity
- 2% spread over CPI
- $200MM outstanding

ISM
- 1/2018 maturity
- 2.05% spread over CPI
- $75MM outstanding

Brewer, I know you're a fan of ISM and OSM, but I have to come in again as a spoiler on this

I can go buy a 10 year TIPS that....

1. Yields 2.36% (real) as of today
2. forget A credit quality has gilt edge credit quality
3. Many TIPS specific issues have a larger weekly float than ISM and OSM have outstanding
4. Are free from state taxes

And I would buy these instead because of why?

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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-02-2006, 08:17 AM   #16
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Re: Cashed in my IBonds today - as rate sink sets in.

Quote:
Originally Posted by saluki9

Brewer, I know you're a fan of ISM and OSM, but I have to come in again as a spoiler on this

I can go buy a 10 year TIPS that....

1. Yields 2.36% (real) as of today
2. forget A credit quality has gilt edge credit quality
3. Many TIPS specific issues have a larger weekly float than ISM and OSM have outstanding
4. Are free from state taxes

And I would buy these instead because of why?
If ISM and OSM were trading at par, I would sell all I owned and never look back. But they are selling at a significant discount to par, which offers the investor a real yield of over 100BP greater than TIPS at current CPI levels. If we go into a nasty inflationary sprial and CPI shoots up a lot higher, the spread over TIPS will be even higher due to the CPI multiplier effect (you get CPI plus a spread on face value, but you paid ~90% of par, so your actual yield is CPI + 2.05% times 1.11). If TIPS real yields drop, these things will appreciate as well. I view the extra spread on these things are very generous compensation for a minimal amount of credit risk. You also do not have to deal with the "phantom" taxable income that TIPS generate.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-03-2006, 01:33 PM   #17
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Re: Cashed in my IBonds today - as rate sink sets in.

So, brewer, why do you think OSM and ISM dropped so far from par in April, and then again in June?
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-03-2006, 01:40 PM   #18
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Re: Cashed in my IBonds today - as rate sink sets in.

Quote:
Originally Posted by bongo2
So, brewer, why do you think OSM and ISM dropped so far from par in April, and then again in June?
PMS
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-03-2006, 02:02 PM   #19
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Re: Cashed in my IBonds today - as rate sink sets in.

Quote:
Originally Posted by bongo2
So, brewer, why do you think OSM and ISM dropped so far from par in April, and then again in June?
TIPS spreads widened I believe, plus these things trade very strangely, likely due to lack of liquidity. If you are patient, you can get a good deal when they slip down for no obvious reason.
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Re: Cashed in my IBonds today - as rate sink sets in.
Old 08-03-2006, 05:04 PM   #20
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Re: Cashed in my IBonds today - as rate sink sets in.

Either that or theres something you dont know about. Yet.
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