Cashed in my IBonds today - as rate sink sets in.

[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 too bad, but it will soon be getting some of that Emigrant 5.15%

 

[brewer12345]

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.

 

[cute fuzzy bunny]

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.

 

[brewer12345]

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.

 

[cute fuzzy bunny]

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?

 

[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

 

[cute fuzzy bunny]

Oddball question. Any funds that hold these (and their ilk) for better diversity and simplicity?

 

[brewer12345]

Not that I am aware. Closest thing would be a TIPS fund, I guess.

 

[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.

 

[brewer12345]

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.

 

[Dawg52]

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.

 

[brewer12345]

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.

 

[JB]

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.

 

[mikew]

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

 

[saluki9]

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?

 

[brewer12345]

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.

 

[bongo2]

So, brewer, why do you think OSM and ISM dropped so far from par in April, and then again in June?

 

[haha]

So, brewer, why do you think OSM and ISM dropped so far from par in April, and then again in June?

PMS

 

[brewer12345]

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.

 

[cute fuzzy bunny]

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

 

[brewer12345]

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

Maybe, but I do credit analysis of financial institutions for a living, and I really don't think there is ANY way Sallie Mae will ever default.

 

[cute fuzzy bunny]

Please dont make me bring up the blockbuster thing again. Please!

 

[brewer12345]

Please dont make me bring up the blockbuster thing again.  Please!

Let me guess, you have never made a mistake ever, right? Now shove off, *******.