Confused about I-Bond rates

[wabmester]

For the past 2 years I have been buying small I Bonds for my young grandchildren (ages 3 and 1 yrs old). I buy for their birthdays and Christmas thinking it would be helpful for them in 15 years or so. After reading this ,I`m not so sure about that. Can anyone suggest something better  ? Thanks for any help   

TIPS. As brewer said, the treasury has been offering below-market yields on i-bonds, but they can't get away with that on TIPS.

 

[REWahoo]

And while we're at it, what's all the dryer sheet mumbo jumbo? :

A forum legend...
http://early-retirement.org/forums/index.php?topic=4763.msg82830#msg82830

 

[cute fuzzy bunny]

Hey Wahoo, while you're at it, look up all the threads where I said i-bonds stunk and was considered an idiot for recommending cd's and money markets...

And tips arent much better given you have to hosey up the tax money every year on income you dont get for 10 or 20 years, then maybe you also get to sell them at a loss if rates pop up and CPI stays low and nobody wants them anymore.

1% "cpi adjusted" return (I give up on continuing to point out the lack of 'real'ness to it) isnt worth anything. 2% isnt much better.

 

[wabmester]

2% isnt much better.

Real yield curve today is 2.27% to 2.48% (for 5-20 year maturity). CPI-U for the last 12 months was 4.1%.

So, TIPS still look better than cash, but if you're looking for a short-term place to park cash, 6% CD's look fine to me.

There is simply no reason to accept 1% (or 1.4%) real for i-bonds when you can get over 2% real from TIPS.

 

[REWahoo]

Hey Wahoo, while you're at it, look up all the threads where I...was considered an idiot...

CFB, you have to understand I'm 59 and the few good years I have left aren't going to be spent doing endless research.

 

[cute fuzzy bunny]

I just hope all y'all appreciate all the easy slow lobs you're getting today...

 

[GTM]

The low overall rate is due mostly to the low inflation portion of the I bond even though the fixed portion is low in comparison to Tips. Over the last 6 months that was not the case so I bond holders did not do that bad.

The low inflation portion had to have an effect on Tips as well but if you bought 5 year Tips last week the fixed is 2.38%.  Thats good.

I bonds held over a year can be redeemed. Take the 3 month penalaty and buy a 26 week T note yielding 4.91% or an Emigrant CD at 5% for a minimum of 9 months or
Leave in Emigrant money market at 4.5% wait until July and buy a 10 year Tip. The yield curve will give you an good indication as to what the fixed portion will be. It was right on the money with the April 5 year auction.

 

[retire@40]

I wouldn't buy I-Bonds again until the fixed rate gets at least to 3.5% to 4.0%.

 

[bpp]

I wouldn't buy I-Bonds again until the fixed rate gets at least to 3.5% to 4.0%.

I wouldn't be surprised if it never gets that high again. They are much more popular now than they were when they first came out. I'm actually surprised that the fixed jumped as high as 1.4% in one shot this time.

Bpp

 

[haha]

I wouldn't buy I-Bonds again until the fixed rate gets at least to 3.5% to 4.0%.

You may live that long. 

Ha

 

[retire@40]

You may live that long. 

Ha

I bought some in June of 2000 with a 3.6 fixed rate that gave me about 9% for the past 6 months. That was only 6 years ago, so I can see that happening again in the not too distant future.

 

[JB]

Actually, I bought them in December of 2004 - If I check the Treasury Direct Account today, It still lists 6.73% as the interest rate. Do you know to find out what my 'real' rate of return is?

The website does not seem to have very specific info on what portion is real and what portion is inflation adjusted.

I noticed the same issue awhile back. Your rate will change on the anniversary (mod 6 mo) of your purchase.

 

[haha]

I bought some in June of 2000 with a 3.6 fixed rate that gave me about 9% for the past 6 months.  That was only 6 years ago, so I can see that happening again in the not too distant future.

You were very sharp to pick those up at that time.

I got some in fall of 2001 I think, @ 3% fixed. I hadn't been aware of I-Bonds prior to that. My feeling is that these were new at that time, and the whole investing class of people was sure they could make 50% a year minimum on NASDAQ stocks. So I-Bonds had to be a bargain to get off the ground.

I think given their characteristics of liquidity, tax deferral and lack of market risk they would be a reasonable deal at even 2%, especially since you are not locked in very long. IMO, they are not all that bad even at present.

Brewer, thanks for the explanation. I couldn't find my Excel Functions book, so I ignored the amortization of the discount and just dealt with current yield. I can see now that the amortization is meaningful.

Ha

 

[Lancelot]

CT,

Before you unload your I-Bonds, make sure that you have received all of the high 6.73% interest payments due you. For I-Bonds held less than five years, there is a three month interest penality that also "delays" the interest that you receive for three months.

In other words you may still have some more 6.73% payments due you.

Lance

 

[Cut-Throat]

CT,

Before you unload your I-Bonds, make sure that you have received all of the high 6.73% interest payments due you. For I-Bonds held less than five years, there is a three month interest penality that also "delays" the interest that you receive for three months.

In other words you may still have some more 6.73% payments due you.

Lance

Thanks for the tip! - I did send them an e-mail asking about this specific issue!


Update:

Yup, you were correct! - I got an e-mail from them and I will continue to receive the 6.73% for another 3 months. I'll dump them in August!

 

[brewer12345]

Brewer, thanks for the explanation. I couldn't find my Excel Functions book, so I ignored the amortization of the discount and just dealt with current yield. I can see now that the amortization is meaningful.

Ha

I realized that I actually forgot another source of extra yield in my explanation, specifically the leverage on CPI.  Assuming the bonds are trading at 22.50, they pay CPI plus the spread on the whole par amount.  That means that in addition to the extra 23BP from the spread over CPI, you also get 25/22.50 times CPI on the base aomount.  IOW, the bonds actually yield 1.11X CPI plus 3.26%.  That extra .11 times CPI is naturally tough to calculate, since CPI will flop around and we have no way of knowing what it will be in the future, but if CPI averages 3% (well within historical range), we are talking about another 33BP of yield.

 

[mark500]

I got lucky and bought some I bonds in 1999 when the stock market was booming.
Current rate of those bonds is 9.2%

 

[Lancelot]

Update:

Yup, you were correct! - I got an e-mail from them and I will continue to receive the 6.73% for another 3 months. I'll dump them in August!

Great! Glad to hear your good news...

 

[Telly]

I'm sorry.  It's my fault.  I am responsible.

A couple months ago I bought an I Bond for the first time.  1% fixed part of rate.  The semiannual inflation adjustment was high.
Now, for new I Bond issues, the fixed part moved up to 1.4%.  And the semiannual inflation adjustment for all has dropped waaaaay down to .5%.

I think I have a reverse Midas touch on TIPS bond funds and I Bond!

I wondered how the inflation adjustment could drop like a rock like that.  Doesn't seem to fit my observations!
So I looked @ bls.gov at CPI-U.  Inflation went NEGATIVE for Nov. and Dec.  Then in January it went positive again.  So for the 6 months, inflation dug a hole first, then climbed out of it.  So that lowered the overall by quite a bit.  Still doesn't make me feel any better.

The last time I looked, about a month ago, the Vanguard TIPS fund I purchased in May of 03 has had an overall 9.1% rate of return for the period.  Not % per year, that's ~3 years total!  In retrospect, I would have been better off with CD's!

 

[yakers]

I just stopped my ibond orders. Not like it was much, just $100 a month for the last three years. I just expected to keep accumulating them for a few more years. But now I figure I can do just as well with these funds elsewhere, I will probably buy some dividend paying stocks instead.

 

[rjk514]

Very confusing, as it depends on when the bonds were purchased, (month & year) as to the interest they are
earning and when it will fall to the new May 1st lower rates. Still confused about when to cash these bad boys in and which 3 months of interest you would lose.
Anyone know the answer to this: If you have bonds that were purchased May of 2003 (they are now earning 2.11%, and bonds purchased Nov. 2004 (they are now earning 2.01%. If cashed in today , do I lose the past 3-months interest (a much higher rate) or better to wait 3 months( til Sept 1) then sell and lose the last 3-months at the 2% range. Am I looking at this right??

 

[d]

wait three months so it is the 3 months at 2ish% that you forfeit

 

[Andre1969]

I bought one $5,000 I-bond back in early August, 2005. I was going to buy another one this year, but a little voice in my head told me not to. It was the same little voice that told me NOT to buy the motorhome I was thinking about getting back in October 2000, when my investments were at a then-all-time high and I thought the prosperity would go on forever. Considering what the economy, and my investments, did soon thereafter, plus with me finally getting fed up and quitting my second job, I guess it's a good thing I listen to that little voice sometimes.

 

[yakers]

I guess it's a good thing I listen to that little voice sometimes.

And what does your little voice say about interest rates, real estate, GDP and the like?

 

[Andre1969]

And what does your little voice say about interest rates, real estate, GDP and the like?

Umm... "Danny's not here right now, Mrs. Torrance?"