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Re: Here's the New I Bond Rate
Old 11-01-2005, 06:41 PM   #21
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Re: Here's the New I Bond Rate

Does anyone know how the fixed rate is set on I Bonds?? *The inflation period *is backward looking (March-September). *But no explanation for how the fixed rate is set (clearly not based on 5-year TIPS) but "plucked out of thin air" is not really a good answer either.
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Re: Here's the New I Bond Rate
Old 11-03-2005, 09:39 AM   #22
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Re: Here's the New I Bond Rate

Holy crap! My I-bonds from 2001 are yielding +9%! Is it the 1970s again?
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Re: Here's the New I Bond Rate
Old 11-03-2005, 10:36 AM   #23
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Re: Here's the New I Bond Rate

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Originally Posted by soupcxan
Holy crap! My I-bonds from 2001 are yielding +9%! Is it the 1970s again?
I bought some I bonds in June 2000, now earning 9.40%. I wish I had purchased more.

Can these bonds be purchased in the name of a corporation or partnership?
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Re: Here's the New I Bond Rate
Old 11-03-2005, 10:45 AM   #24
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Re: Here's the New I Bond Rate

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Originally Posted by soupcxan
Holy crap! My I-bonds from 2001 are yielding +9%! Is it the 1970s again?
Yeah, I've got some from 2000/2001. It's not the high inflation as much as those historically high 3%+ real yields. You can't beat that with any other bond (except for TIPS of the same era).
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Re: Here's the New I Bond Rate
Old 11-03-2005, 04:26 PM   #25
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Re: Here's the New I Bond Rate

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Originally Posted by wab
Yeah, I've got some from 2000/2001. It's not the high inflation as much as those historically high 3%+ real yields. You can't beat that with any other bond (except for TIPS of the same era).
I managed to wind up getting about $30k worth of I-bonds back in 2000/2001 when they were first coming out, and averaged a fixed rate of 3.3% + CPI.

Originally, they were going to be my emergency fund...but given the high fixed return, I'll have to turn them into a separate bond class and find a place to put my new emergency fund (either more I-bonds - hopefully in June 2006 with a higher fixed rate - or opening a MM account).

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Re: Here's the New I Bond Rate
Old 11-03-2005, 04:42 PM   #26
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Re: Here's the New I Bond Rate

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Originally Posted by . . . Yrs to Go
Does anyone know how the fixed rate is set on I Bonds?? *The inflation period *is backward looking (March-September). *But no explanation for how the fixed rate is set (clearly not based on 5-year TIPS) but "plucked out of thin air" is not really a good answer either.
Maybe it is as low as the Fed thinks they can get the suckers to take?
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Re: Here's the New I Bond Rate
Old 11-05-2005, 06:39 PM   #27
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Re: Here's the New I Bond Rate

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Maybe it is as low as the Fed thinks they can get the suckers to take?
I wouldn't be too surprised if the answer is fairly close to that...in all competitive markets, you only pay as much as you have to (or, conversely, charge as high a price as your customer is willing to bear).

I have never seen the figures, but I'd be interested in seeing what the annual purchases are by Americans for savings bonds - anyone have any data?

I'd imagine that there are plenty of financial simpletons who either have relatives or themselves were recipients of EE bonds from the 80s and enjoyed 7% average annual returns, and saw a $5,000 investment grow to $15,000, and figure that savings bonds are an awesome thing (and subsequently automatically buy them).

So, if the government advertises a sky-high rate (due to inflation) for I-bonds, it only makes sense for them to offer as low of a fixed rate as they have to in order to maximize their intake while minimizing their interest payments. Sure, it sucks for the person buying the bonds, but the Treasury Department isn't in the business of printing money to give us just to be nice.

Now, the REAL interesting part will be in May 2006, when they reset the fixed rate. Short-term rates will likely still be in the 4% +/- range. Given how high oil ran in the previous 6 months to cause the CPI to jump to a 6% annual rate, if the current slide in oil remains steady, the CPI index from now to May 2006 will (IMO) be pretty damn low. So, if short-term rates in May 2006 are about 4%, and CPI is only, say, 1.5%, that would force the treasury to jack up the fixed rate to make the overall interest rate on I-bonds (somewhat) comparable to short-term rates, and would require a huge increase in the fixed portion...unless they want to try offering a miniscule 1.x% fixed with a low CPI rate.
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Re: Here's the New I Bond Rate
Old 11-11-2005, 08:38 AM   #28
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Re: Here's the New I Bond Rate

Forget the I Bonds! 5 year TIPS are now trading in the secondary market with a 2% fixed yield - a full 100 basis points more than I Bonds!!
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Re: Here's the New I Bond Rate
Old 11-11-2005, 12:46 PM   #29
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Re: Here's the New I Bond Rate

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Originally Posted by . . . Yrs to Go
Forget the I Bonds!* 5 year TIPS are now trading in the secondary market with a 2% fixed yield - a full 100 basis points more than I Bonds!!
This is good to hear from the guy who said i-bonds were a slam-dunk compared to TIPS.

This is the flattest I've seen the real yield curve. The difference between the 5-year and 20-year is only 13 bp. And this is the original reason the treasury wanted to switch from nominal bonds to TIPS -- no term premium!
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Re: Here's the New I Bond Rate
Old 11-11-2005, 12:52 PM   #30
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Re: Here's the New I Bond Rate

How about a side by side evaluation between IBonds and TIPS? I am on the fence myself and would like to see an unbiased comparison. Any suggestions on where to go to see this without drowing in the numbers? 8)

Thanks
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Re: Here's the New I Bond Rate
Old 11-11-2005, 12:57 PM   #31
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Re: Here's the New I Bond Rate

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Originally Posted by SteveR
How about a side by side evaluation between IBonds and TIPS?* I am on the fence myself and would like to see an unbiased comparison.* Any suggestions on where to go to see this without drowing in the numbers?* 8)
The answer is: it depends. There are three options: i-bonds, TIPS, and TIPS funds (like VIPSX).

Go with i-bonds if you plan to cash-out in less than 5 years, and don't want any volatility.

Go with TIPS if you know you'll hold to maturity and don't need all of the interest distributed each year.

Go with VIPSX if you want liquidity and distribution of the inflation adjustment at the expense of slightly lower-than-TIPS yield and daily volatility.
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Re: Here's the New I Bond Rate
Old 11-11-2005, 04:12 PM   #32
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Re: Here's the New I Bond Rate

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Originally Posted by SteveR
Any suggestions on where to go to see this without drowing in the numbers?* 8)
Good luck with that. I bonds are sold at origination and the TIPS mentioned earlier are sold on the secondary market, where their premium return is probably included in their premium price.

Having said that, let the numbers fly....
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Re: Here's the New I Bond Rate
Old 11-11-2005, 04:23 PM   #33
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Re: Here's the New I Bond Rate

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Good luck with that.* I bonds are sold at origination and the TIPS mentioned earlier are sold on the secondary market, where their premium return is probably included in their premium price.
Spoken like a guy with a 100% stock portfolio.*

The TIPS yield quoted is the *market* yield.* *You don't pay a premium for market yields.* *TIPS have been paying around 2% real for many moons now, both on the secondary market and for new issues.

The odd thing about i-bonds is that they pay a below-market real yield.* *The only reason to buy them is for a short-term non-volatile play vs money markets or short-term CDs.
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Re: Here's the New I Bond Rate
Old 11-11-2005, 06:57 PM   #34
 
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Re: Here's the New I Bond Rate

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...at the expense of slightly lower-than-TIPS yield and daily volatility.
Did you mean "...slightly lower-than-TIPS yield and lower daily volatility. "

or

"...slightly lower-than-TIPS yield but with daily volatility "?

Thanks,
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Re: Here's the New I Bond Rate
Old 11-11-2005, 07:32 PM   #35
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Re: Here's the New I Bond Rate

I've always lamented that English has no distributive property.* * Bobby quickly(ate and ran).

To rephrase, VIPSX will be volatile, and VIPSX will have a slightly lower yield than TIPS (due to fund expenses).

By directly owning TIPS and holding to maturity, you take fund expenses and volatility out of the equation.* *Sure, the value of your TIPS may fluctuate, but since you're not selling before maturity, you know that you won't* be selling on a down day.

VIPSX has an average maturity of around 11 years, an average duration of around 7 years, and an SEC real yield of 1.86%.

You can buy 5-year TIPS (shorter maturity, lower duration) and get a 2% real yield and the knowledge that your inflation-adjusted principal is guaranteed at maturity.* *If you buy on the secondary market, you'll be subject to a small spread and fee.* *When I recently bought through Vanguard, the bid/ask spread was 2/32, and the fee was $40.

I mentioned this earlier, but I'll say it again: I don't consider i-bonds or TIPS to be a bargain when the real yield is below 2.5%, but they still beat getting a negative real yield from CDs and nominal bonds.
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Re: Here's the New I Bond Rate
Old 11-11-2005, 10:31 PM   #36
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Re: Here's the New I Bond Rate

Quote:
Originally Posted by wab
This is good to hear from the guy who said i-bonds were a slam-dunk compared to TIPS.*

This is the flattest I've seen the real yield curve.* *The difference between the 5-year and 20-year is only 13 bp.* *And this is the original reason the treasury wanted to switch from nominal bonds to TIPS -- no term premium!
Good memory wab.

When I made the "slam dunk" comment the difference between the real yield on TIPS and I Bonds was about 30 bps (5-year TIPS at 1.5% and I Bonds at 1.2%). The 100 bps give now is too much. But here are two things you forgot to mention in your side by side comparison:

1) Taxes on I Bonds are deferrable until you sell them. This can be huge for people who are in a high tax bracket now and expect to be in a low tax bracket when they retire. Someone in the 35% tax bracket who buys 5% nominal yielding TIPS will realize an after tax yield of 3.25%. If that same person buys 5% I Bonds and defers their tax payments until they are in the 15% tax bracket, their after tax yield is 4.25% - a full 100 bps more. Almost makes up for the screwing you get on the I Bond fixed rate.

2) I Bonds are 30 year securities but the holder has the option to "put" them back to the treasury if real yields go up. If you hold TIPS and the real yield goes up, the price of your bond goes down. With I Bonds you can "put" them back to the treasury at par and exchange them for higher yielding bonds. This is a pretty valuable option considering how low interest rates are currently.
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Re: Here's the New I Bond Rate
Old 11-11-2005, 11:11 PM   #37
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Re: Here's the New I Bond Rate

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Originally Posted by . . . Yrs to Go
But here are two things you forgot to mention in your side by side comparison:
Yeah, I intentionally omitted some subtleties.* *The tax deferral can either work for you or against you.* *If you know for certain what your tax rate will be when you sell vs what it is when you buy, then it makes sense to consider this point.

Same goes for the free put vs cap gains/losses.* *If you know for certain that your bonds or funds will lose value, then the free put is valuable.* *Of course, if your bond or fund rises in value, then you'll be glad you didn't get the free put and give up your upside.

I consider those i-bond "benefits" a wash.* *Personally, I like the predictability of holding TIPS through maturity.* *That's what these instruments are supposed to be about -- predictable preservation of purchasing power + predictable growth.
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Re: Here's the New I Bond Rate
Old 11-12-2005, 09:29 AM   #38
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Re: Here's the New I Bond Rate

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1)* The tax deferral can either work for you or against you.* *

2)* If you know for certain that your bonds or funds will lose value, then the free put is valuable.* *Of course, if your bond or fund rises in value, then you'll be glad you didn't get the free put and give up your upside.
1)* I always prefer paying taxes later rather than sooner - I think most people should.* Even if my tax rate is the same in 30 years, the present value of those future taxes is much lower.* The deferral also gives me the ability to manage my taxable income, which I can't do with TIPS.

2)* Options are valuable.* You don't need to know for certain whether or not the option will move in to "the money" for it to be valuable.* Consider out of the money puts and calls.* They are bought and sold for real $ every day even though they may expire worthless.* What do you think a 30 year interest rate put would trade for on the open market?* I don't know either, but I'm sure it would be worth a ton of dough.*

With respect to capital gains, if the TIPS rise in value it is because real rates have gone down, in which case you should be happy to hold your I Bonds with an above market yield.* If you are holding to maturity then you should be indifferent to changes in the market price.* If, however, you want or need to sell them prior to maturity, then you are better off with the TIPS - but only in a situation where real rates have fallen.*


I think these are real advantages that I Bonds have over TIPS.* The only question is whether or not they are worth the 100 bp give up in real yield.* At 1% real I'm inclined to pass on the I Bonds, for now.
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Re: Here's the New I Bond Rate
Old 12-21-2005, 11:44 AM   #39
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Re: Here's the New I Bond Rate

I read some where in the past few days that you can purchase Ibonds with your credit card, is this correct? Do they charge a fee for that convenience? Also if I were thinking about buying, would now be a good time or should I wait for March?

Gosh I could really rack up the points if I can use my credit cards.
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Re: Here's the New I Bond Rate
Old 12-21-2005, 12:21 PM   #40
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Re: Here's the New I Bond Rate

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I read some where in the past few days that you can purchase Ibonds with your credit card, is this correct?* Do they charge a fee for that convenience?* Also if I were thinking about buying, would now be a good time or should I wait for March?

Gosh I could really rack up the points if I can use my credit cards.
Can no longer use CC for Treasury Direct. Sorry
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