Originally Posted by brewer12345
I like ISM and OSM and I find them attractive, especially as they approach 22. You get 100 or so BP of extra spread over TIPS for exposure to an A-rated credit and the bonds often trade down when it seems like they shouldn't (translation: illiquidity sometimes gives you a bargain). At maturity, you do indeed get $25 back.
These things are more akin to an I bond than TIPS, though. They also have an advantage over TIPS in that you get your inflation adjustment every month as cash on the barrel head, so if we subsequently enter a period of deflation (highly unlikely, IMO) you won't get the deflation taken out of your principal.
The best free source for info on ISM, OSM and other retail income securities that I know of is www.quantumonline.com
I think they will make you register, but since I am registered as "Heywood Jahblowme", I think it is pretty informal.
As these things head for 22, I am increasingly interested in adding to my position. A nice, low risk play, IMO.
It looks like interest rate is the percent increase in the CPI over the previous 12 months,
plus 2.05%. I talked to Schwab and they say they're looking at 3-month old data to
make this calculation. So even though the current dividend is 6+%, that's based on
August numbers (the increase from Aug '05 to Aug 06), so since we already have later
numbers, we can predict what the dividend will be in subsequent months - for example,
she computed the Jan '07 dividend rate as only 3.36%. I guess this explains why the
price dropped from nearly $25 (in March) to close to $22 now.
Apparently the interest rate is paid on the $25 par value. But this principal is never
adjusted as with TIPS. Thus, if inflation drops very low, the dividend rate drops to
2.05%. Seems like disinctly different behavior from TIPS, where if there's lots of
inflation, and then none, you still get the advantage of the inflated principal from
the high-inflation period.
I wonder why one would choose OSM instead of ISM. Looks like the interest rate is
lower, but I see no advantage.