TIPS or IBONDS, To Buy or Not To Buy... ?

[ShokWaveRider]

Excuse my ignorance. OK that said, no laughing.

I am looking at I Bonds and TIPS. and I have some questions.

1) Is now a good time to buy them. (Say 30% of a portfolio, if I can get that many)

2) I looked on Treasury direct for TIPS and really do not understand what the current rates of return are for them. Can someone help explain how they work.

3) Is it best to buy direct from the Web site or from a bank or does it matter?

4) What is the MAX of each anyone can buy at one time? I think this is clear on the Treasury site, but I would like to confirm. Something versus paper and virtual holding.


Oh! I should say for the record I am considering these for After Tax Money (Taxable) funds. I understand that is not a good idea, TIPS are better held in a Pre-Tax environment?

Thanks

SWR

[yakers]

Brewer will probably have the complete story. For I bond info I like this posting from Morningstar Vanguard Diehards site: http://socialize.morningstar.com/New...&t1=1151074513

I do not have a good way to hold TIPS (OK, I have a Roth,but I like the fund I have already). And I have a plus for Ibonds as I may be able to use them tax free for my son's college costs (depends what my income will be, but it may work) Lots of considerations. I like the idea of ibonds as they can be used as a cash backup after one year. But I stopped my monthly buy lately after the inflation part was reduced.

[brewer12345]

IMO, I bonds as currently available suck, plain and simple. Return is just too low. If you hanker for something similar, look at ISM and OSM, which are exchange-traded bonds issued by Sallie Mae.

5 and 10 year TIPS appear to be yielding a real rate of ~2.6% right now, which isn't half bad. You get protection from an inflationary spiral and a decent, if not spectacular, real rate. So I think it isn't a terrible time to buy TIPS, but bear in mind that TIPS can decline in value. The real rate has been as high at 4% IIRC.

How TIPS work: You start out with a face value of, say, $1000. Every year, the face value is increased by the CPI times the starting face amount. At maturity, you get the inflated amount of the face back. You also get a coupon that increases with inflation. So at current yields, you would get 2.6% times whatever the inflation-adjusted amount of the face is. Your total return if held to maturity is 2.6% plus inflation. If we keep running at 4+%, that implies returns of around 6%, far ahead of other treasuries.

Where to buy: you can participate in a TIPS auction via treasurydirect. In that case you submit a "non-competitive" bid where you simply take whatever the clearing price turns out to be. You can tell what it will be by looking at current secondary market yields around the time of the auction. You may also be able to buy TIPS via auction or on the secondary market through your broker. You can also buy TIP and ETF that tracks a pool of TIPS.

A couple of issues with TIPS: 1) they are more volatile than similar maturity fixed rate treasuries, so be prepared to hold for the yield and endure some price swings. Since this is a security that is inflation-indexed, your purchasing power will be maintained, so holding through price movements isn't as big a deal as with fixed rate bonds. 2) The accretion on the face amount (by CPI) is taxed as current interest income even though you don't get the cash until maturity. TIPS are best held in a tax deferred account, although it is not the end of the world if you buy them in a taxable account.

[73ss454]

Brewer,

Can you explain which is a better way to buy TIPS.

Individual, ETF or Fund?

[ShokWaveRider]

Thanks for the explanation Brewer.

SWR

[brewer12345]

"Better" depends on the situation.

Taxable cash: cheapest way is via treasury direct (free). * But you have to wait for an auction (no big deal).

Tax deferred: Buy individual TIPS if you can do so without paying a giant commission or spread and you have a big enough chunk to invest (at least $10k). *Otherwise, something like TIP or the Vanguard TIPS fund would work well.

[mathjak107]

i use the etf tip

[. . . Yrs to Go]

I plan to buy some 20-year TIPS from Treasury Direct during the upcoming auction in July. At 2.6% real, the yield is getting to the point where I think it makes sense to diversify your bond holdings between inflation protected and "normal" securities.

I also think TIPS become increasingly attractive as the real yield moves closer to my targeted withdrawal rate. I've got my fingers crossed that yields will move into the low 3% area, in which case I can essentially immunize my bond portfolio against inflation.