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TIPs or I-bonds
Old 01-16-2008, 09:58 PM   #1
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TIPs or I-bonds

Anyone out there own individual TIPs or I-bonds?

Is it possible to create a bond ladder of individual TIPs or I-bonds? If so, what denominations do the ladders need to be purchased in? Will $4000 type per security work (like CDs) or does the purchase need to be 10k or 100k?

I have an emergency fund in CDs right now. I am thinking of using an inflation indexed security if I can ladder the bonds in 90 day increments.

Thx in advance.
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Old 01-16-2008, 10:13 PM   #2
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You can buy TIPS in $1000 chunks. You can buy i-bonds in smaller ($50?) chunks, but the total limit is low this year ($5000, I think).

To build a ladder all at once, you'd have to buy on the secondary market.

But CDs will probably give you a better yield. Treasuries of all kinds have had their yields pushed to the floor due to the recent flight to safety and fed actions.
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Old 01-17-2008, 06:40 AM   #3
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I wouldn't put emergency funds in a bond ladder. Ibonds lock you up for a year and penalize you (albeit sightly) if you withdrawl within 5 years. TIPS can be sold but the spreads on bonds for retail customers are pretty bad, IMO.

If you're talking non-emergency funds, you could build a ladder out of either. ibonds have better tax treatment but tend not to pay as much as TIPS.

I'm building a TIPs ladder using the 20 year. I'm doing it in an IRA and timing them to mature annually beginning when I'm 59 and can start withdrawing the funds. I'm basically constructing my own inflation-protected annuity.


FWIW, a lot of market timers consider now to be a bad time to buy TIPS.
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Old 01-17-2008, 08:18 AM   #4
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I am researching before doing for sure. My CDs are getting between 1.9 and 2.3% interest rates right now, I read that CPI is going up between 4-6% for 2007. So my thought was that the inflation component will give a better return than any interest even a money market would make.

I have 3 CDs in a 90 day ladder for my EF. I was hoping to do something similar with either TIPs or I-bonds. Doesn't sound realistic from the two posts thus far.
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Old 01-17-2008, 09:48 AM   #5
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Quote:
Originally Posted by Maurice View Post
FWIW, a lot of market timers consider now to be a bad time to buy TIPS.
I have several years of cash in money market funds returning around 4.7%. I worry about the rates dropping below inflation but I can't find anything better to put it in. I would love to get into TIPS if they had a better return but that does'nt sound likely in the foreseeable future. When things get bad in the MMFs I hope someone here has some hot tips on where to go. Maybe real estate?
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Old 01-17-2008, 11:31 AM   #6
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Some random points to consider:

The CPI is a backward-looking metric. The fact that inflation was 4.1% last year doesn't tell you anything about what it will be this year or the next. For example, a lot of the increase in the CPI came from energy prices increasing something like 35%. Do you expect that to happen this year too?

Why are you in such low-yielding CDs? In general, CDs are yielding much higher than treasuries of the same maturity. For example, see:

CD Thread, Post The Best Rates You Can Find Here!

And compare that with yields from treasuries here:

Bloomberg.com: Rates & Bonds

The bond market expects TIPS and nominal treasuries to yield approximately the same, so that tells you what the market expects inflation to be going forward (a little over 2%).
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Old 01-17-2008, 12:03 PM   #7
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Why are you in such low-yielding CDs? In general, CDs are yielding much higher than treasuries of the same maturity. For example, see:

CD Thread, Post The Best Rates You Can Find Here!
I just opened these accounts in 2007. I did what was simple for the need. Money was withdrawn from that bank's account, they opened the CD right there. I know the return appeared low to what I read about online. The important thing is this money is tied up and out of our account right now (so my wife cannot spend it accidentally).

Each one was 90 days. Rate in Oct 2007 was around 2.05%. Rate dropped in January to 1.9%, I think. $4000 in each CD. Maybe the rate I looked at was effective yield, and after 360 days it will resemble the annual numbers everyone is talking about?

4000*1.019*1.019*1.019*1.019=$4312.77 $312.77/$4000= 7%, so that does not seem right...

thoughts?
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Old 01-17-2008, 12:07 PM   #8
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I think banks generally quote annual yields. CD rates vary widely among banks. But even BofA (famous for their low rates) offers something like 4.6% for a 4-month CD, so your rates do seem low. Shop around.
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Old 01-17-2008, 12:11 PM   #9
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I think banks generally quote annual yields. CD rates vary widely among banks. But even BofA (famous for their low rates) offers something like 4.6% for a 4-month CD, so your rates do seem low. Shop around.
I found part of the issue. My CDs are 90 days. Better rates are on 6 month CDs.

https://www.53.com/wps/portal/!ut/p/...ode.do#7_B_373

If I had a 6 month or 7 month ladder, my rate would more than double.

Link broke, try https://www.53.com

90 day CD rate 1.49% for less than $5000
7 month rate is 3.68%

How quickly can money be retrieved from online banks and at what cost?
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Old 01-17-2008, 12:23 PM   #10
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If you don't have a local branch, most banks I've dealt with require written instructions that you want to cash out the CD at maturity and then they mail you a check.

Although, some, like PenFed are much more flexible. PenFed gives you maturity options when you open the account, and you can then transfer funds via EFT.

Again, shop around and ask them questions before you commit.
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Old 01-17-2008, 12:27 PM   #11
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If you don't have a local branch, most banks I've dealt with require written instructions that you want to cash out the CD at maturity and then they mail you a check.

Although, some, like PenFed are much more flexible. PenFed gives you maturity options when you open the account, and you can then transfer funds via EFT.

Again, shop around and ask them questions before you commit.
I need the CD to roll over every 90 days. This is our emergency cash in case one spouse or another loses their job. I don't ever want to spend this cash... but it's needed.

3 months cash is in the 90 day CDs. One CD matures every 30 days, then it rolls back into a 90 day CD if I do nothing. I have a 10 day look back period to get cash (so if I lose job 9 days after it matures, I can get money). Otherwise I need to wait 20 days until next one matures.

I might be able to get this account up to 6 months cash (to get higher yields), but I would need to not put money in an IRA for a year or two, and that doesn't make sense (long term).

Yield is not the biggest concern with this concept, IMO. If I can do better, good, but I do not want to lose access to money. I also don't want access to all 12k at same time. That is just too tempting.
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Old 01-17-2008, 12:31 PM   #12
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You might want to look at what the penalties would be for early withdrawal on a 1-3 year CD ladder. The gains from higher interest rates will likely offset any penalties should you ever have to use the money. Odds are you will end up significantly better off than with 90 day returns.
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Old 01-17-2008, 01:24 PM   #13
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You could use a MM fund (e.g. Vanguard Prime) in place of your shorter dated CD's (e.g the 90-day or less ones). It currently yields 4.54% and gives you 100% liquidity with no early withdrawal penalties.

Depending on your tax situation you might consider either a Municipal MM fund, or a Treasury MM fund (which would not be subject to state and local income taxes).

All of these seem to offer higher yields than you are currently getting with the short-term CD's you are buying.
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Old 01-17-2008, 01:29 PM   #14
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Yeah, if this is for an emergency fund, Vanguard Prime is the way to go. In fact, 42% of the fund is in short-term CDs.

Edit: oh, I forgot. You're trying to make the money illiquid so you're not tempted to spend it all. Just invest your cash and take out a HELOC for emergencies. The interest you'd pay will hopefully be a disincentive for you to use it.
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Old 01-17-2008, 02:18 PM   #15
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I have a bunch of I-Bonds that I bought back when the rates were good (3.5% + inflation). I didn't buy them for an emergency fund but rather to integrate into an overall bond/CD ladder. The last time I checked rates on I-Bonds they were pretty low and I don't believe I would buy any now. (I am retired so the amount of new money I invest is pretty limited these days.)

What's beautiful about I-Bonds in terms of laddering is that you can pretty much assign them a "virtual" maturity date so they can fit in on your ladder anywhere you want them to. (You can hold them for up to 30 years but don't have to. After a year you can redeem them for a small penalty; after 5 years you can redeem them with no penalty). And, you don't pay a cent in income tax until you redeem them. (And if you want to use them to help fund your kids'/grandkids' education, there is no income tax.

I don't expect to be around when they finally mature but if I were, it would break my heart to have to redeem them. They provide a wonderful cushion and a lot of security in uncertain times.
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Old 01-17-2008, 03:51 PM   #16
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You could use a MM fund (e.g. Vanguard Prime) in place of your shorter dated CD's (e.g the 90-day or less ones). It currently yields 4.54% and gives you 100% liquidity with no early withdrawal penalties.

Depending on your tax situation you might consider either a Municipal MM fund, or a Treasury MM fund (which would not be subject to state and local income taxes).

All of these seem to offer higher yields than you are currently getting with the short-term CD's you are buying.
Gross Income is approaching top of 25% bracket. But we still have 5 figures of raises to go before I really begin to see 28% bracket coming my way. I think.

100% liquidity... can a person get to money at 3:00 am on a Saturday? On a Sunday? On a holiday if markets are closed?

How would a person open an account for Vanguard Prime (does T Rowe have an equivalent?- that is where my IRAs are). Only have 12k to put in it- is that an issue?

2.5% adds about $250 per year to account (make $240 or so in interest now annually, 4.5% would amost double that). I am not sweating not having the extra $250, but money is more money if I keep the liquidity/access.

My bank has hours 7 days per week and is in all grocery stores in Ohio. I don't have an issue if I need to walk in and get cash.
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Old 01-17-2008, 07:42 PM   #17
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... can a person get to money at 3:00 am on a Saturday? On a Sunday? On a holiday if markets are closed?
No. You would need a MM fund linked to a checking account within the same bank to be able to do this (but the interest rate you receive will be much lower). With Vanguard you can write checks (for $250 or more). You can also move money by wire or by linking your Vanguard account to your checking account. You would have to initiate electronic moves during business hours.

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How would a person open an account for Vanguard Prime (does T Rowe have an equivalent?- that is where my IRAs are). Only have 12k to put in it- is that an issue?
You can get details here:

Vanguard Prime Money Market Fund

The minimum to open the account is $3000. I use Vanguard, but I'm sure T-Rowe Price has something very similar.
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