would be greatly appreciate. I've done a bit of homework and am still no positive I have it right. I'll give my understandings and hopefully someone will bail me out if I'm wrong.
Treasury Bond
1. Bought on the market not directly from the Gov't
2. May sell at either a discount or premium to face value, market determines.
3. Market value goes down if rates rise, and vv.
4. If I happen to buy at original face value $1000 and original interest was 4%, I get a $20 check every 6 months.
Is that correct?
Second, TIPS
1. They only differ from above by having a variable principle, tied to inflation.
So the question on TIPS is this, are they issued with lower original interest or are their yields lower because thier market value is high relative to face value?
I GOOGLED myself to a bloody pulp and could not find "Treasuries for Dummies".
Thanks
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You are correct on traditional treasuries. With TIPS, my understanding is that the interest is inflation-liked as well as the principal. That means you get a fixed rate of interest plus an inflation adjustment every 6 months, plus the principal grades up with inflation.
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I believe that the last period of deflation of any note was the Great Depression. Maybe there was a brief period in the late 40s early 50s, when there was a pretty severe recession, but obviously it didn't last long.
TIPS have two minor drawbacks. One is that you pay income taxes on the principal adjustment in the year its made, not when you sell the bond. So in years of high inflation, you'll be paying some taxes. Second is that the inflation 'protection' is tied to the CPI inflation measure, which may or may not reflect your actual personal inflation rate or the actual inflation rate in your area. Some bozos crow about making 'real' returns with tips or having foolproof plans based on 100% tips portfolios. May or may not be true. If you live in a cheap area and have a cheap lifestyle, probably more true. You live in an expensive escalating cost metro area and include a lot of expensive lifestyle costs, probably very untrue.
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Well...if inflation roars to 6%+, tips and ibonds will be mighty nice to have. Unfortunately its unlikely that many investors will have enough of them to really matter.
Bonds in general have 'bull markets' just like stocks do. Usually during long periods of dropping interest rates. Bonds kicked the doors down in 2000-2002 while stocks took a beating...someone in a 60/40 fund hung in there pretty good during those equity lean years.
Given that rates will keep rising for the rest of this year, at least, and take a while to come back down, if they do (and I think they will), probably no bond bull markets. Plus the long term bonds really havent taken the beating they should have in response to rising rates. Yet. Might be a big shoe that drops soon, taking bond prices way down and yields way up...
Bonds are sort of the ballast while equities are the sail. You can have a lot more sail if you've got a good heavy keel on the boat. A real heavy keel, not enough sail and rough waters and you've got a bigger problem though.
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I GOOGLED myself to a bloody pulp and could not find "Treasuries for Dummies". Thanks
In Bigfoot's I bonds thread, ats5g linked Mel Lindauer's I bond tutorial from Morningstar's Vanguard Diehards board. Note that Mel started the thread over five years ago and it has 140 posts, so you have to read the entire thing and note all the changes on a scorecard. For example you'll see credit-card charge rebates (a deal too good to be true!) have been eliminated from Treasury Direct, but that's only apparent if you read the entire thread.
Vanguard also has a "Bond Squad" forum with about 3000 threads. Ain't never been there, but they tell me it's nice.
You might find a good discussion of bonds in Investing for Dummies, but I'd do that from a library instead of spending real money on it.
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You can avoid the drawback of TIPs (having to pay current taxes on the inflation adjustment) by buying I-bonds instead. These can be bought on-line directly from the Treasury. With I-bonds no taxes are due until they are cashed.
grumpy,
thanks. that's the kind of info that is hard to find when you're just beginning to think about bonds like I am. Would not have thought of that issue at all if not for notth's comment.
notth,
So, if TIPS yield 1.75% then I got to buy a huge amount of them to provide income but at least I get an inflation protected principle at payout but all in between I'm at the mercy of the Feds?
As with all things government, both seem to yield about the same over the 30 year period, just differing tax situation and income stream. I-Bonds=less now, more later it seems to me and TIPS are more now and because of taxes, less later.
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You've about got it right, except I'd replace the term 'inflation protected principal' with 'cpi adjusted principal'. AS mentioned before, for a lot of people, CPI<>inflation.
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Notth,
Just yesterday did a CPI calculation using CPI publication and then weighting it against my budget.* (I have no car, no life..err no life ins, no clothes to last a lifetimke and I have no worldly goods).* It was 2.8%.
So maybe I finally found a glimmer of hope.* I beat inflation, woohooo.
If you're depending on the interest, is it my understanding that the downside to owning TIPS, is that you receive only the interest portion (1 5/8% on 10 year) while you're paying tax on both interest and the added inflation portion.
Doesn't leave you with much.
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I just can't get past thinking of how closely they yield to CD's and the CD is rock solid safe.* Seems like I'm missing the point of bonds.
Consider that while Bonds such as Treasuries can and often are purchased by individual consumers, their scale is geared more towards institutional investors like pension funds or foreign interests like central banks - where liquidity is key. CD's are illiquid (non-broker) so can't be sold on an open market, and besides have too small a face value for these types of investors, plus there can be restrictions on US deposits from foreign investors. This is one possible explanation for the 'discrepancy' on interest rates payable between the two. CD's are more suited to your situation IMHO - their value won't change and therefore they are less risky, aim to get the highest possible rate, and work out your own inflation considerations as th advises.
BTW: Sounds like you're still pondering what to do vis a vis bonds -* CD's - Condo. Consider that the real estate market in Chicago is not ranked anywhere near the top of published bubble warnings. Plus the Hancock is a class A building which will be more resistant to a RE collapse. Furthermore, the cost of the studio is reasonable and close to the median cost of a US home. Therefore should prices slump the fall won't be as great as an SF or NY condo. While recent years have seen over saturation of condo building in downtown Chicago, the Hancock is still one of kind. I'm amazed the studio is so cheap? How much space does it have?
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You are correct on traditional treasuries.* With TIPS, my understanding is that the interest is inflation-liked as well as the principal.* That means you get a fixed rate of interest plus an inflation adjustment every 6 months, plus the principal grades up with inflation.
That's sort of correct, but I think it might be confusing the way you've stated it. Only the principal is inflation-adjusted. The interest rate stays fixed. There is no inflation adjustment to your interest per se, but your *effective* interest increases because the fixed rate is applied to the adjusted principal. I hope that's clear. The yield is inflation-linked, even though the interest rate is not.
I believe that the last period of deflation of any note was the Great Depression.* Maybe there was a brief period in the late 40s early 50s, when there was a pretty severe recession, but obviously it didn't last long.
Brewer is obviously not from Japan. You don't have to go back to the Great Depression to find deflation.
You do in the US.* Japan's economy, regulatory system, capital maarkets, consumer behavior, etc. are very different from the US.
Well, I'm not predicting deflation, but the causes always seem "obvious" in retrospect. I'm sure the Japanese thought they were doing the right thing in the 80's when everything looked like it was coming out roses.
I have no idea how this period in the US will look like 20 years from now, but I wouldn't be surprised if somebody from Japan looked at our loose monetary policies, trade deficits, federal budget deficits, pension obligations, consumer savings rate, and leveraged real estate speculation, and asked "what the f*** were they thinking?"
Quote:
The yield is inflation-linked, even though the interest rate is not.
Linear Mode
