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Old 11-26-2011, 02:43 PM   #21
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Originally Posted by clifp View Post
The reason I bought so few back then was you were limited to purchasing $500 Ibonds.
For each transaction you had to re-enter all of your information. The good news was the Treasury was accepting credit cards back than and I so I got a 1% cash back on my Discover card. But after doing this a dozen times (I ended up with 10K 3.3-3.6% ibonds. I figured why not forget this penny ante stuff and buy TIPs which I did in 2000/2001. At the time it did not seem all that important that TIPs were 10 year maturity vs 30 years for the iBonds. I just knew that both were close to the 4% inflation protected rate of return I wanted.
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"Whoosh!! What was that?, that was your life mate". - Basil Fawlty

Amazing how time flies. I didn't start to buy I-Bonds until 2003 when it was much easier to do so on-line. I wish I'd had the patience to buy some paper bonds earlier.
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Old 11-26-2011, 02:49 PM   #22
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Am I missing something ? I get about 3.3% average between my CDs and munis for the next 17 years, until I reach 62. I guess I need to learn more from you guys...
You're doing about what today's I bonds would pay, and unfortunately the Treasury has clamped way down on how much you can buy per year.
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Old 11-27-2011, 03:42 AM   #23
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Originally Posted by thefinancebuff View Post
Treasury is in the business to raise money for the government at the lowest cost. Selling savings bonds retail costs too much. It basically pays off the middlemen (banks, print shops, post office, ...). Plus the interest rate is too high (0% fixed plus an early-out option versus negative on TIPS and no option). I think they made the right move.
I have no way to verify this, but the bank where I bought my I=bonds this summer claimed that they sold them as a service to their customers. They claimed that they did NOT make any money from the gummint. Since this would be relatively easy to verify or refute (note that I have done neither, heh, heh) I would not think a bank manager would lie to me about it. But, I don't know, so YMMV. I would agree that selling via the net has to be cheaper, but if it means you sell a lot less, I don't understand why they are trying to kill paper bonds. Think about merchants demanding cash instead of plastic. Yes, on the sales they make, they make more money than when people use plastic. But, as everyone now expects to be able to charge, the merchants sales would drop. Just sayin....
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Old 11-27-2011, 02:03 PM   #24
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I remember when the Bogleheads were sure that Treasury had made some horrible mistake and was going to revise that rate at any minute. But IIRC I bonds weren't selling very well in 2000 and Treasury was trying to lure fish to their bait.
I don't understand why they thought the Treasury made some form of mistake....back when I-bonds first appeared on the scene, it wasn't long after the TIPs were created (1999/2000). It is true that TIPs/I-Bonds weren't immediately gobbled up, as they were a new product in the entire fixed income arena (hardly any private US inflation-linked products were offered ever before).

Given the interest rates at the time, the market rates for 10 year TIPs (one of which I purchased) were roughly 3.6%-4.25% fixed + CPI (roughly 2%-2.5% at the time), yielding a composite rate of roughly 6%-6.5%...which is about what the traditional fixed 10-year notes were yielding. Which makes sense because current fixed rates are a composite of the market's future inflation expectations plus a fixed rate.

In order to have any success at auction, the Treasury would be forced to offer a market composite rate on I-bonds and TIPs, or else no one would buy them and would just buy the fixed traditional EE bonds/T-notes.
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Old 11-27-2011, 02:20 PM   #25
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In order to have any success at auction, the Treasury would be forced to offer a market composite rate on I-bonds and TIPs, or else no one would buy them and would just buy the fixed traditional EE bonds/T-notes.
Very good point. THanks, MooreBonds. This must be at least 90% of the explanation for why the Feds are killing I-bonds. They probably will not kill TIPS for a while longer. After all, they get to tax the crap out of your earnings without actually paying you anything (until cashed in). Win-win for now for the Feds. Of course, YMMV.
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Old 11-28-2011, 11:32 PM   #26
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After all, they get to tax the crap out of your earnings without actually paying you anything (until cashed in). Win-win for now for the Feds. Of course, YMMV.
As other posters have pointed out in the past, it may seem like it's just the gov't way of screwing you....but imagine the scenario where the government paid out the inflation increase each year instead of just adding it to the principal and giving it to you at the end of the term.

Now imagine what happens when deflation happened for a short period of time happens.

Does the gov't run after all of the holders of the billions in bonds and ask them to cut checks to the gov't? Does the gov't deduct it from an interest payment? If an interest payment, how do they pro-rate it over the course of the year? It's much cleaner (and of course, carries the nice side benefit of an 'interest free loan') to just tack the inflation changes onto the bond and pay out at maturity.

You can also get into the semantics of what a TIP really is - it's a debt instrument that seeks to give you a constant yield based on an initial principal amount. If they pay out the inflation increases each year, then the constant yield will always be based on the original principal, and you'll actually be getting screwed over time, because your real interest payments will be decreasing, rather than holding constant, as well as having to find a place to invest the principal adjustment payments.
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