I-bonds Now?

[km4hr]

I read some advice recently recommending avoidance of new I-bond purchases. The reason was that I-bond rates could reasonably fall to 2% next May(?) because the inflation part of the total return will drop to almost nothing. Has inflation fallen that much recently? What is your opinion on I-bonds now?

 

[cute fuzzy bunny]

Inflation may not have fallen that much, but CPI is well under control.

During times of high, uncontrollable inflation, CPI indexed securities are a good idea. Having seen some of the thousands of pages of wordsmithing around how the CPI is created, and seeing everything...and I mean everything...with the exception of consumer electronics bought every 3-10 years...go up through the roof while the CPI ticks off 1-3% increases...I'll take my chances with other investments.

Housing is up huge. Gas is up huge. Food is up. Healthcare is through the roof. This is 2%?

 

[GTM]

The reason was that I-bond rates could reasonably fall to 2% next May(?) because the inflation part of the total return will drop to almost nothing.

I don't buy this theory. The currently issued I bonds have a fixed portion of 1%. If the bond is going to pay 2% then the inflation portion can only be 1%.
The older I bonds have a fixed portion of 3% so theres no chance of those paying less than 4%.

At worst if you bought an I bond you can always redeem it after a year with a 3 month interest penalty. Not a very big loss
Try getting out of a muni bond when there is a dramatic change in rates.

 

[grumpy]

The time to buy inflation protected bonds is when inflation is LOW. When inflation is high, the demand for these bonds goes up so the US Treasury can lower the fixed portion of the yield and still sell plenty of them. While the fixed portion currently is only 1%, it could get lower in the future. The whole point of buying I bonds is as an insurance policy in case hyperinflation takes off. You are not going to get rich on these, you just hope not to get poor due to the effects of inflation.

Grumpy

 

[Maximillion]

GLD is up 40% YTD, that is telling you something?

 

[haha]

Where the tax aspects won't hurt you, it seems to me that TIPs are much better priced than I-Bonds right now. If choosing between one or the other, give a look to TIPs.

Ha

 

[GTM]

Tax Considerations
Interest earnings are exempt from State and local income taxes, but are subject to State and local estate, inheritance, gift, and other excise taxes.
Interest earnings are subject to Federal income tax.
Interest earnings may be excluded from Federal income tax when used to finance education (see education tax exclusions)

 

[Nords]

I can't see the I bond rate going lower in May, but I could see it going up a quarter-point or so.  The problem is that last November has everyone thinking that I bonds will pay 6.73% for the next 30 years, so there'll probably still be strong demand through May.

How many I bonds are you planning to buy?  How much will it cost you to be wrong?  It might be better to just DCA a bond or two every six months and stop trying to outguess both Bernanke & the Treasury.

GLD is up 40% YTD, that is telling you something?

It's telling me that you don't seem to have much to contribute to a conversation about bonds... just an pithy one-liner with a veneer of apparent credibility and no discussion to back it up.

If you're trying to say that GLD is up because inflation is soaring, I'd disagree.  I'd suspect that GLD's price is more closely linked to the dollar's drop.

 

[retire@40]

The time to buy inflation protected bonds is when inflation is LOW.

You are right. Try to buy them when the fixed rate is high and the inflation rate is low.
They don't look very appealing at current rates.

I bought some I bonds a few years ago and the last time I checked, I was getting about 9% on them.

 

[Nords]

I bought some I bonds a few years ago and the last time I checked, I was getting about 9% on them.

When those 3% base-rate I bonds came out I think that Mel Lindauer over at the Vanguard Diehards board bought $60K for himself and another $60K for his spouse, and then begged the Treasury for an exemption to buy more. The VDs probably grabbed a substantial portion of the auction all by themselves.

But considering TH's comments on what kind of inflation it takes to get the CPI to produce that interest rate, I'd rather live in a world where I bond yields suck.

 

[Craig]

I'm not an expert in I-Bonds, but I agree that CPI is a rigged game. Not interested in buying an investment that is indiexed by the same guys that are manipulating the index. Prefer equities, commodities, T-bills, money markets.

Agreed on the price increases. So many indicators are putting the lie to CPI these days. A few more years and it will be a well-recognized laughing stock ... often takes time for truth to become accepted.

 

[lazyday]

Tax Considerations
Interest earnings are exempt from State and local income taxes, but are subject to State and local estate, inheritance, gift, and other excise taxes.
Interest earnings are subject to Federal income tax.
Interest earnings may be excluded from Federal income tax when used to finance education (see education tax exclusions)

I could be wrong, but I think that the inflation adjustment is also tax deferred until you sell the bond, unlike with TIPS in a taxable account.
In a hyperinflation environment, that could be a huge benefit.

 

[cute fuzzy bunny]

But considering TH's comments on what kind of inflation it takes to get the CPI to produce that interest rate, I'd rather live in a world where I bond yields suck.

I'd buy 3% tips or ibonds too. Why not? CPI will probably be allowed to float around the 1-3% range. Thats as good as cash.

Granted if inflation surges off (and CPI tracked it), they'd be a nice idea. Given the price increases so many goods and services have seen the last couple of years, their relative non-impact on CPI should be well noted.

I still see a whole buncha invisible inflation. Meals getting smaller, items dropped from the plate, services reduced to worthless wastes of time. I imagine at some point you just cant take anything else off the plate or get your service costs any cheaper and you have to start raising prices. Maybe CPI is forced to fall in line with 'real' inflation at that point.

 

[Gone4Good]

I read  some advice recently recommending avoidance of new I-bond purchases. The reason was that I-bond rates could reasonably fall to 2% next May(?) because the inflation part of the total return will drop to almost nothing. Has inflation fallen that much recently? What is your opinion on I-bonds now?

I think too much focus on short-term CPI readings may lead you astray. Who cares whether the return over the next 6 months will be 2% or 10% when buying a security with a holding period from 5-30 years? The reason to buy I Bonds or TIPs is to protect against CPI (a.k.a. inflation) over the relevant 5-30 year holding period, not the next six months.

There is, however, a bigger reason NOT to buy I Bonds now . . . the all-important fixed rate is a meager 1%. The fixed rate is the amount you earn in addition to CPI and never changes for the life of the security (because it's fixed ). The fixed rate is the relevant measure to look at when evaluating I Bonds or TIPS (not CPI). The fixed rate, or "real yield" on I Bonds of 1% is considerably lower than the ~2.2% currently being offered by TIPS.

Considering the huge difference in yields between TIPS and I Bonds, I'd be looking at TIPS right now. But, if you can wait until May, the fixed rate on I Bonds will be re-set and should be higher. How much is anyone's guess but it will certainly be worth waiting the extra month or two to lock in the higher yield.

 

[Nords]

But, if you can wait until May, the fixed rate on I Bonds will be re-set and should be higher.

I've read that if you can wait until the end of May, say the Monday or Tuesday of the last business week, you can get the whole month's interest with your purchase.

 

[GTM]

I've read that if you can wait until the end of May, say the Monday or Tuesday of the last business week, you can get the whole month's interest with your purchase.

I would buy them at the end of April prior to the change if you feel the inflation portion is going down or the fixed portion will not change much.

When you buy the I bond say April 20 or so you will get the current rate for 6 months even after the change has taken place in May. So you get 6.73% for 6 months from the April purchase date.
If I bonds are not appealing leave them to rennew in October for 6 months then next April you can sell with the 3 month penalty.
These are not going to make you alot of money but if you have up top 60K liquid why not. Especially if you live in a state with a high tax rate.
Also rememeber these are tax deferered so you can control when you take the money. If 2007 is an RE year for you and you income is low you will pay less Fed Tax if you redeem that year.