Confused about I-Bond rates

[moguls]

I just read an article in AARP Magazine (May/June 2006) that says IBonds are currently yielding 6.73%.   When I look at the rates on Treasurydirect.com it looks like the combined yield is 2.4%.    What am I missing here?

Thanks
Moguls

 

[brewer12345]

The T-Direct rate is correct. The rate just changed today (and it sucks).

 

[justin]

Yep. Now you get a 1.4% fixed (for life) return and whatever the CPI inflation is. For May-October 2006, the CPI works out to 1.0% annualized, for a total annualized return of 2.4%.

 

[moguls]

Thanks folks.  I just checked out AARP's website and they refer to the same 6.73%.  They  must be smoking something.

I'm looking for the best place to park some intermediate term cash.    Won't need it for 2 - 4 years.     At this point I'm leaning towards simply parking it in a CD.   Any suggestions?   

Moguls

 

[wabmester]

6.7% was the correct annualized yield yesterday.    Both the fixed real portion and the inflation adjustment change every six months (May 1 and Nov 1).

PenFed offers 6% CDs for 3-5 years, and that looks pretty good to me.

 

[brewer12345]

Thanks folks.  I just checked out AARP's website and they refer to the same 6.73%.  They  must be smoking something.

I'm looking for the best place to park some intermediate term cash.    Won't need it for 2 - 4 years.     At this point I'm leaning towards simply parking it in a CD.   Any suggestions?   

Moguls

A CD from Pen Fed isn't a bad idea. Money market fund from VG is decent as well. I have been buying ISM lately, but you'd have to be willing to put up with a small amount of the price flopping around (compensated by yield of CPI plus over 3%).

 

[modhatter]

Penn Fed. I remember looking at their site and answering their questions, which then told me I would not qualify. Is it imperative to be 100% truthful to these questions?

 

[brewer12345]

Penn Fed.  I remember looking at their site and answering their questions, which then told me I would not qualify.  Is it imperative to be 100% truthful to these questions?

You can join if you become a member of the National Military Family Assn for $20. They even have a joint application where they sign you up for both at the same time. Go peruse the site again.

 

[Cut-Throat]

The T-Direct rate is correct. The rate just changed today (and it sucks).

I just looked at some that I purchased last year and the rate said 6.73% on the T-Direct site. Does the new rate affect previously purchased Bonds or do these also pay the meager rate. If so, does it make any sense to pull them out and just move them to my Emmigrant Savings Account paying 4.5%?

 

[brewer12345]

I just looked at some that I purchased last year and the rate said 6.73% on the T-Direct site. Does the new rate affect previously purchased Bonds or do these also pay the meager rate. If so, does it make any sense to pull them out and just move them to my Emmigrant Savings Account paying 4.5%?

I bonds have a fixed (real) rate and an inflation adjustment. The fixed part never changes over the life of the fund. So if you bought in the second half of last year, congratulations, you just locked in a 1% real return for the life of the bond (sarcasm). It is the inflation adjustment that flops around. I don't find a 1% real return to be all that attractive, so I would be thinging about dumping the bonds if I owned them.

 

[Cut-Throat]

I bonds have a fixed (real) rate and an inflation adjustment. The fixed part never changes over the life of the fund. So if you bought in the second half of last year, congratulations, you just locked in a 1% real return for the life of the bond (sarcasm). It is the inflation adjustment that flops around. I don't find a 1% real return to be all that attractive, so I would be thinging about dumping the bonds if I owned them.

Actually, I bought them in December of 2004 - If I check the Treasury Direct Account today, It still lists 6.73% as the interest rate. Do you know to find out what my 'real' rate of return is?

The website does not seem to have very specific info on what portion is real and what portion is inflation adjusted.

 

[brewer12345]

Actually, I bought them in December of 2004 - If I check the Treasury Direct Account today, It still lists 6.73% as the interest rate. Do you know to find out what my 'real' rate of return is?

Ask and you shall receive: http://www.publicdebt.treas.gov/sav/sbirate2.htm

Looks like you locked in that smokin' 1% rate, you lucky guy.

 

[Cut-Throat]

Ask and you shall receive: http://www.publicdebt.treas.gov/sav/sbirate2.htm

Looks like you locked in that smokin' 1% rate, you lucky guy.

Well, before I sell them, can you explain what is the 6.73% that is listed on my bond?

 

[Dawg52]

Remember all the recommendations from various financial articles concerning I-bonds? I wonder what the same ones that recommended them would say now? I will probably hang on to the ones I own as they will probably have their day again, but I can't see buying anymore. 

 

[justin]

Cut throat - your yield for the next 6 months will be 2.0% annualized - 1.0% from the fixed rate and 1.0% for the inflation component. That 6.73 was the rate yesterday and for the preceding 6 months. If it still says 6.73, it probably hasn't been updated yet.

 

[brewer12345]

Well, I parked some money there about a year ago, that I need this year to buy a car, so it's probably time to redeem them. 

CT - Been too busy lately and have not been paying attention!

Not exactly the end of the world.

I just think it is pretty schitty of the gummint to pay below market rates on stuff that is bought by the clueless small fry. Didn't use to be that way.

 

[audreyh1]

So the REAL problem is that the May 2006 semi-annual inflation rate is was set to 0.5%.  

This has come way down from the last 6 months where the semi-annual inflation rate was 2.85%

The formula for the total (composite) rate is:

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate X Semiannual inflation rate)]

I guess they are giving you an annualized rate there for the "composite rate"?

Hmmm - looks like my May 2003 IBonds are going to be earning a whopping 2.11% (annualized) for the next 6 months.

But look how variable that semi-annual inflation rate is:

DATE INFLATION RATES*
MAY 1, 2006 0.50%
NOV 1, 2005 2.85%
MAY 1, 2005 1.79%
NOV 1, 2004 1.33%
MAY 1, 2004 1.19%
NOV 1, 2003 0.54%
MAY 1, 2003 1.77%
NOV 1, 2002 1.23%
MAY 1, 2002 0.28%
NOV 1, 2001 1.19%
MAY 1, 2001 1.44%
NOV 1, 2000 1.52%
MAY 1, 2000 1.91%
NOV 1, 1999 1.76%
MAY 1, 1999 0.86%
NOV 1, 1998 0.86%
SEP 1, 1998 0.62%
*semiannual rates

Audrey

 

[brewer12345]

Nope. The real problem is that the real rate is far, far below what you canget with TIPS or other CPI linked notes. The treasury has set it so low that the rubes buying I bonds are getting rooked. They did the same thing to the EE bond.

 

[haha]

I have been buying ISM lately, but you'd have to be willing to put up with a small amount of the price flopping around (compensated by yield of CPI plus over 3%).

Brewer, I wish you could maybe run through the calculation that gives you CPI + 3% from ISM.

As I figure it, it is nowhere near that except with fairly extreme assumptions. As long as you buy ISM at a discount, you will get some amount>2.05% over CPI. (Unless delta CPI is negative. The monthly floor is 0, not (0+2.05)/12)

How much over CPI will depend on reported CPI in every monthly period. For example, I made a spreadsheet. If ISM is bought at $22.50, it returns at least 3% over CPI only if CPI is 6.5% or greater. The actual calculation is very complex, since it is figured monthly. But as a generalization, if you bought at $22.50, and CPI was regular 6.5%  over the previous years corresponding month, then you would indeed get 3% over CPI. Otherwise, less.

If I am missing something, could you help me to see what I am misunderstanding?

Ha

 

[Dawg52]

Well I've been grouped with the clueless small fry and a rubes today.  Think i'm gonna go home and cry in my beer. 

 

[haha]

Well I've been grouped with the clueless small fry and a rubes today.  Think i'm gonna go home and cry in my beer. 

Yeah, I think we are seeing why Brewer works behind the scenes. Please pass the empathy?

Ha

 

[brewer12345]

Brewer, I wish you could maybe run through the calculation that gives you CPI + 3% from ISM.

As I figure it, it is nowhere near that except with fairly extreme assumptions. As long as you buy ISM at a discount, you will get some amount>2.05% over CPI. (Unless delta CPI is negative. The monthly floor is 0, not (0+2.05)/12)

How much over CPI will depend on reported CPI in every monthly period. For example, I made a spreadsheet. If ISM is bought at $22.50, it returns at least 3% over CPI only if CPI is 6.5% or greater. The actual calculation is very complex, since it is figured monthly. But as a generalization, if you bought at $22.50, and CPI was regular 6.5%  over the previous years corresponding month, then you would indeed get 3% over CPI. Otherwise, less.

If I am missing something, could you help me to see what I am misunderstanding?

Ha

I can't see your spreadsheet, so I've no idea what you did right or wrong.  Bt it sure sounds like you took a major turn into left field and maybe ran right through the fence to go join Greg and Rothbard in the basement.

I'm a lazy person at heart, so if I can think my way through something I won't actually do the math.  This is one of those cases.  Let's assume that the CPI adjustment never goes negative.  I know its a faulty assumption, but I don't feel like mucking about with Black-Scholes based interest rate options simulators to actually determine the value of the embedded floor I am giving away.  So if that is the case, we have an instrument that pays CPI plus 2.05% on par of $25.  If it sells at a discount to par, you have two sources of extra yield over the stated coupon: 1) the leverage you get on the coupon and 2) the accretion up to par as we get closer to maturity.  From door #1, you get aditional yield of (2.05% times (25/22.50)) - 2.05% = about 23BP.  From door #2 you get about another 96BP.  The way I get this is to take 22.50 and multiply it by (1+X)^11, plugging in numbers for X until I get to 25.  So I see totla yield over CPI of 2.05 plus .23 plus .96 equals 3.24%.  Note that this is the yield in addition to whatever CPI is.

That's how I get to CPI plus over 3%.  Now I gave away an embedded floor, but I am willing to do so at these prices.  You do the same thing with an I Bond, which is the main thing I am comparing ISM to.

 

[brewer12345]

Well I've been grouped with the clueless small fry and a rubes today.  Think i'm gonna go home and cry in my beer. 

Sorry. I guess I could have been more politic. I just think the treasury is taking advantage of people and I don't like it.

 

[scrinch]

Okay, I give up. What is ISM? And while we're at it, what's all the dryer sheet mumbo jumbo? :

 

[Dancer373]

For the past 2 years I have been buying small I Bonds for my young grandchildren (ages 3 and 1 yrs old). I buy for their birthdays and Christmas thinking it would be helpful for them in 15 years or so. After reading this ,I`m not so sure about that. Can anyone suggest something better ? Thanks for any help