wabmester said:
I'm not sure that I'd call that "risk." First, an inflation premium is supposed to be built into all bonds (not just inflation indexed bonds), so if the market believes that the fed is under-reporting inflation, that should be reflected in how the market prices the bond. Second, you can always sell the bonds if you feel you're being undercompensated and invest elsewhere, so this "risk" doesn't seem to affect your returns.
Bottom line: bond yields are a function of market forces, not government fiat.
Wabmester
I agree with you that at the point the return or projected return on any bond does not fairly compensate, the instrument can be sold.
I also agree that any bond does have an inflation premium built in. Thus, a 6% bond may have a 3% inflation premium and 3% real return.
I do not agree that government inflation adjusted bonds (I and TIPS) are structured so that yield is a function of market forces. The bonds are sold at par with a fixed rate and an inflation adjustment. The inflation adjustment is based on CPI. CPI is a government generated figure that is subject adjustment in the actual figure, but more importantly to adjustment in the method of computation.
As the upcomig budget crunch becomes more severe, the potential to adjust to benefit the government, IMHO, will increase. Its not just the bonds that are subject to this adjustment, but other government payments as well. I believe that the potential to "adjust" the numbers is present.
Don't believe me, look no further that the figures presented to Congress regarding the cost of Medicare prescription drugs. True figures were held back.
BTW, I'm still holding the I bonds, bought some time ago. Think they are a good investment at this time. I do, however, recognize the potential for the government to play games with the return.
Uncledrz