Savings bonds....I bonds making a come back

[rollergrrl]

What are your thoughts on investing in T-bills, Notes, TIPS, FRNs and saving bonds?

[Freedom56]

Rates are still too low. The current I-Bond rate is only 2.58% and is adjusted every 6 months. If you are looking for safety, FDIC insured CDs may be a better option or if you want liquidity a money market savings account (such as Amex at 1.45%) may be a better option. I would look for 10 year note rate of at least 4% before I would consider it. Below that, there are much better options.

[OldShooter]

We view TIPS as critical insurance against runaway inflation like we had in the 70s and 80s. Really, this kind of inflation is the only thing that could ruin our retirement. Yield is much less of a concern, but IMO people are silly when they look at yield without looking at the bonds' increase due to the inflation adjustment of principal value. Whatever we do lose at the margin in yield is simply the cost of insurance. Not to be obsessed over.

If inflation takes off, TIPS will substantially increase in value. First, Treasury will stop issuing them with a view to not be throwing gasoline on a fire. Secondly, their prices will be bid up into negative yield territory by people who are totally panicked by the inflation. So I think we will do well. At worst, we have a substantial inflation-proof nest egg.

I have looked at I bonds a couple of times, both very briefly as they seem to be designed for very small savers and have some other negatives that I don't offhand remember.

For shorter term parking of funds, we've just been buying t-bills on the auctions. Much more liquid than brokered CDs but at a cost of some reduced yield.

Regarding govvies in general maybe supplemented with high-grade corporates, they make sense to me for the "fixed income" side of the portfolio. We have that side of the portfolio as the "low risk" portion, right? So I have never understood those who immediately take that side and go chasing volatility and risk in things like junk and emerging markets. Risk is easy to achieve by leaving a little more on the equity side of the split.

[GrayHare]

TIPS are inflation insurance. I dislike that their rate is whatever rate the government declares as official, rather than what my inflation rate is. Should I need lots of health care, and health care is inflating at a 10% rate when TIPS are paying 4% I'm losing ground.

[OldShooter]

Quote:

Originally Posted by GrayHare TIPS are inflation insurance. I dislike that their rate is whatever rate the government declares as official, rather than what my inflation rate is. Should I need lots of health care, and health care is inflating at a 10% rate when TIPS are paying 4% I'm losing ground.

Absolutely true. But you are still better off with TIPS in a high-inflation environment than you would be without inflation protection. The glass is definitely half-full IMO.

[GrayHare]

Quote:

Originally Posted by OldShooter Absolutely true. But you are still better off with TIPS in a high-inflation environment than you would be without inflation protection. The glass is definitely half-full IMO.

In the specific example, which is one we all face with some chance, I would hope a health care fund would track inflation better than TIPS.

[donheff]

How much inflation protection do you really get from a a small allocation TIPS anyway? Seems like you would have to have a boatload to cover much of your expenses in a 70s scenario.

[MichaelB]

The inflation adjustment from TIPS is taxable ordinary income, so in most cases after tax, it will always lose real purchasing power. It’s attractive for a pension fund that is not concerned about tax, but not really for individuals. There is no asset or investment that is guaranteed to hold after tax real value, but a portfolio with at least 35% - 40% equities comes closest.

[Blueskies123]

Quote:

Originally Posted by MichaelB The inflation adjustment from TIPS is taxable ordinary income, so in most cases after tax, it will always lose real purchasing power. It’s attractive for a pension fund that is not concerned about tax, but not really for individuals. There is no asset or investment that is guaranteed to hold after tax real value, but a portfolio with at least 35% - 40% equities comes closest.

And it seems one would have to have the additional complexity of buying the TIPS directly from the FED. I looked at a few TIPS funds and they are basically yielding zero so they have already been bid up in price.

[OldShooter]

Jeez, you guys get up early! Now I have to catch up ...

Quote:

Originally Posted by GrayHare In the specific example, which is one we all face with some chance, I would hope a health care fund would track inflation better than TIPS.

Actually, I think the opposite. The federal government is already the biggest health care customer and they have plenty of medicare and medicaid experience telling vendors what they will be paid. As costs continue to rise, this hammer will be used more and more. Consider the jungle drums in Washington now indicating that drug companies' profits may be on the chopping block. If not this year, soon. So I would be avoiding health care, not investing in it.

Quote:

Originally Posted by donheff How much inflation protection do you really get from a a small allocation TIPS anyway? Seems like you would have to have a boatload to cover much of your expenses in a 70s scenario.

Well, boats come in various sizes. In our case we have serious six figures in our TIPS insurance policy. But I think it's a "Some is good, more is better." situation. People with less money probably have a greater need for inflation insurance as one big wave could sink a small boat.

Quote:

Originally Posted by MichaelB The inflation adjustment from TIPS is taxable ordinary income, so in most cases after tax, it will always lose real purchasing power. It’s attractive for a pension fund that is not concerned about tax, but not really for individuals. .

True enough, the bold print giveth and the fine print taketh away. We hold our TIPS in tax-sheltered accounts, which is a bit of a help. I don't think the tax argument leads to a conclusion that they are only for pension funds, though.

Quote:

Originally Posted by MichaelB There is no asset or investment that is guaranteed to hold after tax real value, but a portfolio with at least 35% - 40% equities comes closest.

With respect, you don't know that. All you can say is that such a portfolio backtests well. The 70s and 80s were a very different time. Unions and inflation-indexed wages were much bigger factors. Also, the problem was more or less home-made though triggered by oil prices. Hence wage and price controls.

IMO the next big hit, due someday, will be the loss of the dollar's status as the world's reserve currency. Everyone hates us and everyone hates that fact that we can and do use our banking system as an instrument of policy. Also, our elected idiots are goosing the debt well into banana-republic levels. We are not yet Greece but we are on that trajectory.

So, what happens when the dollar loses 20%? Well, all our direct imports of electronics, clothing, etc. go up by 25%. All commodities like food, lumber, oil, etc. also go up by 25%. Prices are mitigated by sellers of consumer staples and consumer durables desperately cutting margins to preserve their top lines. Energy companies, who knows? The Fed has absolutely no mechanisms to control this type of inflation, so in such a scneario who knows whether a successfully back-tested equity strategy is even close to optimum. I certainly don't and, with respect, I doubt that you do either.

Think it can't happen? Look at the history of the Euro. IIRC it has ranged more than 100%, from 90 cents to $2. Or read some recent economic history of southern Europe.

Quote:

Originally Posted by Blueskies123 And it seems one would have to have the additional complexity of buying the TIPS directly from the FED. I looked at a few TIPS funds and they are basically yielding zero so they have already been bid up in price.

Additional complexity? I just call the Schwab bond desk and tell the nice man how many bonds I want to buy on the next auction and it's done. If he's feeling generous (usually) he waives the $25 fee.

But remember they are not yielding anything like zero. They are yielding actual inflation plus a variable amount determined by the market. In the last 10 years our TIPS have yielded, net of coupon and inflation adjustments, over 3%. That's not too shabby IMO.

Re TIPS funds yielding zero, that simply shows that using a fund to buy govvies is like flushing money down the toilet.

[copyright1997reloaded]

My how I miss being able to grab more of those 3.8-4.0 real rate (+ inflation) TIPS and other inflation adjusted notes.

[brewer12345]

Lately I have been buying floating rate treasuries at auction. They are 2 year maturity and pay quarterly interest that is an average of the last quarter's 90 day t bill rates. Not very exciting, but it doesn't get lower risk.

[copyright1997reloaded]

Quote:

Originally Posted by brewer12345 Lately I have been buying floating rate treasuries at auction. They are 2 year maturity and pay quarterly interest that is an average of the last quarter's 90 day t bill rates. Not very exciting, but it doesn't get lower risk.

So about 1.45-1.50% currently?

Silly question, but what is the advantage of them over buying (and rolling) 90 day treasuries?

[brewer12345]

Quote:

Originally Posted by copyright1997reloaded So about 1.45-1.50% currently? Silly question, but what is the advantage of them over buying (and rolling) 90 day treasuries?

Laziness on my part is #1 on the list. I tend to forget to reinvest when T bills mature, so the floaters do it for me. Depending on the market, you might get a few bps more yield, but it is pretty much de minimus. Last t bill quote was 1.62%.