The I Bond Thread

Mulligan said:
The TIPS fixed is getting hard to ignore compared to IBonds. A 10/27 TIPS I bought this week had a fixed of over 2.2%. Well above the IBond fixed.
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The 2%+ real yield is attractive. I bought a couple earlier this week, a 10/32 and 10/33. I only wish there were TIPS maturing between 2034-2039 so I could build out my ladder.

I’m hoping rates hold through the January 10 year auction so I can get a 2034 maturity. If rates are good, I might double the amount and fill my 2035 allocation too.
 
No, but I really like it. Definitely bookmark that one!

That would be a great tool to construct a social security bridge... it could provide inflations adjusted cash flow from ER or 62 to FRA or 70 for those chosing to delay SS.
 
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pb4uski said:
No, but I really like it. Definitely bookmark that one!

That would be a great tool to construct a social security bridge... it could provide inflations adjusted cash flow from ER or 62 to FRA or 70 for those chosing to delay SS.
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So did I. Thanks Blueberry!
 
I'm not getting the ladder thing. Is the idea that one has a stack of money and buys T-bills or bonds going out several decades and then lives on the interest and maturing bonds as the years roll by? Is it an ongoing process where one buys what one can, funding the earliest years first?

I've been buying 26 week T-bills every month, using the funds from the maturing T-bill to buy the next 26 week bill.
 
calmloki said:
I'm not getting the ladder thing. Is the idea that one has a stack of money and buys T-bills or bonds going out several decades and then lives on the interest and maturing bonds as the years roll by? Is it an ongoing process where one buys what one can, funding the earliest years first?

I've been buying 26 week T-bills every month, using the funds from the maturing T-bill to buy the next 26 week bill.
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Same here. Seems like buying TIPs is a form of gambling on inflation except that bond coupons are low.

I can't figure these things out to get any kind of feel for what my anticipated final return will be at maturity. Plus, I think you have to pay taxes on the interest along the way?

At least if you buy a 5 or 10 year treasury bond with a fixed coupon like 4.03% (example), you can calculate the interest payments and total return over the life of the bond.
 
I look at TIPS as getting a known real return without having to worry about inflation.

For short-term, I would avoid TIPS. I think they’re best used if you are worried about SORR and want to guarantee income for a set number of years 5+ years out.

We tend not to think about inflation, so we don’t factor it - or not as easily - into our returns. But historically inflation has averaged around 2-3%, so buying 10 year+ TIPS should return around 4-5%. Pretty much the same as 10 year treasuries.

And I only buy TIPS in tax sheltered accounts. I don’t want to deal with taxes on TIPS (sounds like a pain).
 
aja8888 said:
Same here. Seems like buying TIPs is a form of gambling on inflation except that bond coupons are low.

I can't figure these things out to get any kind of feel for what my anticipated final return will be at maturity. Plus, I think you have to pay taxes on the interest along the way?

At least if you buy a 5 or 10 year treasury bond with a fixed coupon like 4.03% (example), you can calculate the interest payments and total return over the life of the bond.
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The idea is you can lock in a real inflation adjusted return for the duration of the ladder. If you buy various TIPS of different maturities out 10 years, and assuming they are all around 2.0% fixed rate return, you are guaranteed your principle plus 2.0% each year, adjusted for inflation.

In theory people should be concerned about inflation adjusted yields, not nominal yields.

Yes the interest and inflation adjustment are taxable. TIPS work best in tax advantaged accounts.
 
TIPS ladders are a for of DIY annuity/income replacement, except that you know exactly when they will stop, unlike annuities. They're a good way to get guaranteed income (because they will cover inflation since you cash them only when they are mature) plus a small nominal return
you may get 2% return on TIPS, when a 60/40 portfolio would have returned 5% over inflation, but one is a sure thing the other is not. Your portfolio might have a balance some years.
This is why TIPS ladders can be a good bridge to SS, cover at least your basic expenses, or match what you'll get from SS, and SWAN. You know, or at leat control when you will take SS, so you can build your ladder accordingly.
 
If i buy a secondary TIP with 4 years left at say 1,200 and inflation goes down could I not get the 1,200 back?
 
DuluthGA said:
If i buy a secondary TIP with 4 years left at say 1,200 and inflation goes down could I not get the 1,200 back?
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The lowest that TIPS will pay out is face value (par value) of $100/bond. If we experience deflation (meaning negative inflation numbers, not just a drop closer to 0) the payout of TIPS can drop until it hits face value.

Most brokerages have 10 bonds as the minimum, so for a $1200 purchase in the secondary market if you're paying $120/bond yes you can lose the $20 of principal if deflation occurs. On the other hand if you're buying 20 bonds at a discount for $60/each, you're guaranteed to get the $100 face value. Both of these numbers are unrealistic, I doubt you'll find tips going for $60 or $120 but it should demonstrate the idea.

Lots of TIPS investors like to buy TIPS for at/under par value for this reason: the principal is then protected.

Like others, I can't justify buying I-bonds over TIPS right now. I'm hoping that on Nov 1st the treasury issues a higher fixed rate for I-bonds, and I can load up for 2023.
 
Ibonds

https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/



The actual rate of interest for an I bond is a combination of the fixed rate and the inflation rate. The combined rate can, and usually does, change every 6 months.
I bonds protect you from inflation because when inflation increases, the combined rate increases.
Because inflation can go up or down, we can have deflation (the opposite of inflation). Deflation can bring the combined rate down below the fixed rate (as long as the fixed rate itself is not zero). However, if the inflation rate is so negative that it would pull the combined rate below zero, we don't let that happen. We stop at zero.
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IMO, Ibonds have the virtue of being simple.

Tips

https://www.investopedia.com/articles/investing/102215/3-reasons-stay-away-tips.asp

On the other hand, TIPS have very real issues during periods of financial stress when traditional Treasury bonds shine. The problem is due to the way the government designed the deflation floor for TIPS. The Treasury guarantees that the principal for TIPS will not fall below the original value.

However, later upward adjustments for inflation can be taken back if deflation occurs. Therefore, newly issued TIPS offer much better protection from deflation than older TIPS with the same time to maturity. When deflation becomes an issue, as it did in 2008 and again in March 2020, TIPS ETFs, such as the iShares TIPS Bond ETF (TIP), declined significantly.
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If a TIP is paying 2% real, and I put my living expense for 1 year into it, then at some point in the future, 5, 10, 15 years from now, I should be able to take out that money and meet current living expenses, all things being equal, and still have a bit left over. If this is not the case then some wool has been pulled over our eyes in the inflation calculation or the TIP calculation.

I mean over a basket of goods, not just 1 or 2 items.
 
TIPS will be volatile with interest rate changes. This is because their coupon is low and a lot of the value is in appreciation of the principal which is paid at the end.
 
Montecfo said:
TIPS will be volatile with interest rate changes. This is because their coupon is low and a lot of the value is in appreciation of the principal which is paid at the end.
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this is why ladders are built on bonds being cashed in at maturity. You have no idea what they will be doing between now and then, but you know what they do when you cash them out. You should ladder so that they provide the cash you need on each rung of the ladder. There is a lack of flexibility that comes with that which is why I liken them to annuities.
 
To recycle them, you have to cash them in, any return over what you paid for them will be taxable. It would take a sizable increase for me to do that, though I doubt it would be large enough next month.
 
The now is like a step up in basis. Pay it now or pay later. Depending on your current bracket vs future, it could matter.
I happen to need extra cash early in the year to make deferred contributions to my Roth IRA, so the tradeoff on taxes should be a wash, so I will "upcycle" $20K worth.
 
beowulf said:
To recycle them, you have to cash them in, any return over what you paid for them will be taxable. It would take a sizable increase for me to do that, though I doubt it would be large enough next month.
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I could buy more but not cashing in yet. Need to keep income low.
 
All makes sense. My wife and I have met our max for 2023, so we will have to wait until Jan 24. Not sure exactly which tax bracket we will be in next year, so I’ll stand pat for now.
 
beowulf said:
To recycle them, you have to cash them in, any return over what you paid for them will be taxable. It would take a sizable increase for me to do that, though I doubt it would be large enough next month.
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Understand. Not a problem in my case as the ones with the lowest fixed rate also haven’t had a super long time appreciating, so I can deal with the taxable income. I manage my annual income to stay within a certain IRMAA bracket, and if I have room I’ll pay taxes now rather than later.

I was considering cashing these out anyway.
 
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