U.S. Bonds @ inflation

[Gone4Good]

However, if you "never, ever" cash in that bond, what good is it, other than sort of pretty. The only way that I know of to get that good interest out is to redeem the bond.

Well, I hope you would after 30 years, since they won't earn any more interest after that.

I often wonder if literal interpretations like this are honest misunderstandings or are deliberately argumentative.

In either event, after they stop accruing interest they don't really have a 3+% real rate anymore, do they? So even if you TRY to misinterpret my comment by applying a ridiculously literal interpretation, it still makes sense as written.

 

[zzyp]

3.6% fixed rate? Unlikely

I am not selling my I-bonds with real rates interest rates of between 3.4 to 3.6%, with tax free compounding, until 30 years is up or I die which ever comes first.

According to the Treasury's I Saving Bonds Rates & Terms web page, the highest fixed rate for I bonds was 3.4%, and that was only a two month period in 1998.

The actual rate (composite of fixed + inflation adjustment) was recently as high as 7.99% with 3% fixed (before it dropped to 0 for 6 months).

 

[clifp]

According to the Treasury's I Saving Bonds Rates & Terms web page, the highest fixed rate for I bonds was 3.4%, and that was only a two month period in 1998.

The actual rate (composite of fixed + inflation adjustment) was recently as high as 7.99% with 3% fixed (before it dropped to 0 for 6 months).

Nope I-bonds bought between May and Nov 2000 earned a 3.6% rate. Actually the ones I bought in Aug 2000 earned a slightly higher rate, since I got a 1% cash back from my Discover Card and I got a ~45 day float on the money. . The treasury department stopped allowing the use of credit cards to buy I-bonds and frankly buying them $500 at time was somewhat of pain. In quite buying them when the fixed rate dropped to 3.00% in 2001.

I was just learning about the 4% SWR so I sold tech stocks to buy I-bonds and TIPs with interest rates close to 4% in 1999 and 2000. Probably the best "market timing", I've ever done.

 

[haha]

According to the Treasury's I Saving Bonds Rates & Terms web page, the highest fixed rate for I bonds was 3.4%, and that was only a two month period in 1998.

Wow, you are off to great start!

Move over Millionaire Mommy, move over *****!

Ha

 

[Darryl]

Move over Millionaire Mommy, move over *****!
Ha

It seemed so exciting for a moment a "free" secretary willing to crunch the numbers for me and now several of you guys throwing cold water on the dream.

I'm awake now. Clifp and Co. congratulations on your timing. I get pretty excited when I can buy TIPS at 2.5%+ would love to see Ibond rates like that too.

 

[clifp]

It seemed so exciting for a moment a "free" secretary willing to crunch the numbers for me and now several of you guys throwing cold water on the dream.

I'm awake now. Clifp and Co. congratulations on your timing. I get pretty excited when I can buy TIPS at 2.5%+ would love to see Ibond rates like that too.

LOL Millionaire Mom that brings back fond memories.

Ah but the rest of the story is the "fun" part. You see those TIP bonds I bought, I sold in early 2008 at nice profit. I then proceeded to invest most of the money, in big name name banks stocks like BAC and bought a lot Sallie Mae inflation protected bonds ISM/OSM. Let see the BofA I bought at around $27 I sold recently at $13, and those medium term A rated ISM/OSM bonds I bought for $20 are now worth $12 and like all inflation bonds yielding near 0%.

Hence my initial comment about keeping the Ibonds.

 

[IndependentlyPoor]

I finally put the iBond composite rate formula into a spreadsheet. Here is a plot of the composite rate vs. the inflation rate for various fixed rates.

It may be more productive to view iBond return in real terms. Here is the real iBond rate vs inflation for several fixed rates.

Here is the spreadsheet
View attachment iBond rates.xls
The formula is here
Individual - I Savings Bonds Rates & Terms
It is interesting that the composite rate is not just fixed + inflation.

 

[Dave J]

You asked for advice on when to sell, I can only tell you what I did.
I sold $90K face value (+ int) of I bonds purchased in Dec '05 on Sep. 2nd of this year on

Hi zzyp,

Welcome to the board.

I was also lucky enough to also buy I-Bonds in Oct 2001 and get the 3% + inflation rate. One of the best things I've done, retirement and investment wise,for me.I'm curious, how did you purchase $90k face value in Dec '05?
In 01 the limit was 30k per SS number, so my SO and I each bought the limit?How did you get 90k?

 

[brewer12345]

Hi zzyp,

Welcome to the board.

I was also lucky enough to also buy I-Bonds in Oct 2001 and get the 3% + inflation rate. One of the best things I've done, retirement and investment wise,for me.I'm curious, how did you purchase $90k face value in Dec '05?
In 01 the limit was 30k per SS number, so my SO and I each bought the limit?How did you get 90k?

Probably had his pet sheep buy some.

 

[Alan]

Probably had his pet sheep buy some.

Shaun?

 

[zzyp]

How purchase $90K I's in '05, Want $20K now?

One message said:
"I was also lucky enough to also buy I-Bonds in Oct 2001 and get the 3% + inflation rate. One of the best things I've done, retirement and investment wise,for me.I'm curious, how did you purchase $90k face value in Dec '05?
In 01 the limit was 30k per SS number, so my SO and I each bought the limit?How did you get 90k?"

First, as one query asked, I didn't use my sheep.

The rules with $30K limit allow $120K per couple. $30K limit on on-line purchase, 30K paper bonds at the bank per purchaser's Social Sec.#, thus $60K for me with spouse as co-owner and $60K purchased by my spouse, me as co-owner. That adds up to $120K, but I set up only one on-line treasury account so only did $90K. It is no stretching of the rules, they state on-line limit is apart from paper bond purchase limit.

With the current $5K limit, the limit, using rules above would be $20K per couple. WHYBefore you consider it, look at current I bond rate. Rate will change in November, but any I bond purchase now starts off with 0.0% for the first 6 months before a positive rate. Waiting till Nov. maybe you could start out for 6 mo. with above zero rate. (Icon means crazy. I try not give advice unless asked, I just mean it sounds crazy, in my Humble Opinion)

 

[zzyp]

Happy to redeem in 30 years

Quote:
Originally Posted by . . . Yrs to Go
I'd never, ever sell an I Bond with a 3+% real rate. Don't care what the near-term inflation adjustment is.









"Well, I hope you would after 30 years, since they won't earn any more interest after that.

It'll be a sad day for me in 2030 when I have to redeem mine (3.4% fixed)."

Sad, not me, because I am approaching 80, so alive then is better than expected.

 

[Dave J]

One message said:
"I was also lucky enough to also buy I-Bonds in Oct 2001 and get the 3% + inflation rate. One of the best things I've done, retirement and investment wise,for me.I'm curious, how did you purchase $90k face value in Dec '05?
In 01 the limit was 30k per SS number, so my SO and I each bought the limit?How did you get 90k?"

First, as one query asked, I didn't use my sheep.

The rules with $30K limit allow $120K per couple. $30K limit on on-line purchase, 30K paper bonds at the bank per purchaser's Social Sec.#, thus $60K for me with spouse as co-owner and $60K purchased by my spouse, me as co-owner. That adds up to $120K, but I set up only one on-line treasury account so only did $90K. It is no stretching of the rules, they state on-line limit is apart from paper bond purchase limit.

With the current $5K limit, the limit, using rules above would be $20K per couple. WHYBefore you consider it, look at current I bond rate. Rate will change in November, but any I bond purchase now starts off with 0.0% for the first 6 months before a positive rate. Waiting till Nov. maybe you could start out for 6 mo. with above zero rate. (Icon means crazy. I try not give advice unless asked, I just mean it sounds crazy, in my Humble Opinion)

I thought the limit was 30k per ss number back then, regardless of how you purchased them and it changed to so much on line and so much in person when they lowered the limits. From the above, I guess I was misinformed.
Thanks for the answer.(wish I had bought more in 01)

 

[zzyp]

"Real" rates are unreal to me with negative C

I think I now understand the term "real rates", which are suppossed be be good. If so, I should be overjoyed to get an I bond 0% gain over 6 months, because I am getting a higher real rate than if I was receiving an interest rate above 0% on my I Bond. The higher the rate of DEflation, the higher is my real rate of 0%.

To me, "real" rates are hard to understand, and somewhat unreal. Also the math of

 

[zzyp]

Yes, there was a 3.6% fixed rate, true

Nope I-bonds bought between May and Nov 2000 earned a 3.6% rate. Actually the ones I bought in Aug 2000 earned a slightly higher rate, since I got a 1% cash back from my Discover Card and I got a ~45 day float on the money. . The treasury department stopped allowing the use of credit cards to buy I-bonds and frankly buying them $500 at time was somewhat of pain. In quite buying them when the fixed rate dropped to 3.00% in 2001.

I was just learning about the 4% SWR so I sold tech stocks to buy I-bonds and TIPs with interest rates close to 4% in 1999 and 2000. Probably the best "market timing", I've ever done.

Sorry for doubting, I overlooked the period of 3.6% interest in looking at the Fixed rate table. I too bought some bonds with a cash-back credit card when that option was available.

 

[zzyp]

It is interesting that the composite rate is not just fixed + inflation.

I think it is a correct calculation of CPI-U into an inflation adjustment in the long run, since interest rates are normally shown on an annual basis, but the I bond rates are for 6 month. It makes for wild swings if there is 6 month significant inflation or deflation, it is doubled into the 6 months inflation rate adjustment.

 

[IndependentlyPoor]

I thought I was doing well buying iBonds in August of 2000, but it never occurred to me to buy them on a cash back credit card! How cool is that?

Life certainly hands out surprises. A $100 iBond bought then is now worth $179 for a CAGR of 8.76%. I would have never dreamed that some iBonds would turn out to be my best investment 9 years later.

 

[zzyp]

That's cute

Shaun?

The singing sheep clip from Alan, or was it from Shaun, don't know what it has to do with I bonds, but cute anyway.

 

[zzyp]

It's a puzzle to me?

I thought I was doing well buying iBonds in August of 2000, but it never occurred to me to buy them on a cash back credit card! How cool is that?

Life certainly hands out surprises. A $100 iBond bought then is now worth $179 for a CAGR of 8.76%. I would have never dreamed that some iBonds would turn out to be my best investment 9 years later.

---------
If I bought a 3% fixed rate I bond with a credit card with 1% cash back, is it really like a 4% fixed rate for the life of the bond. or does the 1% just like a temporary benefit, for the first 6 months, or the first year?. When the treasury bond or corporate bond investors buy bonds at a discount, don't they just add their discount to the coupon rate to determine their return until maturity? If so, it seems as if I got more of a bargain than I thought.

I really don't know, but I wish they still allowed credit card on-line bond purchases.

 

[ziggy29]

If I bought a 3% fixed rate I bond with a credit card with 1% cash back, is it really like a 4% fixed rate for the life of the bond. or does the 1% just like a temporary benefit, for the first 6 months, or the first year?.

Neither. In reality, you effectively paid $990 for a $1000 bond that yields a real $30 per year.

Your effective "real" rate of return is $30/$990, or 3.03% -- for the life of the bond -- plus a small one-time bonus of a little more than 1% when you redeem the bond (i.e. paid $990, receive $1000).

 

[Alan]

The singing sheep clip from Alan, or was it from Shaun, don't know what it has to do with I bonds, but cute anyway.

Glad you liked it. It was Brewer who introduced the idea of the pet sheep buying bonds so I figured it must be Shaun - he's the sharpest sheep I know by far

Probably had his pet sheep buy some.

 

[zzyp]

CAGR vs Yield

[...]

Life certainly hands out surprises. A $100 iBond bought then is now worth $179 for a CAGR of 8.76%. I would have never dreamed that some iBonds would turn out to be my best investment 9 years later.

The treasury program Savings Bond Wizard in addition to the Rate column has a column "Yield" which for that Aug. 2000 $100 bond shows a yield of 6.56%, contrasted to CAGR you show as 8.76% for the same $79.68 gain.

I believe both Yield, I assume APY(Average Percentage Yield), and CAGR (Compound Annual Growth Rate) seem to be measures of interest rate required, when compounded, when given the gain over a time period. The results seem to be different. Can you explain? Is one better than the other?

I looked up both APY and CAGR on Wikipedia, which gave formulas and details, but no comparisons between them
-zzyp-

 

[IndependentlyPoor]

Can you explain?

Yeah, I can explain. I muffed the CAGR formula in my spreadsheet.
I thought 8% sounded kinda high. Shoulda looked more carefully. I left out a parenthesis. Odd that I ended up with something sorta close.

When I do it right, I get 6.65% CAGR, which I imagine is close enough 6.56% since I didn't do the calculation for the exact dates the interest was paid.

As far as I know, CAGR is just the equivalent interest rate it would take so that a savings account, compounded annually, would give the same return over the same amount of time. It is good for iBonds because their interest rate changes.

I don't know what formula the wizard uses, so I can't say anything about that. I have a Mac, so I can't use the wizard program.

Thank you for bringing it up. I would change it, but it has been quoted, so I can't.

I would say mea culpa, but I'm afraid to after reading the pet peeves thread.

 

[zzyp]

Close enough for government work

[...]
As far as I know, CAGR is just the equivalent interest rate it would take so that a savings account, compounded annually, would give the same return over the same amount of time. It is good for iBonds because their interest rate changes.

I don't know what formula the wizard uses, so I can't say anything about that. I have a Mac, so I can't use the wizard program.
[...]

The yield I quoted was for 9 years and 1 month, when I changed and did 9 years, 08-2000 to 08-2009,the Wizard shows 6.62% yield, very close to your 6.65%, value $179.68. When I used 1.0662 and compounded $100 nine times with a simple calculator, it figures at $178.05 which is darned close to $179.68 that the Wizard shows, considering that a yield to 3 places has some rounding error.

Assuming that the Savings Bond Wizard uses APY for the yield column, I would say that, experimentally, APY and CAGR are the same thing.

Exact dates within the month are not needed since savings bonds purchased or sold anytime in the month, the treasury assumes occurred on the first of that month.