Gyroscopic Investing

I'm very anxious to see what the new I-Bond fixed rate is going to be for bonds issued between May and November.

It has been 0.00% since last November.

It will be interesting to see what number the Treasury Dept. comes up with.

Same.  My guess is .2%

I, too, have been awaiting this with great interest.  I'll be buying regardless, I think, even at 0%.  I passed for the first half of the year but what can I say?  I need my I-bond fix.

I wonder whether EE bonds will still offer the same pathetic 0.4% fixed rate of today.

The last batch of I-bonds I purchased were back in the spring of 2009 when the fixed rate was .70%.  I remember thinking how low that sounded.  It's funny, because that sounds like an awesome rate right now.

FWIW, those bonds are now up 5.7% in value from when I purchased them (a $1,000 bond is now worth $1,057.00), or about 2.85% per year, tax deferred.  Pretty cool compared to what else is out there right now.

MediumTex wrote: The last batch of I-bonds I purchased were back in the spring of 2009 when the fixed rate was .70%.  I remember thinking how low that sounded.  It's funny, because that sounds like an awesome rate right now.

FWIW, those bonds are now up 5.7% in value from when I purchased them (a $1,000 bond is now worth $1,057.00), or about 2.85% per year, tax deferred.  Pretty cool compared to what else is out there right now.

Yeah, 2.85% is super, especially when you consider the tax deferral.  I think that so long as the real rate of interest remains negative (Treasury rates below the level of price increases), these things are always going to be big winners.

As a bonus, they have superior deflation treatment to TIPS, since their principal protection is much better.  Rather than operating in an "all or nothing" fashion the way TIPS do, a negative CPI just means you maybe don't get interest for one period, but that's it.  A wavy negative-then-positive CPI cycle could leave you earning 0% on TIPS but I-bonds would still give a positive return in the end.

Now personally, I expect a positive CPI for the foreseeable future... but what I expect and what actually happens often aren't the same thing.  (Sometimes they don't even resemble each other.)

Lone Wolf wrote: I, too, have been awaiting this with great interest.  I'll be buying regardless, I think, even at 0%.  I passed for the first half of the year but what can I say?  I need my I-bond fix.

I wonder whether EE bonds will still offer the same pathetic 0.4% fixed rate of today.

LW,

If it remain 0%, why not wait until November to see if there is an uptick?

6 Iron wrote: LW,

If it remain 0%, why not wait until November to see if there is an uptick?

Good point, Iron.  Thanks for reminding me that my hand isn't really forced until November.  My new minimum for May: 0.2%. 

Lone Wolf wrote:
Good point, Iron.  Thanks for reminding me that my hand isn't really forced until November.  My new minimum for May: 0.2%.   ;)

I am going with 0.5% as my minimum. Otherwise, I will wait and buy at November, regardless of the rate (call me "Mr. Vegas").

I guess we will find out tomorrow.

The suspense is killing me.

Does the Inflation portion come out tomorrow too?

moda0306 wrote: Does the Inflation portion come out tomorrow too?

I assume it does.  It looks like that number is already available.

Still 0% fixed, but look at that inflation factor.  2.3% for 6 months resulting in a 4.6% annual rate (tax-deferred no less). 

Once again, for all its flaws, the treasury has proven to be extremely giving in its inflation portion interest.  If there were some doubts about i-bonds in this time of soaring food/fuel/education/medical costs, but depressed home, wages, etc, I think we can lay them to rest a bit.

I love I-Bonds.

moda0306 wrote: Still 0% fixed, but look at that inflation factor.  2.3% for 6 months resulting in a 4.6% annual rate (tax-deferred no less). 

I love I-Bonds.

That's more than 30 year treasuries, with no interest rate risk and no default risk.

Beautiful.

MT,

Imagine holding one still today from 2000 yielding about 3.5% fixed... I think if I had yr 2000 issued i-bonds I'd sleep with them in my bed.  I try to tell people about these, but when you start getting into the interest rate complications and 1 & 5 year holding requirements, etc you lose a lot of people.

moda0306 wrote: MT,

Imagine holding one still today from 2000 yielding about 3.5% fixed... I think if I had yr 2000 issued i-bonds I'd sleep with them in my bed.

I would put them in plastic sleeves and weave them together into a suit.  I would wear it all the time.  People would call me "the crazy Ibond guy", but I wouldn't care.

Between the honesty implied in the inflation portion interest and the killing of Osama I'm feeling so patriotic today.

MediumTex wrote:
Still 0% fixed, but look at that inflation factor.  2.3% for 6 months resulting in a 4.6% annual rate (tax-deferred no less). 

I love I-Bonds.

So I bonds are yielding 4.6% right now?

Adam,

I'm pretty sure for the 6-month period between now and November, if you have an I-bond already with a 0% fixed portion, you'd get 2.3% of the balance for the next 6 months ($230 on $10k), but then come November it would be whatever the updated rate is.

For i-bonds purchased today, I don't know, but now my ears are mighty-well perked.... it's on my to-do list to finish figuring out how these d*mn things work.

Adam

http://www.treasurydirect.gov/indiv/res ... dterms.htm

"The semiannual inflation rate is determined each May 1 and November 1. Each semiannual inflation rate applies to all outstanding I Bonds for six months."

That wording says to me that it's only 2.3% on already outstanding (though I'd call all i-bonds outstanding.... hahahah) bonds.  If you were to buy now you'd be at 0% fixed and ??% inflation methinks.

So this begs the question, was waiting to see if we could possibly get .2% fixed (that would have lasted for years and years possibly) worth missing out on the 2.3% inflation-adjustment over the next 6 months.  That's a factor of about 11 fixed payments at .2% but we get it all at once.  Further, based on history, I think we could have bet that the inflation adjustment was going to be pretty lucrative this period.

Yet we will continue to get laughed at for buying these, and only MT in his "bond suit" will be deserving of the ridicule.  I kid.  I'd do the same.

Now we just have to petition the treasury to make some I-Bearer-bonds (a la Die Hard) so we can have some interest-bearing matress money.

So I could buy today and I'd get 0% fixed + 2.6% for next six months.  Nov 1 it will change to 0% + % for inflation, right? 

The fixed part stays the same for however long you hold the bond but the inflation portion changes, right?

Adam,

To your first question, I am having trouble nailing this down.  The definitions/terms are fuzzy to me.

To your second question relating to the fixed/inflation portions, yes that is exactly how it works, but the inflation (if negative) can never push YOU negative.


Modified from earlier.

http://www.depositaccounts.com/blog/201 ... rates.html

Looks like you get the inflation rate for 6-months, so even if you were to buy in September or so, you'd get 2.3% for 6 months, then it would change accordingly.  

Even better.  God I love these things.  This is coming from a life-long cash-hater.

The author in that link reccommends buying late in the month (as they always pay at the beginning of each month) and selling right after the 1st of each month, if you are in a position to do something better with your cash.  The penalty is 3 months of interest until 5 years of holding the bond.

If one were to buy $10,000 in I-bonds on May 31st, they'd earn $38.33 in interest the very next day, and that much in interest per month over the next 6-months until the new inflation rate kicked in.  Come next May 1st you could sell yours with a 3-month penalty (but you really didn't even have it in for almost 1 full month of the 12, so it's almost like you only had a 2 month penalty).  Your main reason for selling could be a new, higher fixed rate bond you want to buy into, personal need, rebalance, etc., but these things are so flexible it's unreal.  I think I might buy my first I bond in coming months.  Who knew cash could be so fun?

Negative inflation-portion interest can't eat into your principal... but can it eat into a previous-period's inflation portion interest?  I'd imagine that amount counts as principal at that point and it can't retroactively go back and steal previously calculated interest.


Oh, and just a little reminder as to why I-bonds are so great, take a look at the 1-3 year yields: .22%-1.01%, less fees, less taxes, less any loss of value due to interest-rate fluctuations. To get 4.6% yield in a taxable account assuming 25% in taxes you'd need 6.13%.

http://www.treasury.gov/resource-center ... data=yield

Assuming people have 1) scarce tax-deferred space, and 2) enough in their 25% cash portion to fill any short-term emergency needs and then some, this is a great way to "yield-chase" in ways consistent with HB's general philosophy and can help you from giving up on the PP at sub-1% interest rates.

moda0306 wrote: Once again, for all its flaws, the treasury has proven to be extremely giving in its inflation portion interest.  If there were some doubts about i-bonds in this time of soaring food/fuel/education/medical costs, but depressed home, wages, etc, I think we can lay them to rest a bit.

This isn't really generosity, just keeping up with price inflation.  The inflation portion of I-bonds is (from what I understand) simply based on the CPI-U index.  I think that it's really the Fed doing all the "giving" by "giving" us a lot of inflation. 

CPI-U has climbed a bit over 2% in the last 6 months, thus the inflation adjustment of 2.3% (semi-annual).  If you extrapolate that out to a whole year, there's your 4.6% rate. 

I like I-bonds because it's a reliable way to keep up with inflation and not get taxed right away for the privilege.  If you do this with TIPS, you're going to pay tax... even though all you're doing is trying to keep up with a weakening currency!

Even though I'm saddened by the 0% fixed rate, I'm still gonna pile these things on just like I always do!

moda0306 wrote: I think I might buy my first I bond in coming months.  Who knew cash could be so fun?

I'm shocked that you've never bought one before!  I thought you were one of the I-bonds' biggest fans!

Get started ASAP on signing up for TreasuryDirect for your electronic bonds... it takes a bit of time to get through with that and no need to miss the May interest payment.  In the meantime, get in line at your local bank branch to buy paper savings bonds with me and the other grandmas. 

By the way, EE bond rates are now at 1.1%.  Not exactly knocking my socks off... but it beats a 3-year Treasury Note!  Worst case, if rates rise I can hold them for one year (or more) and then cash them out, eating the 3-month interest penalty and still come out way ahead of a one-year Treasury.  And if interest rates stay low, doubling in 20 years (at an effective rate of >3.5%) will sound pretty good!

The only real downside is the increased hassle.

I-bonds are still by far the superior instrument, so I would always do those first.  But if you completely fill up on them the EE's might be worth looking at.