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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6730  
Subject: Re: Bonds and asset allocation Date: 12/11/2001 9:31 PM
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An earlier post suggested that Ed Yardeni currently suggests a 20% allocation in bonds ... What sort of bonds?

I don't know what specifically Ed Yardeni was thinking of, but generally when bonds are mentioned, it is in reference to investment-quality bonds and Treasuries. Some people use TIPS (or TIPS funds like Vanguard's inflation-protected bond fund) in "tax favored" accounts or I-Bonds in regular (taxable) accounts.

Usually when people are talking of bond allocation it excludes so-called "high yield" bonds or "high yield" bond funds. ("High yield", sometimes spelled "hi yield", is a polite way of saying "junk", that is, bonds issued by corporations that have a significant risk of default, just like credit card issuers will raise interest rates to card holders who have a bad credit history. In this case, corporations that have a risk of defaulting on their bonds have to offer their bonds at higher interest rates to entice investors to buy them.)

I did buy some I-Bonds in October. At that time the posted rates were 5.92%. I understand there are two parts to the interest these bonds earn, and I believe the fixed portion of my bond was 3%; which was lowered to 2% in November. I understood that my bonds would stay at 3% plus a rate for inflation. So, what do my bonds earn now?

Your understanding is essentially correct. The fixed rate component is fixed for the life of your I-Bond, but the inflation rate will change on every 6-month "anniversary" from the issue month of the I-Bond, based on the CPI-U (Consumer Price Index for all Urban consumers, one of the measures for inflation.)

The I-Bond information page is at http://www.publicdebt.treas.gov/sav/sbiinvst.htm but, as you guessed, the "current rate" posted on that page is for Series I Savings Bonds issued between November 2001 and April 2002, and then applies only to the first six months because the CPI-U (inflation) component can change every six months from the month of issue.

To find what the October 2001 I-Bonds are returning today, you have to do a little more digging: under "Features" is the link, "I Bond Interest Rates" (http://www.publicdebt.treas.gov/sav/sbirate2.htm). Scroll down and you will see the table, "EARNINGS RATES THAT BONDS WILL BEGIN EARNING BETWEEN NOV 2001 AND APR 2002". The line pertinent to October 2001 I-Bonds would be the second line: "MAY 2001-OCT 2001 5.42%".

Your I-Bond was purchased in October 2001 and will continue to yield 5.92 until March 2002. Starting April 2002 it will start yielding 5.42% and will continue yielding that for six months. Then in October 2002 your I-Bonds will start earning a different rate based on the 3% fixed rate of your October 2001 I-Bond plus the CPI-U adjustment that will be announced in May 2002. (Actually, it is not a straight addition, but a more complicated formula further down on that "I Bond Interest Rates" web page.)

I have about $25,000 I would like to put into "short term savings" (3-5 years). What bonds, if any, would be a good investment?

That is a good question. My personal inclination would be to go with 6-month or 1-year CDs (but watch those maturity dates--the "substantial penalty for early withdrawal" could undo the higher interest rates CDs generally offer, well, now they are pretty low, but still higher than a typical money market account), or a money market fund at a major fund family or brokerage (e.g., Vanguard Prime Money Market (http://www.vanguard.com) or TIAA-CREF Money Market (http://www.tiaa-cref.org)), or in a money market account at a credit union or bank.

These are some rate finder or information sites I have gathered that might be useful if you wish to compare rates and then contact the issuer directly. (With today's FOMC rate cut, those rate finder sites may be a little out of date.)

bank ratings, etc: http://www.bankrate.com
various bank rates: http://www.gomez.com/
CD and MMA http://www.banxquote.com
CDs: http://www.money-rates.com/cdrates.htm
MMAs: http://www.money-rates.com/mmarket.htm
MMFs: http://www.ibcdata.com/index.html
Treasuries: http://www.treasurydirect.gov/
Savings Bonds http://www.savingsbonds.gov/

Be sure to check the disclosures and truth in savings statement or prospectus before committing money.

A short-term bond fund or an ultra-short bond fund might work, but with more room for interest rates to go up than down, I would be reluctant to suggest them.

Maybe other people may have additional ideas, or maybe people on the "Bonds & Fixed Income Investments" board (http://boards.fool.com/Messages.asp?bid=100135) would have other ideas.
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