Skip to main content
No. of Recommendations: 3
The Bureau of the Public Debt Tuesday announced the new earnings rate of 3.06% for Series I (for Inflation) savings bonds issued from November 1, 2011 through April 2012.

Series I Bonds, or i-bonds, are a low-risk, liquid savings product. While you own them they earn interest and protect you from inflation. You may purchase I Bonds here and at most local financial institutions.


Inflation Bond Facts:

I Bonds earn interest from the first day of their issue month.

You can redeem them at any time after a twelve-month minimum holding period

They are an accrual-type security

They increase in value monthly and the interest is paid when you redeem the bond

I Bonds are sold at face value; i.e., you pay $50 for a $50 I Bond

I Bonds grow in value with inflation-indexed earnings for up to 30 years

If you redeem I Bonds before they’re five years old, you’ll forfeit the three most recent months’ interest; at or after 5-years old, you won’t be penalized.

Annual rates compounded semiannually


http://seekingalpha.com/article/304381-new-3-06-tax-deferred......


I don't own any I-bonds, but will probably buy some by the end of the yr. I do own TIPS thru VIPSX

rk
Print the post Back To Top
No. of Recommendations: 1
The nice thing about I bonds is that the value of the principal doesn't go down if you have to cash them out when interest rates have gone up.

TIPS value does decline when interest rates have go up. The NAV of the fund that holds them declines. If you hold TIPS you have the option to hold them to maturity and get the par value of the principal. If you own TIPS through a fund, which never matures, you will lose principal if interest rates rise.

This is why I bonds hold their value in an exceptionally low interest rate environment (like now). TIPS are not as good, and TIPS funds are only good if you think that Treasury interest rates will not rise. (That will happen if the U.S. enters a lonnnngggg deflationary recession, like Japan's. If and when the economy recovers, Treasury rates will rise.)

Wendy
Print the post Back To Top
No. of Recommendations: 0
Incidentally, I do own I-Bonds (a LOT of I-Bonds that I bought in 2001 with a yield of 3% + inflation) and TIPS, but not TIPS bond funds.

Wendy
Print the post Back To Top
No. of Recommendations: 0
>> This is why I bonds hold their value in an exceptionally low interest rate environment (like now). TIPS are not as good, and TIPS funds are only good if you think that Treasury interest rates will not rise. (That will happen if the U.S. enters a lonnnngggg deflationary recession, like Japan's. If and when the economy recovers, Treasury rates will rise.) <<

I would tend to agree in most typical situations, but I don't think this is always true. In October 2008, with asset values of almost everything melting down, TIPS were commonly priced to yield close to 3% at a time when the fixed rate on new I bonds was zero. In that scenario I would say TIPS were a much better choice for new money.

#29
Print the post Back To Top
No. of Recommendations: 3
<In October 2008, with asset values of almost everything melting down, TIPS were commonly priced to yield close to 3% at a time when the fixed rate on new I bonds was zero. In that scenario I would say TIPS were a much better choice for new money. >

I agree with you, ziggy. In October 2008, I invested heavily in TIPS but did not buy new I-bonds although I kept my 2001 I-bonds that yield 3% + inflation.

This is such an important point that I will summarize a general rule:

The market is expressing an opinion about long-term inflation when it prices TIPS. It is also expressing an opinion about the long-term market supply/demand ratio for Treasury debt, whether or not the specific instrument is inflation-adjusted.

I have been studying TIPS for years. The yield of Treasuries has always been higher than the yield of TIPS, because inflation was always positive. Since TIPS were first sold by the government, the bond market consistently underestimated the actual CPI-U inflation rate (as expressed in the spread between TIPS and Treasuries).

In October-December 2008, the yields inverted and the spread became negative. This unprecedented inversion said that the market expected deflation to last over the remaining life of the bond.

This is where personal judgment came into play. Fed Chairman Ben Bernanke gave a speech in 2002 saying that a Fed Chairman had the powerful tool of a "helicopter dropping money" to reverse deflation so "IT would not happen here."

In my judgment, a severe recession could cause deflation (as Mike Shedlock predicted), but in my opinion this would be short-lived. I bought 10-year TIPS because I believed then (and now) that the Fed and Treasury will massively increase the money supply, causing inflation.

TIPS have a large, liquid market (though much smaller than Treasuries). The time to buy TIPS (relative to Treasuries) is when the market underestimates future inflation.

I-Bonds are a different story. The government sets yields, not the market. Until a few years ago, an individual or trust could buy up to $30,000 of paper I-Bonds plus<i/> and additional $30,000 of electronic I-Bonds. Since each bond is issued to an individual, it cannot be sold in the market (like TIPS). If redeemed before maturity (over one year of hold time), it is redeemed at face value even if prevailing interest rates have risen, which would cause a TIPS bond to drop in value.

Unfortunately, Savings Bonds are no longer a worthwhile investment. They can only be bought electronically in relatively small amounts. The yields are disappointingly low.

Wendy
Print the post Back To Top
No. of Recommendations: 0
One additional consideration is that you can determine when to pay the taxes on the I-Bond

BEC
Print the post Back To Top