No. of Recommendations: 0
This may be obvious, but this is my first time on this board. I have a question or two I could use some help on. I know very little about bonds and/or purchasing them.

I had an "investment advisor" recommend that I purchase some govenment bonds. He said they are 2 year bonds that are currently paying 5.25%, and completely safe. You buy the bonds at face value and they do not go up or down in value and you get a nice steady stream of income for 2 years. Sounds good for a fixed income in these days.

I talked with another "advisor", this time at Fidelity Investments and he said if I could get the above bond, I should jump on it: he would take all he could get. He stated the latest released govenment bonds were for three years and paying about 3%(as I recall, the actual numbers are on my desk at work).

This may be a stupid question, but do some of you understand bonds well enough to know what I am looking at?? Can I buy these bonds direct from the government? I looked at a government web site and saw I and EE bonds, and treasury notes etc., but I'm not sure what I am looking at or for.

Any help would be appreciated. Thanks.
Print the post Back To Top
No. of Recommendations: 3
"I had an "investment advisor" recommend that I purchase some govenment bonds. He said they are 2 year bonds that are currently paying 5.25%, and completely safe. You buy the bonds at face value and they do not go up or down in value and you get a nice steady stream of income for 2 years. Sounds good for a fixed income in these days.

I talked with another "advisor", this time at Fidelity Investments and he said if I could get the above bond, I should jump on it: he would take all he could get. He stated the latest released govenment bonds were for three years and paying about 3%(as I recall, the actual numbers are on my desk at work).

This may be a stupid question, but do some of you understand bonds well enough to know what I am looking at?? Can I buy these bonds direct from the government? I looked at a government web site and saw I and EE bonds, and treasury notes etc., but I'm not sure what I am looking at or for."

The Fidelity guy is right: if you could get 2-year US government bonds ("safe") paying 5.25% you should jump on them. But the first guy is full of it—nothing close.
"I had an "investment advisor" recommend that I purchase some govenment bonds. He said they are 2 year bonds that are currently paying 5.25%, and completely safe. You buy the bonds at face value and they do not go up or down in value and you get a nice steady stream of income for 2 years. Sounds good for a fixed income in these days.

I talked with another "advisor", this time at Fidelity Investments and he said if I could get the above bond, I should jump on it: he would take all he could get. He stated the latest released govenment bonds were for three years and paying about 3%(as I recall, the actual numbers are on my desk at work).

This may be a stupid question, but do some of you understand bonds well enough to know what I am looking at?? Can I buy these bonds direct from the government? I looked at a government web site and saw I and EE bonds, and treasury notes etc., but I'm not sure what I am looking at or for."

The Fidelity guy is right: if you could get 2-year US government bonds ("safe") paying 5.25% you should jump on them. But the first guy is full of it—nothing close.

This link will give you current rates on Treasury Bonds, both Nominal (fixed rate T-Bills) and Inflation Indexed (TIPS).

http://www.federalreserve.gov/releases/h15/update/

Fixed rate 2-year T-bills are at 2.8%, 3-year at 3.08% (yields change daily). 5-year are at 3.51%, which is about .8% less than what you can get for a 5-year, FDIC insured, CD. They didn't list 2-year TIPS, but the latest CPI (official inflation figure) was 2.67%, so the fixed rate component of TIPS will be approximately that of T-bills minus inflation. (That isn't exact, since traders are guessing what the average CPI will be over the whole period of the bond and CPI changes every six months. For example, the fixed rate now trading for 5-year TIPS is .92%, so the traders are guessing inflation will average 2.59% over next 5 years, to make 5-year TIPS pay the same as the 3.51% 5-year T-bills.)

You need to be sure you don't get confused between US Government Bonds (T-bills and TIPS), which trade on the open market or can be bought from the Treasury at initial auction, and US Savings Bonds (EE-bonds and I-bonds), which can be bought in small denominations and cashed in after a year (with an interest penalty up until 5-years). EE bonds are now paying 3.25%, I-bonds 3.67% (1% fixed rate plus 2.67% inflation).

http://www.publicdebt.treas.gov/sav/sav.htm

If you buy T-bills or TIPS, you either have to hold them to maturity or sell them on the open market. If you have to sell them and interest rates go up between now and then, which most of us think likely, you will have to sell at a loss, so you should only buy if you intend to hold till maturity, at which point you get your principle back. EE-bonds are pegged at 90% of what 5-year T-bills have averaged over the previous 6 months and their yield changes every 6 months to reflect changes in what 6-year T-bills have been paying. Tax on interest on EE bonds and I bonds is delayed until you cash in, so if you hold onto them long enough (around 20 years depending on your tax situation), you will do better them regularly than buying 5-year T-bills on a regular basis. The relationship between I-bonds and 5-year TIPS is a little less clear, but the same principle holds.

As I keep saying, until I see either Treasury Bonds or US Saving Bonds paying better than Insured CDs you can get from a Credit Union or bank, I'll stick to CDs.
Print the post Back To Top
No. of Recommendations: 0
I had an "investment advisor" recommend that I purchase some govenment bonds.

Did the advisor happen to mention which government was issuing these bonds?

Sounds like this might be like those commercials for the 9/11 commerative coins. Thet present as if it is a US coin, but are careful to word things to mask that "the mint" that they refer to isn't the US Mint.
Print the post Back To Top
No. of Recommendations: 0
It is, of course, theoretically possible to buy a T-bill that pays 5.25% (5.25% coupon rate)—that is you would be buying a T-bill that was issued several years ago with a 5.25% coupon, maybe originally a 5-year T-bill from 2001 that now has 2 years left (I don't know if 5-year T-bills were actually paying 5.25% in November 2001, but that's possible). The problem is you have to buy an older T-bill with a higher rate than new 2-year T-bills at a premium (more than 100 cents to the dollar) to make up the difference, so 2 years from now you would get back less than you paid—it would work out so the total principle plus interest over the two years would be the same as if you bought a 2.8% 2-year T-bill at par (100 cents to the dollar).
Print the post Back To Top
No. of Recommendations: 1
I had an "investment advisor" recommend that I purchase some govenment bonds. He said they are 2 year bonds that are currently paying 5.25%, and completely safe.

In today's bond market, 5.25% for a 2-year bond is not reasonable for a safe government bond.

I concur with others who posted: Which government? If this is an old issue with two years left, how much premium would you have to pay for the bond? (If you pay a high premium to get the 5.25% coupon, your effective yield would be less.) Which currency is the bond issued in? Is this a direct debt of that government, or a debt that the government or agency is guaranteeing?

If I am reading Bloomberg correctly, a 2-year Treasury Note has a current yield of 2.84%. According to Bankrate, the national average for a 2-year CD is 2.95%APY, the best rate for a regular 2-year CD (i.e., not a Jumbo CD) is 3.45%APY. (You would expect CDs to pay a little more because interest on CDs is taxable at the state and local levels as well as at the federal level, but dividends on a 2-year Treasury note is taxable only at the federal level.)

With safe 2-year investments paying 2.84% to 3.45%APY, I would have questions about a "safe" 2-year "government" bond paying 5.25%.
Print the post Back To Top
No. of Recommendations: 0
Thanks to all for your responses. I have learned a lot and now feel comfortable about asking this "advisor" what it is he has. I will let you know what I find out.

Thanks again, mntman
Print the post Back To Top
No. of Recommendations: 0
(You would expect CDs to pay a little more because interest on CDs is taxable at the state and local levels as well as at the federal level, but dividends on a 2-year Treasury note is taxable only at the federal level.)


This is certainly what makes sense. However, for the last few years (as long as I've been paying attention), 5-year CDs have consistently been paying yields well above the state-local tax differential. With the latest 2-year T-bill auction, which was the highest yield since '02, the differential with 2-year CDs is now close to the tax expectation. But CDs don't change as quickly as daily bond trading. I'll be curious to see if 2-year CD rates go up a couple of tenths over the next few weeks (assuming T-bills don't go back down, but 2-years seem more closely to map onto Fed rates than do longer maturities).
Print the post Back To Top
No. of Recommendations: 3
...for the last few years (as long as I've been paying attention), 5-year CDs have consistently been paying yields well above the state-local tax differential.

Lok, wouldn't this depend on what each individual's state-local tax differential is? For example, my s/l tax rate is 10.44%. That reduces the rate on a 5 year ING CD from 4.10% to 3.69%. I bonds are currently paying 3.67%, and I only have to tie up the money for 1 year, not 5.

Also, why do you compare the rates to a 5 year CD only? I think a more practical comparison would be to a 1 year CD, currently 2.95% at ING.
Adjusted for my s/l tax rate = 2.655%. EE bonds are currently paying 3.25%.

If one is buying EE bonds or I bonds, the money is only 'locked-up' for 1 year, not 5. Yes, if you cash them in before 5 years you pay a relatively small penalty of 3 months interest. But I say 'relatively small' because the penalty at ING if you cash in any CD early is 1/2 the interest accrued to the cash-in date--that can get pretty expensive on a 5 year CD.

2old

Print the post Back To Top
No. of Recommendations: 0
Lok, wouldn't this depend on what each individual's state-local tax differential is? For example, my s/l tax rate is 10.44%. That reduces the rate on a 5 year ING CD from 4.10% to 3.69%. I bonds are currently paying 3.67%, and I only have to tie up the money for 1 year, not 5.

Yes, the differential does depend on your particular state and local tax situation, but overall the differential has been quite high. Comparison with I-bonds is appleas and oranges: 5-year T-bills are comparable to EE bonds, which are pegged at 90% 5-year T-bills, and 5-year CDs are analogous to 5-year T-bills minus tax advantages.

Currently 5-year T-bills are trading at about 3.5% yield; you should be able to do better than 4.1% on a 5-year CD (my credit union is now offerring about 4.3% not compounded). At your tax rate, which is very much on the high end, a 4.25% CD would be worth 3.8%, which is still better than a T-bill. And if you itemize deductions, you'd get some of the state and local taxes back, lets say 25% bracket, which means your 4.25% CD would really yield 3,917%. In my case, with about 4% state and local taxes, a 4.25% CD and a 29% bracket is worth 4.13%. 4% state and local tax is higher than national average by state; I don't know by population, since the most populous states tend to have the highest taxes.

Don't forget if you are using I-bonds to park money for a year, there's a 3-month interest penalty. It's till probably a better place for a year than money markets or Ing Savings, but you'd have to have a reason for keeping money around for just one year.
Print the post Back To Top
No. of Recommendations: 0
It's till probably a better place for a year than money markets or Ing Savings, but you'd have to have a reason for keeping money around for just one year.

I'm using a mix of I-bonds and EE bonds for my e-fund, which in my case is 10-12 months of living expenses, so tying up the money for 5 years in a CD and running the risk of losing 1/2 the accrued interest is out-of-the-question for me.

I'm also estimating that my post-retirement fed tax rate will be 10% lower than my current rate, so I'm hoping to not cash the bonds in until after I retire.

2old

Print the post Back To Top
No. of Recommendations: 0
which means your 4.25% CD would really yield 3,917%.

~wants the 3,917% CD~


TW
Print the post Back To Top
No. of Recommendations: 0
"~wants the 3,917% CD~

TW"

Me, too (waiting for the day html picks up my typos like Word).
Print the post Back To Top