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They changed the fixed rate from 1.2% to 1.0%!
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I-bonds combined 6.73% (1% plus 5.73% inflation); a ridiculous 3.2% fixed on EE bonds.

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


"They changed the fixed rate from 1.2% to 1.0%!"

I win, I win!!! (A first. I can no longer claim my predictions are always wrong, just almost always.)
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I win, I win!!! (A first. I can no longer claim my predictions are always wrong, just almost always.)

Well, *my* record is still intact, as I was pretty convinced they wouldn't lower it (in fact, I thought they'd raise it).

Can't believe that they lowered the EE rate. Ridiculous indeed!

The inflation adjustment is 5.70%, based on:
The CPI-U increased from 193.3 to 198.8 from March to September 2005, a six-month increase of 2.85 percent.

So that means they first round up to the nearest hundredth, since the actual change is 2.8453% * 2, which is 5.69%.

My guess is the next 6-month inflation adjustment is going to be MUCH lower ... but given my track record, watch out above! ;)

Ken
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I meant to purchase some yesterday (10/31) through treasury direct... but noticed before submitting that they may move the purchase date to the next business day.

Sigh... this 'feature' is probably mentioned in the other posts.
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<I win, I win!!! >

Indeed you do!

And so did I, for listening to your advice, and buying more I-Bonds last week :-).

Thanks for the extra income!
Wendy
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I meant to purchase some yesterday (10/31) through treasury direct... but noticed before submitting that they may move the purchase date to the next business day.

Sigh... this 'feature' is probably mentioned in the other posts.


That's too bad. I purchased on the 27'th on Treasury Direct and they actually performed the purchase and money transfer on the 28'th. Hopefully inflation will moderate again next year and they may consider bringing the fixed rates higher again. Oh how I long for those days of 3+% fixed rates!!! I neglected to purchase as many as a could have back then. Oh well.
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Oh how I long for those days of 3+% fixed rates!!! I neglected to purchase as many as a could have back then. Oh well.


Did I also mention I missed the cutoff for using credit card to purchase? (Thinking of all the freebies from Amazon card that I didn't get :-(
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<<<I win, I win!!! >>>

Indeed you do!

And so did I, for listening to your advice, and buying more I-Bonds last week :-).


I hedged and bought half of what I would have normally bought last month, and was planning on buying more this month if the rates increased. I think I will skip buying the 1% fixed this period and see what happens next May and next November.
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I win, I win!!!

Me too! Purchased a big chunk on 10/28. :-)
I liked the idea of knowing without a doubt what my rate of return will be over the next 12 months.

(I'm beginning to think they determine the fixed rate based upon what they think 'the market will bear', and I guess they figure 6.73% is good enough for the savings bond-buying market.)

2old
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Well, one debate I think this clears up is whether savings bond rates still are based at all on the bond market: a resounding, no way René. Even the differential of fixed I-bonds and EE bonds of 2.2% is well below any differential between Treasuries and TIPs, including 30-years, all of which are now well above 2.5% and on the whole, without crunching the numbers, would have been above 2.5% for the last 6 months.
The fixed I-bond rate is well below 90% of 5-year TIPS for last 6 months; the EE-bond rate is well below 90% 5-year Treasuries fo rlast 6 months (which is unacceptable as a measure, anyway, now that these are fixed: 30 year bond yields would be fairer).
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Did I also mention I missed the cutoff for using credit card to purchase?

TreasuryDirect doesn't allow you to use a credit card to purchase. Hasn't for over a year now.
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Can't believe that they lowered the EE rate. Ridiculous indeed!

The lowering of the EE rate seems to bolster my feeling that the gov't is trying to eliminate them but doesn't have the guts to do it outright.

jmc
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Did I also mention I missed the cutoff for using credit card to purchase?

TreasuryDirect doesn't allow you to use a credit card to purchase. Hasn't for over a year now.


What I meant was: I looked into using credit cards to purchase some ibonds back when it was still allowed. The second time I looked, I missed the deadline.
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"The lowering of the EE rate seems to bolster my feeling that the gov't is trying to eliminate them but doesn't have the guts to do it outright."

I believe the Treasury would like to eliminate US Savings Bonds, altogether: it is a lousy way to raise money for the national debt, even though the rates are lower than through tradable bonds. The total amount of debt covered isn't worth the staffing. Politically, it is difficulty: Savings Bonds have a history not only as a way the little guy can get some kind of return on savings better than Passbook Savings in a bank, but as a way of helping the country in its hours of need (the last time being WWIII). Even at 1% above inflation, for someone only having a few bucks to put away at a time or looking for a savings gift for their daughter's boyfriend's neices by his 3rd wife, it's all we've got.

I agree EE-bonds are a non-starter, but I can't see why they are trying to kill one but not the other. And I don't see why they couldn't get away with just killing them, while keeping I-bonds. The amount of money they are ripping investors off for isn't enough to be playing tricks
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I think JMC is right, the gov really wants to get rid of EE's I guess calling them "Patriot Bonds" didn't really fly - hehehe
Nov also come due for me, a 30 year E my grandfather gave in 1975 -it's got over 4600 dollars in interest! Whee! Now 1/3 back to the taxman I guess. but I think I will wait until January to cash it. I will still add to the I bond stable at least for now...

110
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I think we should realize that EE bonds are not only purchased as "investments" per se, but are also sold as a savings method via payroll (or other) deduction, or for gifts, or less so as a "patriotic" thing to do. In fact, they've even renamed them "patriot bonds". Surely most of those sales (as opposed to purchases) are to less financially sophisticated folks, but collectively they are a large amount.
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Did I also mention I missed the cutoff for using credit card to purchase?

You can buy these with a credit card??? From a bank? Or Treasury Direct?

Andy
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You can buy these with a credit card??? From a bank? Or Treasury Direct?

You used to be able to buy US Savings Bonds with a credit card at the Treasury's online site (forgot what the site was called, but it's long gone). That freebie ended ... what, 2 years ago now? Something like that.

Ken (proof that there used to be such a thing as a free lunch)
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Nov also come due for me, a 30 year E my grandfather gave in 1975 -it's got over 4600 dollars in interest! Whee! Now 1/3 back to the taxman I guess. but I think I will wait until January to cash it.

Remember the first of any of these three determine what tax year taxes are due:

1. When redeemed,
2. When there is a taxable reissue,
3. When the Savings Bond reaches final maturity.

So if your E reaches final maturity in November 2005, you will owe taxes for the accumulated increase in value of the E in 2005, whether or not you delay the redemption until 2006.
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In fact, they've even renamed them "patriot bonds".

That was a mandate from Congress (the opposite of "progress"?), if I recall correctly. The Treasury never wanted to issue Patriot Bonds.

It's also Congress that keeps on insisting that the Savings Bond program continues, even though that turns out to be the most expensive way for the federal government to borrow money--for a very small fraction of the national debt, it has about ten times the number of people administering it.

It was even worse when Savings Bonds Direct was operating: people would buy with credit cards (so the Treasury paid merchant fees), had to go through the labor of sending paper savings bonds, just to have those savings bonds redeemed six months later (what was the original holding period of I-Bonds), which involved more labor, just to repeat the cycle six months later. This flipping of savings bonds is what first led to the lengthening of the holding period for Savings Bonds to a minimum of one year instead of six months, but also probably encouraged alternatives to credit cards, which is why TreasuryDirect changed from selling marketable securities to using ACH transactions for buying Savings Bonds--the ACH transactions have a very small expense when compared to other forms of payment. Also, there is a move away from paper Savings Bonds and to "book entry" (paperless) form, saving labor, printing costs and postage.

TreasuryDirect is now making marketable securities more available, so I think they are slowly working in an alternative to Savings Bonds.
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I think we should realize that EE bonds are not only purchased as "investments" per se, but are also sold as a savings method via payroll (or other) deduction, or for gifts, or less so as a "patriotic" thing to do. In fact, they've even renamed them "patriot bonds". Surely most of those sales (as opposed to purchases) are to less financially sophisticated folks,

Many, many years ago my brother was a corp exec, and all the execs were expected to sell their departmental staff on buying savings bonds through payroll deduction. This was at a time when sb's were a very bad deal compared to other forms of fixed income, and my brother felt that selling the bonds was a rip-off of unsuspecting, unsophisticated folks. So, he refused to participate--which raised a big hoopla at his company. The powers that be finally agreed that he didn't have to participate, but that he couldn't tell his staff why he he wasn't. IOW, he couldn't tell them that he thought the bonds were a bad deal. When he was asked about the bonds, he simply had to say, "It's your decision--I have no opinion."

Sheesh, the things that went (and still do go) on in corporate America...

2old


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Well, one debate I think this clears up is whether savings bond rates still are based at all on the bond market: a resounding, no way René.

I agree...

Now stop calling me Rene' ;-)

2old
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<<In fact, they've even renamed them "patriot bonds".>>

That was a mandate from Congress (the opposite of "progress"?), if I recall correctly. The Treasury never wanted to issue Patriot Bonds.

It's also Congress that keeps on insisting that the Savings Bond program continues, even though that turns out to be the most expensive way for the federal government to borrow money--for a very small fraction of the national debt, it has about ten times the number of people administering it.

It was even worse when Savings Bonds Direct was operating: people would buy with credit cards (so the Treasury paid merchant fees), had to go through the labor of sending paper savings bonds, just to have those savings bonds redeemed six months later (what was the original holding period of I-Bonds), which involved more labor, just to repeat the cycle six months later. This flipping of savings bonds is what first led to the lengthening of the holding period for Savings Bonds to a minimum of one year instead of six months, but also probably encouraged alternatives to credit cards, which is why TreasuryDirect changed from selling marketable securities to using ACH transactions for buying Savings Bonds--the ACH transactions have a very small expense when compared to other forms of payment. Also, there is a move away from paper Savings Bonds and to "book entry" (paperless) form, saving labor, printing costs and postage.

TreasuryDirect is now making marketable securities more available, so I think they are slowly working in an alternative to Savings Bonds.


I absolutely agree, and I think that these "savings" bonds (EE and I) exist not so much to raise money for government operations, but more as something to make people feel good in various respects. By allowing people to purchase bonds in tiny increments, they also make this available to a much larger percentage of the population. In fact, the clamping down on methods of purchase and holding period was exactly as you describe, a way to limit the abuse of the program by people using these bonds as a profitable way to hold $120,000 each year ($30k paper + $30k book entry, times 2 for husband and wife) for a relatively short period of time (5 months or so).

Basically a "feel good" program that doesn't cost all that much. With the huge levels of government waste out there in so many other costly programs, this is way down on my list of things that need improvement, way way down near the bottom.
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"Basically a "feel good" program that doesn't cost all that much. With the huge levels of government waste out there in so many other costly programs, this is way down on my list of things that need improvement, way way down near the bottom."

How much did they spend on undelivered ice in the aftermath of Katrina (not sure if this was "feel good" so much as "want to look good after looking so bad").

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And now for the really bad part: at the current differential in fixed rates between new I-bonds and 10-year TIPS, a drop from 25% bracket to 15% bracket no longer makes I-bonds the winner at 10 or even 20 years.

Using 1% versus 2% fixed rate, with 3% inflation adjustment, with an ongoing 25% tax bracket, a $1000 TIPS would generate $454 in after-tax interest in 10 years, $1115 in 20 years.

A $1000 I-bond would generate $491 pre-tax in 10 years, $1223 pre-tax in 20 years; but after 15% taxes, you end up with $417.35 and $1039.50, respectively.

This is enough of a difference that I expect this conclusion would hold after 30 years and with other inflation adjustments; probably it also holds for 28% to 15% bracket, though that is worth rechecking for anyone in that situation.

I can't remember what number I used for TIPS fixed rate last time I tried, probably less than 2% versus the 1.2% for I-bonds, but the conclusion was different.
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Do 1%-fixed-rate I-bonds still make sense as a 12-18 month savings vehicle?

I really don't expect to see inflation be low over the next 6 months.
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<<Do 1%-fixed-rate I-bonds still make sense as a 12-18 month savings vehicle?>>

I really don't expect to see inflation be low over the next 6 months.


And that might mean that Money Markets and CD rates will rise. In any case, I doubt they would rise as high as the current I-bond rate of 6.?%

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"Do 1%-fixed-rate I-bonds still make sense as a 12-18 month savings vehicle?>>

I really don't expect to see inflation be low over the next 6 months."

You need a CPI for the next round of about 2.3%, given the 3 month penalty, for a 15 month return that would beat a 1 year CD at 4%. Beyond that is guesswork, though the drop in gas prices is a big factor (as will be rising heating costs). I believe discounting the 1.2% jump in incomes as beside the point is correct.
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Much higher than predicted (like the predictors have a clue) productivity gains last quarter.

http://www.nytimes.com/aponline/business/AP-Economy.html

Implication is lower inflation, less liklihood of extended Fed rate hikes.
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You need a CPI for the next round of about 2.3%, given the 3 month penalty, for a 15 month return that would beat a 1 year CD at 4%.

Could you post your reasoning there? That sounds high to me, especially given the "extra" month of interest for an I-bond. If I purchase an I-bond on 11/30/05, I can redeem it on 11/1/06, right? I would get the interest from 12/05 to 8/06, six months at 6.73% (so a non-annualized return of 3.365%. I would then get three months interest at 1.0% + whatever the CPI adjustment is.

I would also get 4.0% interest for the month of 11/05.

Ignoring compounding for the moment, I figure that gets us to 3.70% return without even counting the three months post-high inflation adjustment. With a high state tax rate, you're already beating (or close to beating) a 4% 12-month CD even without counting on anything for those three months.

I think my reasoning is sound. Please let me know if it isn't.

--B+C
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"I think my reasoning is sound. Please let me know if it isn't."

You threw in the extra month of interest and factored in a high tax state. I didn't.
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You threw in the extra month of interest and factored in a high tax state. I didn't.

The extra month of interest is an inherent benefit of I-Bonds. It seems silly to me not to count it. Freedom from state taxs is a similar benefit.

--B+C
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I already have an account at www.virtualbank.com and they are offering 1-year CDs for 4.60% APY ($10,000 minimum) and if you don't have that much GMAC bank will give you the same rate for a $500 CD. What's the CPI target for that one?
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What's the CPI target for that one?

The way I do the math, assuming you are intelligent and buy at the end of the month (11/30) holding the money in an Emigrant account until then and get out as soon as possible (on 11/1/06, say) would be a semi-annual CPI rate of 1.46% (so an annual rate of 2.9-2.95%). This assumes a state tax rate of 6% (i.e., that you live in MO).

--B+C, made up a simple spreadsheet after his last response in this thread.
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If I purchase an I-bond on 11/30/05, I can redeem it on 11/1/06, right? I would get the interest from 12/05 to 8/06, six months at 6.73% (so a non-annualized return of 3.365%. I would then get three months interest at 1.0% + whatever the CPI adjustment is.

I would also get 4.0% interest for the month of 11/05.


Not exactly. If you bought on 11/30/05, you would get 6.73% from 11/1/05 thru 4/30/06, then you would get 1.0% + from 5/1/06 through 10/31/06. Then if you're still holding on 11/1/06, you would get 1.0% + through 11/30/2006. If you redeem on 11/1/06, you would lose the last 3 months interest (9/1/06-11/30/06).

I believe that's how it works. (You have to be careful with timing of the purchase though to make sure it gets done before 12/1/05.)

2old

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