Should I buy ibond in the end of Oct or Nov?

myf16 said:Excellent (Oct 14) post. I'm solidly in the "bird in hand" camp, meaning I will buy the I bonds in October.
I agree. I think the high inflation during the previous 6 month period (not the most recent one) represents a valuable opportunity for extra returns, and you lose this by waiting until Nov. The fixed rate may go up a little, but if inflation is low in the next 6 months, you're going to want out of your I bonds anyway. If inflation stays high in the next 6 months, you might as well buy now and then keep holding the bonds.

My plan is to hold the I bonds as long as the rates are competative with short term savings and CD rates on a tax-adjusted basis. If I get to 5 years, great - no penalty. If not, I'll take the hit and move on to higher yeilds elsewhere. Remember, the 5%+ strategy already assumes you'll lose 3 months interest for early withdrawl - if you happen not too, so much the better.

xerty said:myf16 said:Excellent (Oct 14) post. I'm solidly in the "bird in hand" camp, meaning I will buy the I bonds in October.
I agree. I think the high inflation during the previous 6 month period (not the most recent one) represents a valuable opportunity for extra returns, and you lose this by waiting until Nov. The fixed rate may go up a little, but if inflation is low in the next 6 months, you're going to want out of your I bonds anyway. If inflation stays high in the next 6 months, you might as well buy now and then keep holding the bonds.

My plan is to hold the I bonds as long as the rates are competative with short term savings and CD rates on a tax-adjusted basis. If I get to 5 years, great - no penalty. If not, I'll take the hit and move on to higher yeilds elsewhere. Remember, the 5%+ strategy already assumes you'll lose 3 months interest for early withdrawl - if you happen not too, so much the better.Thanks xerty for your valuable posts and contributions...

When you compare ibond vs. CD rates, shouldn't we consider term averages? e.g. while ibond may beat 5 yr CD rates for the six months beginning Nov 1, over the five year term maybe not? If you take into account that inflation rate is a yoy rate of change, as you pointed out maybe the rate will not be as high the next 6 months and so on. Rather than take a snapshot comparison of the two, perhaps a more extended view of returns over 5 years needs mention. So far, my ibond inventory at 1.6 and 1.1% fixed have yielded under 4% on average (which includes the 3mo penalty hit). Of course that is the past 3 years, going forward it should be better.

tooshy said:When you compare ibond vs. CD rates, shouldn't we consider term averages? e.g. while ibond may beat 5 yr CD rates for the six months beginning Nov 1, over the five year term maybe not?
You can get 5 year CDs paying 5-5.5% these days. With a base of 1.2% for I-bonds bought now, after the first year you would need about 4% annual inflation in the future for the bonds to pay as well as the CDs (barring tax considerations). I would be very surprised if the I-bond bought today outperformed a 5 year CD bought today on a 5 year horizon.

However, I still think you should buy I-bonds rather than 5 year CDs right now. This is because the bonds pay better now, and if interest rates continue to rise (as many expect), you can cash the bonds and move into a higher rate CD after 14 months. Also, the option to continue holding the I-bonds offers some hedge against future rises in inflation, while a CD does not (ie if inflation stays high, the bonds pay well but CD rates should rise making the CD bought today look less attractive).

denon said:Excuse my I-Bond ignorance, but if I prefer to keep my assets fairly liquid, am I better off purchasing several lower-dollar I-Bonds (and then only cashing out a couple if need be)? Are there any other penalties if I were to cash them out, say, within 2 months of opening them? Or would I simply lose the interest I would have earned, at, say, ED.

Also, I assume these are funded via EFT or ACH if I do them online? Pity we can't get AMEX and the Fed together..

Dont try that two month stuff becuse I bonds must be held for 12 months before ou can redeem them. You cannot cash them in before 12 months.

Rob

robertw477 said:
Dont try that two month stuff becuse I bonds must be held for 12 months before ou can redeem them. You cannot cash them in before 12 months.


Ahh ic. So the early termination is really only for anything less than the 5 years, but longer than 12 months? So there's absolutely no way to cash them in before 12mo? (just making sure I understand you correctly).

Thanks!

denon said:Excuse my I-Bond ignorance, but if I prefer to keep my assets fairly liquid, am I better off purchasing several lower-dollar I-Bonds (and then only cashing out a couple if need be)?

This is a good point, it seems to me to be better to buy 30 $1,000 bonds instead of 1 $30,000 bond. That way you can cash out the ones you need to (after 12 mos) and leave the others if you don't need the full amount of cash at the time. Is there any disadvantage to purchasing 30 instead of just 1?

xerty said:tooshy said:When you compare ibond vs. CD rates, shouldn't we consider term averages? e.g. while ibond may beat 5 yr CD rates for the six months beginning Nov 1, over the five year term maybe not?
You can get 5 year CDs paying 5-5.5% these days. With a base of 1.2% for I-bonds bought now, after the first year you would need about 4% annual inflation in the future for the bonds to pay as well as the CDs (barring tax considerations). I would be very surprised if the I-bond bought today outperformed a 5 year CD bought today on a 5 year horizon.

However, I still think you should buy I-bonds rather than 5 year CDs right now. This is because the bonds pay better now, and if interest rates continue to rise (as many expect), you can cash the bonds and move into a higher rate CD after 14 months. Also, the option to continue holding the I-bonds offers some hedge against future rises in inflation, while a CD does not (ie if inflation stays high, the bonds pay well but CD rates should rise making the CD bought today look less attractive).I agree. Because of this once higher than average inflation rate, it makes sense to hold off on CDs at least for the next 14 months. You can always jump to longer term holdings after that. Unless of course the economy slows significantly and the Feds begin rate cutting in 2006/2007, the bond market rallies, longer term CD rates tank again, then maybe in hindsight it wouldn't have been such a no brainer. Who knows so I would keep 5% CDs just where they are.

Yes, but you have to "convert" that 10% state tax savings into an equivalent interest rate, which involves federal tax.

after tax IBond = after tax CD
IBrate - IBrate*Fed = CDrate - CDrate*Fed - CDrate*State
IBrate (1 - Fed) = CDrate (1 - Fed - State)

Solve for CDrate and put in the IBond 2-month effective early withdrawl penalty, and you get xerty's equation.

If you look at it in another way:
CDrate / IBrate = (1 - Fed) / (1 - Fed - State)

It's a given that higher state tax favors IBond. Higher federal tax favors IBond as well.

xerty, thanks for the nice update on Oct 14
I don't know which option is better, paper or paperless I-bond
I still have some paper I-bond when we used to purchase with cc. Should I cash them out and buy back at the end of Oct?
thanks!