1ofushere said:However, with even -> Bank <- 2 yr CD's available at or above the 5.5 % level, and even using a very high net state income tax rate of 10% to favor the 'non-state income taxable interest' on the 2 yr T-note, any ideas as to why this 2 year T-Note was so popular this time?

The rate is not set by entities that invest in CDs. CDs are not an option for say the Chinese government.

1ofushere, actually the yield of the 2 year is up dramatically from the last auction (9/27 4.66% yield). The bid-to-cover ratio was about the same. It's also consistent with T-bill rates going up. I think it's a reflection of people expecting rate cuts to occur later in 2007 now, rather than earlier.

Interesting though that Treasuries had this "dip" (the 2-year peaked at 5.24% in mid-summer) where they lost about a half percent value, and it didn't really show in CDs or savings accounts. I think that's just another manifestation of bank deposits being driven by business needs rather than economic expectations. Perhaps similarly to how the change in the price of oil doesn't immediately translate in a change of gas prices, if that makes any sense.

Thanks for posting the savings bond info, 1ofushere! For a long term investor, I regard the 1.4% real rate as still too low. Based on the economic situation, it should be at least as high in November as the 1.4% it is now; and if it drops, it wasn't good enough to begin with, and the 6-month (or 1-year Oct 06-Oct 07) combined rate is also not too exciting. The one exception to this would be someone in a high tax bracket now that can cash out in a much lower tax bracket later; that factor could add ~1% to your annualized return on the savings bond, putting it on par with TIPS (or if cashed out for education, likewise it would also add ~1% to your return).

The US Treasury I Bond for the next 6 months yields 4.52% - state and local income tax free.

As the Treasury I Bond is a 30 yr bond with some special provisions, I merely make mention of it here as you can see recent postings on FW - basically the same info in the posts - here , and here.

Even considering the possibility of a totally federal tax free interest payment when able to qualify for the special educational tie-in, there doesn't seem to be much going for the I Bonds at the current level. Yes, there is an inflation component with the I Bond, but that component can move up AND down.

Although the following link was mentioned by ThursdaysChild in the threads mentioned above, I wanted to give it to you here for your convenience - see it here or at http://bankdeals.blogspot.com/2006/11/new-i-bond-composite-rate-of-452-fixed.html . Contained in that linked page is a small chart of the recent inflation components for the I Bond. The combination of the feds tweaking the underlying base rate which is applicable for 30 yrs, and the economic factors impacting the 'inflation component', gives one some uncertainties to factor in.

Here are a few links you may wish to briefly scan if you might be interested in getting some additional info -

education related possibilities here or at http://www.treasurydirect.gov/indiv/planning/plan_education.htm

And in case you want to even more in-depth fun reading, from our beloved IRS, an IRS page for forms here or at http://www.irs.gov/publications/index.html

And, on a different subject, next week, one has the opportunity to acquire a 3 yr and a 10 yr T-Note as announced here or at http://www.treasurydirect.gov/RI/OFAnnce . There is more detail about the auction of these two Notes here .

edit: removed a link re: general I Bond info which had appeared in this thread recently, and added the last link above.

1ofushere, in my understanding these are all single price auctions - just like T-bill auctions, where everyone receives the same yield. I know they do refer to high and low yields in the results, but I think those are a certain percentile of the highest and lowest yields of the competitive bids received - but everyone gets the yield of the highest accepted bid. I.e. those competitive bidders who bid higher, get nothing; those who bid lower, get the highest accepted yield; those who bid noncompetitively are guaranteed to have their order filled at the highest accepted yield. I suppose the "cutoff" for the highest accepted yield is reached at the point where the total money is raised that the Treasury puts up for auction. I imagine they first start filling all noncompetitive orders and then start at the competitive from lowest to highest until they reach the $ amount they declared will be auctioned. The yield is determined by the highest accepted bid.

The bid-to-cover ratio tells how many bids were tendered in relation to how much total money was available in the auction. If the bid-to-cover ratio were less than 1, everyone would get the highest yield that anyone had bid. Since it's usually (always?) higher than 1, some competitive bids (that bid for a too high yield) don't get filled. The higher the B/C ratio the lower the yield usually is, because that means the total $ amount would be filled from the lower bids and the higher bids are all missing out. (a supply/demand equilibrium or sorts)

The November 9 2006 auction of a 10 Year T-Note yielded a 4.627 % investment rate.

The next T-Notes tentatively scheduled to be auctioned are a 2 yr and a 5 yr note. The announcement date is set for November 22. There are no additional T-Notes auctions tentatively scheduled for November.

I have not seen any notice of BF 'specials' from the Treasury.

The Treasury has announced their upcoming auctions for a 2 and 5 yr note. Auction to be held on Tuesday 28 Nov for $20 billion of the 2 yr, and Wednesday 29 Nov for $14 billion of the 5 yr. Details from Treasury here or at http://www.publicdebt.treas.gov/of/releases/2006/ofd112206.pdf .

From the announcement, "Treasury Direct customers have scheduled purchases of approximately $476 million into the 2-year note and $69 million into the 5-year note."

Recent market (not as auctioned) Treasury yields can be reviewed
here or at http://www.treas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml .

From my perspective, unless something really really big happens over the upcoming weekend, the 2 and 5 yr T-Bills are likely to yield pretty bleak returns when compared with 6% Credit Union CD deals and many other bank CD's, (both credit union and banks covered in FW topics) even if those non-Treasury CD's are burdened with a 10% state and local tax.

Happy Thanksgiving Holiday!

I'm just getting familiar with agency bonds. I understand that the Fannie Mae and Freddie Mac are NOT state/local tax exempt. And Federal Farm Credit Bank and Federal Home Loan Bank are "generally" state/local tax exempt.

But what does "generally" imply? In what cases are FFCB and FHLB not state/local tax exempt? Are FFCB and FHLB tax exempt in California?

You know, if interest rates on savings accounts start dropping a bit, the current 4.5% on the I Bonds might not seem so bad all of a sudden...just something to think about before cashing them in, taking penalties and whatever.....and don't forget their state/local tax and tax differral advantages....

There will be an auction on Wednesday, December 13 of a 9-YEAR 11-MONTH 4 5/8% Treasury NOTE. This is a reopening of a Note auctioned in November, 2006.

To obtain more details including the accrued interest from November 15 to December 15, 2006 which will be added to the auction price of the note, see the announcement here or at http://www.publicdebt.treas.gov/of/releases/2006/ofg120706.pdf .

As the fixed interest rate for this note is 4 5/8 %, which is - as of 12/10 at 12:43 pm ET, a HIGHER interest rate than the current market listings for the Treasury 10 year note, this re-opening price might well involve a slight premium (cost more than $1000 per bond). FYI, as of the time of this FW posting, the Fidelity web site is listing an expected yield of 4.48% at auction . A premium is not a problem as long as you have the necessary funds available for the premium price, and in this case, the accrued interest.

For FW readers who have not made fixed income investments with premiums, here is a brief general description:

Premiums for issues provide the seller a greater price in consideration for the higher fixed rate of interest of the issue as compared with the then current market interest rates. For example, if a note was offering a 10% fixed rate of return today, buyers would be willing to pay much more than the 'par value' of $100 for the issue. The amount over par is referred to as the premium. As the interest rate is fixed, and even if with step-up terms in later years, the effective return for the buyer on any given day is based on the price they are willing to pay for the issue, which is essentially a market price at that instant. And this is true for Treasury auctions as well.

Likewise, the price for an issue with a low interest rate of say 2% in today's market, would have to be reduced (discounted from par) to attract a buyer to achieve a higher effective yield. Most TreasuryDirect buyers are very used to having the price for a Bill or Note to be discounted to less than 100, or par.

Given the present interest yield environment, this is perhaps a good time to review the availability of other Agency paper, as well as the other segments of the fixed income market including commercial and municipal paper. This afternoon, Fidelity was displaying quite a few "new issues" for Agencies which may offer a low or no-cost entry for FW readers with brokerage accounts. And a few of the Agencies on that Fidelity list offer the 'sometimes applicable' no state and local income tax exemption as do the Treasury issues.

As opposed to Treasury auctions and Agency new issues, the secondary market offers many alternatives, usually with an associated purchase commission for those who want specific maturities or issuer. There is AAA rated commercial 'more or less 10 year' paper available for your own yield comparison purposes.

Edit: corrected an important word, replacing "lower" with "higher" in the third paragraph, with Thanks to a courteous FW contributor, and added additional text.