ThursdaysChild said:mariojm said:To be honest, these days I'm more interested in TIPS than I-bonds because of the ~ 1% higher yields.
Mario: what do you think of the about-to-be-offered 20-year TIPS (see second page for details)http://www.publicdebt.treas.gov/of/releases/2006/ofp072006.pdf ?

If you look at the Real Yield Curve, there's not much of a premium for 20-yr right now as compared to shorter. Real yields have gone up recently but they have also been higher before, so I'd be concerned about locking in a rate that long (of course you might sell before maturity, if it makes sense). I have a 5-yr with 2.39% yield from the April auction and I'm pretty happy with that term, I can see myself holding that to maturity easily. Of course, if you feel comfortable with this real yield for the long run, go for it! (Keep in mind, the real yield at auction sometimes varies from the one on the yield curve b/c these are sold so infrequently.)

mariojm said:Bump, with a midterm update on CPI numbers for upcoming I bond period!

Relevant will be the change from March 06 - Sept 06

March 06 CPI-U was 199.8
June 06 CPI-U is 202.9

Accumulated inflation: (202.9-199.8)/199.8 = 1.55% in 3 months = 6.2% annualized!

If the current levels of inflation continue we'll be looking at similar I bond rates as one year ago ...

Yeah waiting till October to evaluate the situation, especially with the fixed part being higher than it was last year.

Last year's 14 month strategy ended up coming out to 5.93% APY (including the 3-month penalty) which is better than just about any other fixed interest investment over a similar period. It also has built-in an extra year of tax deferral if redeemed in January (Oct-05-Jan-07) which never hurts.

As far as long term is concerned, I'm not sure if those slumps are easy to compensate for. Even taking into account high point of 6.73% of last year, a 2.4% brings it back to where you about break even with a high-yield MM account without having the liquidity of it. Tax deferral probably gets you ahead compared to say leaving money in ED or high-yield CD. But I'm not sure it beats a series of short term I-bond strategies where you ride the high points and get out before the low points even at the expense of the 3 month penalty. After all 3-month penalty at 2.4% APY isn't really a loss that you cannot make up for in the remaining 3 months (say currently at 5+% APY in a MMS account).

good morninstar article on treasury bonds vs tips
morningstar

Sept. 1 has come and gone --

reminder for folks with June (2005 and earlier) and December (2004 and earlier) I bonds that they stop earning the high inflation component as of today and can be cashed out. I'm cashing out a June 2004 bond and putting it in a 6% CD instead. I still hold on to many older I bonds, but want to diversify my holdings to be less inflation dependent.

If you're interested in an I-bond vs. TIPS comparison, feel free to participate in this thread:

TIPS, Savings Bonds, or regular Treasuries - which one fits you best?

Excerpt from an article at Bankrate.com with predictions for the November I Bond rate:

'One expert we spoke with estimates that the new combined rate will be 4.5 percent, up from the current combined rate of 2.4 percent. On the surface, it looks as though the new I-bond will blow away the current one. But the critical number for long-term investors is the fixed rate, and there's a decent chance that rate will be lower.

Dan Pederson, author of "Savings Bonds -- When to Hold, When to Fold, and Everything In-Between," says he expects the fixed rate to be left alone, but don't bet the farm on it.

"The inflation component will be about 3.1 percent. If they leave the fixed at 1.4 percent you'd have a combined rate of 4.5 percent. The only question is that 4.5 percent starts getting into the range of attractive and whether they might trim it a bit. I don't think they will, but had we not had the drop in the CPI for September, the I bond would be up over 5 percent and there would be a significant likelihood that they'd trim. But I could see them cut the fixed rate to 1.2, and I wouldn't be really surprised to see them cut it to 1 percent." '

dup

is anyone else having problems getting the Savings Bond Wizard to price beyond 11/06? I've done the automated update twice already but, it refuses to price for 12/06...

thanks in advance

Yankees said:is anyone else having problems getting the Savings Bond Wizard to price beyond 11/06? I've done the automated update twice already but, it refuses to price for 12/06...

thanks in advance12/06 pricing update worked fine for me

nm...you found it!

My I-bond was purhcased in March/2006 and only earns a fixed rate of 1%. Right now it earns a poor 2.01%, it will be 4.12% after March.

My tax bracket is 28%, from all of the postings that I read, it seems that it's better if I sell my I-bond on March 2nd and move it to CD to earn a better 5%.

If I buy a CD, I probably will only consider a 6 month short term CD, then what puzzles me is that if I have to pay 28% tax bracket on those 6 month CD interest, is it still a good idea to sell my I-bond in March and change it to CD (every 6 months) ?

I appreciate any advise. Thanks.

fathickory said:My I-bond was purhcased in March/2006 and only earns a fixed rate of 1%. Right now it earns a poor 2.01%, it will be 4.12% after March.

My tax bracket is 28%, from all of the postings that I read, it seems that it's better if I sell my I-bond on March 2nd and move it to CD to earn a better 5%.

If I buy a CD, I probably will only consider a 6 month short term CD, then what puzzles me is that if I have to pay 28% tax bracket on those 6 month CD interest, is it still a good idea to sell my I-bond in March and change it to CD (every 6 months) ?

I appreciate any advise. Thanks.

You purchased your I-bond in March 06, so the earlierst you can cash out is March 07. If I did my math correctly, you would have earned 6.73% for the first 6 months and 2.01% for the last 6 months, so if you cash out in March, you'd lose 3 months of 2.01% interest. Let's ignore taxes for a minute ... 6 months in a 5% CD with the 3 month interest loss would be almost exactly the same as keeping the bond and earning 4.12% on it for the coming 6 months. Of course, if you would cash out then, you'd lose 3 months of 4.12% (which is worse than losing 3 months of 2.01% now). So only keep the I bond if you think you'll keep it for some more years to come; otherwise look at the 2.01% as a good exit opportunity without much interest loss. Like it or not, you may get another fairly low I bond period after the 4.12%. It'll probably be similar to the 2.01% period, as it looks like right now.

Now, for the tax considerations ... the total interest income on the March 06 bond is still comparatively low (you'd have earned a total of 3.88% of your principal, after factoring in the penalty, so the tax on it would be just over 1% of principal), so the fact that you'd have to pay interest income on this bond when you cash it out is not a big deal. (Would be a big deal for several year old bonds.) Plus, it'll be income in '07 - at least you got to push it out for a year.

If you think you'll remain in the 28% bracket for a while (and don't have education expenditures that you could use to reduce the potential tax on an I bond), I'd recommend you cash out this bond. The fixed rate is so low that you'll probably get better CD rates for a while, and the potential future tax savings on the I bond don't offset the higher gain from CD rates right now. Perhaps you can reconsider I bonds when the fixed rate is higher, and when the composite rate is more competitive compared to CD rates. Perhaps it may even make sense to look at a fixed-rate EE bond (if the rate goes higher) and lock in that rate, and think of it as a variable term CD that you can extend anywhere from 1-30 years.

In this environment, the only reason to keep a lower fixed rate I bond is, in my opinion, for inflation protection. Let's say we have a doomsday staginflation scenario. Your fixed rate CD money would melt away, but your I bond would protect the principal. ... But there's a price you pay for this protection, which is a lower yield during normal inflation times.