I bond

I bond

Fixed income

• 06/12/20 – study the details of I bond

Investing in I bonds to beat CDs & Savings with TreasuryDirect

How to Invest in U S Treasury through TreasuryDirect – Better than CDs

Inflation Protected Securities Explained [TIPS & I Bonds]

Inflation Protected Securities Explained! (Protect Your Money From Inflation)

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Series I Savings Bonds Rates & Terms: Calculating Interest Rates

Series I Savings Bonds

Buying Series I Savings Bonds

Series I Savings Bonds Rates & Terms: Calculating Interest Rates

• 06/09/2021 – learn basic on TIPS

Introduction to Inflation-Protected Securities

What Are Inflation-Protected Securities?

When you purchase a normal bond, you know what your nominal return will be at maturity (assuming there is no default). But you don’t know your real rate of return because you do not know what inflation will be during the life of your bond. The opposite occurs with an IPS. Instead of guaranteeing you a nominal return, the IPS guarantees you a real return. So, you know your real rate of return but not your nominal return. This is again because you do not know the rate of inflation during the life of your IPS.

While inflation-protected securities are structured similarly to normal bonds, the main difference is that the IPS structure of the interest payments is in two parts rather than one. First, the principal accrues with inflation throughout the life of the IPS, and the entire accrued principal is paid out at maturity.

Second, the regular coupon payment is based on a real rate of return. While the coupon on an IPS tends to be materially lower than the coupon on a normal bond, the IPS coupon pays interest on the inflation-accrued principal rather than on the nominal principal. Therefore, both principal and interest are inflation-protected. Here is a chart showing the coupon payments of an IPS.

Sounds Too Good to Be True?

While the benefits are clear, inflation-protected securities do come with some risk. First, to realize fully the guaranteed real rate of return, you have to hold the IPS to maturity. Otherwise, the short-term swings in the real yield could negatively affect the short-term return of the IPS. For example, some sovereign governments issue a 30-year IPS, and although an IPS of this length can be quite volatile in the short term, it is still not as volatile as a regular 30-year bond from the same issuer.

A second risk associated with inflation-protected securities is that, since the accrued interest on the principal tends to be taxed immediately, inflation-protected securities tend to be better held within tax-sheltered portfolios. Third, they are not well understood and the pricing can be both difficult to understand and calculate.

The Bottom Line

Ironically, inflation-protected securities are one of the easiest asset classes to invest in, but they are also one of the most overlooked. Their poor correlation with other asset classes and unique tax treatment make them a perfect fit for any tax-sheltered, balanced portfolio. Default risk is of little concern as sovereign government issuers dominate the IPS market.

Investors should be aware that this asset class does come with its own sets of risks. Longer-term issues can bring high short-term volatility that jeopardizes the guaranteed rate of return. As well, their complex structure can make them difficult to understand. However, for those who are willing to do their homework, there truly is a nearly “free lunch” out there in the investment world. Dig in!

• 06/06/2021 – Plan to buy I bond (recommended by Tilson)

The Safe, High-Return Trade Hiding in Plain Sight – WSJ
One retirement consultant calls I bonds ‘the best-kept secret in America.’ Right now they’re yielding over 3.5%, nearly risk free.

“I bonds are the best-kept secret in America,” says Mr. Bodie. With a total of just $46.4 billion outstanding, they amount to less than 0.17% of all U.S. debt held by the public, according to the Treasury Department.

Introduced in 1998, I bonds were conceived to provide primarily small savers with a positive long-term return after inflation. Their yield consists of a fixed rate for the 30-year life of the bond and an inflation rate, which adjusts semiannually. The current 3.54% applies to I bonds issued until Nov. 1, 2021 and will reset every six months unless the official government rate of inflation stays constant.

What if interest rates or inflation head lower? Yes, the yield can decline. But, unlike with Treasury inflation-protected securities, or TIPS, the yield on I bonds can never go below zero. So they protect against both inflation and deflation, which is pretty amazing.

Interest on I bonds is exempt from state and local income tax. In confiscatory states like California, Hawaii, Minnesota, New York and Oregon, a household with $400,000 in taxable income would have to earn roughly 4% on a taxable asset to equal today’s after-tax I-bond return if rates don’t change.

I bonds aren’t as liquid as a bank account, money fund or Treasury bill. You can’t cash out until you’ve held for 12 months. If you redeem within the first five years, you’ll forfeit the last three months of interest. But they’re as liquid as other 30-year bonds—and, if you sell after the first five years, your full recovery of principal and your ability to match or outpace inflation are both guaranteed.

If you buy an I bond at today’s 3.54% rate and sell it one year and a day from now, you’ll earn 2.65% after the penalty (assuming the rate doesn’t change). That’s roughly quadruple what you’d get from a one-year certificate of deposit or ultra-short-term bond fund.

Qs:  Solely on my high regard for Mr Zweig I’ve just bought an I bond for the full $10K. Am asking now (yes, I know, I should have asked before) a few questions about what I’ve bought.

1. How long is the bond for? Ten years? Thirty, I’m guessing.

2. I understand the penalties if I cash in early, but looking at it from the opposite point of view, can the Treasury give me back my money early? As, for example, if interest rates stay under 2%, why would they want to keep paying me 3.54?

3. If interest rates go up to, say 5%, do we still keep getting 3.54?

4. What happens if inflation goes up to, say, 5%. Do we keep getting 3.54?

5. In the same way, what if inflation stays below 2 percent? Do we still keep getting 3.54?

Ignorant questions, forgive me.

Answer: You can find answers at  treasurydirect.gov under Individual/ Research Center/ Products in depth/ I-Bonds/ Redeem.