Tamales wrote: Phineas J. Whoopee wrote:
surfer1 wrote:I look at I-bonds as a no-brainer and buy the max I can each year. It's basically a gift "CD" from the fed. You won't find a better risk-free interest rate. If you need the money, just break the bond after 12 months.
I agree, but just for the record, they aren't from the Fed. They're from Treasury....
Tamales wrote:Could you elaborate on this "gift CD from [treasury]" aspect?
No, I could not, because I didn't write that. I was helping with terminology a little bit for something surfer1 said. Re-rading my words now, I see I could have been more clear
that I was agreeing with the "you won't find a better risk-free interest rate" aspect, but not necessarily the other aspects. I needed to leave the "gift" part in because I was specifically differentiating between the Fed and the Treasury and that was its context.
Perhaps surfer1 would care to elaborate.
When I look here: http://www.treasurydirect.gov/indiv/res ... dterms.htm
it says the current composite rate for an I Bond purchased in late November would be 1.48%
and when I look here: http://www.interest.com/cd-rates/rates/ ... e&MSA=6200
that 1.48% rate on I Bonds matches most closely with the highest yielding 3 year CD, nationwide.
So I'm not entirely clear on what is meant by it being like a gift CD, since you can get that same rate or higher via CDs (if you shop around and are OK with 3 year or longer term CD)?
If instead you compare the I Bond to a 5 year CD (since I bonds have an "early withdrawal penalty" of 3 months interest if cashed out within first 5 years, similar to many 5 year CDs) they are quite a bit less.
A zero percent fixed I Bond will keep up with inflation, on a before-tax basis, for up to thirty years. I'm not sure where the comparison to three- and five-year CDs comes from. One will be misled if one fails to distinguish between nominal and real returns.
If I calculate the 5-year break-even rate today
it's 1.59%. The I Bond's inflation adjustment will change each six months to represent realized inflation, so 1.48% is almost certainly not
what it will return over any period longer than six months.
Furthermore, the post you responded to is a year old. Nominal and real interest rates then were not what they are now.
Tamales wrote:Also wondering, has this relationship held historically (i.e. that I bonds are approximately the same yield as the highest yielding 3 year CD at any given date, or is that just a coincidence of the present? Has the composite rate on I bonds ever been less than the highest yielding 3 year CD? 2 year? 1 year?)
I don't know. Perhaps if you look up historical data on high-rate CDs for the past several years somebody could volunteer an analysis. I would be surprised if the relationship is persistent because nominal and real rates don't move in tandem.