TIPS Yield: How high before redeem I-Bond?

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TIPS Yield: How high before redeem I-Bond?

Postby yukon50 » Tue Jun 25, 2013 9:54 pm

I have a bunch of I-Bonds that yield 0% fixed.

How high would the yield on a TIPS fund (let's use the ETF TIP for an example) have to rise before it makes sense to redeem I-Bonds? Assuming buy replacement stocks in taxable and in an IRA sell the same amount of stocks and buy TIP in IRA.

I'm thinking somewhere near 1% real yield. Currently LTPZ (long-term TIPS ETF) might be yielding over 1%, but it's hard to find info on it.
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Re: TIPS Yield: How high before redeem I-Bond?

Postby Kevin M » Wed Jun 26, 2013 2:47 am

It's a judgment call. With I Bonds you have basically no interest-rate risk--just the 3-month's of lost interest if you withdraw in less than five years from purchase date. With TIPS, your interest-rate risk increases with increasing maturity.

Some very knowledgeable folks here are OK with 1% real on 30-year TIPS. For me, that's way too much interest-rate risk for such a low yield. Many other folks here are happy just to keep 50% of their fixed income in the (original) Vanguard TIPS fund and "stay the course". Others have shortened their duration and moved at least some into the newer short-term TIPS fund.

I personally no longer own any TIPS, but I have been maxing out I Bonds the last few years. Selling them hasn't even crossed my mind yet. Maybe if intermediate-term real rates hit 2% I'd think about it.

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Re: TIPS Yield: How high before redeem I-Bond?

Postby Investing is boring » Wed Jun 26, 2013 7:56 am

I have wrestled with the same question. What I decided was to start rolling over 0% iBonds into iBonds with real return as they become available. This free's up $20k per year for a number of years (currently 2 years, as I just started iBonds in 2011). That free $20k per year will then go against the mortgage (if I buy) or just into my AA. I invest according to my IPS, which includes inflation protected bonds.

This was the most logical approach for me.
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Re: TIPS Yield: How high before redeem I-Bond?

Postby #Cruncher » Wed Jun 26, 2013 8:16 am

As of last Friday my updated post showed the average YTM of the 0 - 5, 1+, and 15+ year TIPS indexes to be -0.56%, +0.21%, and +1.23% respectively. These are are indexes used by the Vanguard VTIP, iShares TIP, and PIMCO LTPZ ETFs. I agree with Kevin M that these yields aren't high enough to warrant exchanging 0% fixed rate I Bonds for them.

yukon50 wrote:Currently LTPZ (long-term TIPS ETF) might be yielding over 1%, but it's hard to find info on it.
The LTPZ fund has only 7 holdings so it's relatively easy to calculate the weighted average YTM yourself on a spreadsheet. Here it is using weights from the PIMCO web page and yields from WSJ TIPS Quotes 6/25/2013 :
Code: Select all
Matures      Coupon    Weight     Yield
----------   ------    ------     -----
01/15/2029    2.500    12.87%     1.085
04/15/2029    3.875    26.40%     1.072
04/15/2032    3.375     6.95%     1.205
02/15/2040    2.125    12.97%     1.341
02/15/2041    2.125    20.88%     1.353
02/15/2042    0.750    14.40%     1.399
02/15/2043    0.625     4.90%     1.420
                       ------     -----
Total / Wtd Avg        99.37%     1.242
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Re: TIPS Yield: How high before redeem I-Bond?

Postby letsgobobby » Wed Jun 26, 2013 8:31 am

2% on 15 year would be very appealing to me, but I wouldn't sell my I bonds for anything, really. The potential for tax free redemptions in twenty or twenty five years is just too appealing. I'd probably exchange out of another fixed income holding, whether stable value or total bond.
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Re: TIPS Yield: How high before redeem I-Bond?

Postby Call_Me_Op » Wed Jun 26, 2013 8:35 am

You are actually contemplating replacement of an apple with an orange. I would keep my I-Bonds and buy TIPS with new money if I really want them.
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Re: TIPS Yield: How high before redeem I-Bond?

Postby jeffyscott » Wed Jun 26, 2013 6:34 pm

I-bonds expand the tax deferred space, if you are maxing out other options. For me it's not (currently) I-bonds vs. TIPS, it's stable value at 2.3% and various bond funds vs. TIPS fund.

The other thing is, will the next I-bond rate feature real return above 0%?
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Re: TIPS Yield: How high before redeem I-Bond?

Postby Kevin M » Thu Jun 27, 2013 4:54 pm

jeffyscott wrote:I-bonds expand the tax deferred space, if you are maxing out other options.

Kind of. The TA space really is not comparable to say an IRA or a 401k, due to the lack of fungibility; i.e., if real rates rise enough, it may no longer make sense to hold I Bonds @0% real, and you can't use the space for a given year's I Bond allotment for anything else.

jeffyscott wrote:For me it's not (currently) I-bonds vs. TIPS, it's stable value at 2.3% and various bond funds vs. TIPS fund.

Lucky you! That's a great rate on your SV fund. A couple of my relatives had SV funds earning only about 1%; still better than a MM, which often is the only cash-like choice in a 401k/403b.

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Re: TIPS Yield: How high before redeem I-Bond?

Postby Valuethinker » Fri Jun 28, 2013 10:33 am

yukon50 wrote:I have a bunch of I-Bonds that yield 0% fixed.

How high would the yield on a TIPS fund (let's use the ETF TIP for an example) have to rise before it makes sense to redeem I-Bonds? Assuming buy replacement stocks in taxable and in an IRA sell the same amount of stocks and buy TIP in IRA.

I'm thinking somewhere near 1% real yield. Currently LTPZ (long-term TIPS ETF) might be yielding over 1%, but it's hard to find info on it.


Since you are constrained on how many Ibonds you can buy, I wouldn't let them go unless you really needed them to execute an asset allocation shift.

Presumably assuming wealth accumulation whatever you do you are never going to have enough Ibonds (relative to your total portfolio). So why sell?
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Re: TIPS Yield: How high before redeem I-Bond?

Postby yukon50 » Sat Jun 29, 2013 12:33 am

Valuethinker wrote:
yukon50 wrote:I have a bunch of I-Bonds that yield 0% fixed.

How high would the yield on a TIPS fund (let's use the ETF TIP for an example) have to rise before it makes sense to redeem I-Bonds? Assuming buy replacement stocks in taxable and in an IRA sell the same amount of stocks and buy TIP in IRA.

I'm thinking somewhere near 1% real yield. Currently LTPZ (long-term TIPS ETF) might be yielding over 1%, but it's hard to find info on it.


Since you are constrained on how many Ibonds you can buy, I wouldn't let them go unless you really needed them to execute an asset allocation shift.

Presumably assuming wealth accumulation whatever you do you are never going to have enough Ibonds (relative to your total portfolio). So why sell?


Why sell?

I'm young and in wealth accumulation mode. I mainly bought I-Bonds because they had an above-market yield. They were 0% real when a TIPS fund was -1% real. But if I can get a TIPS fund for greater than 0% real, there has to be a point where the risk return tradeoff becomes a good risk in favor of a TIPS fund.

I have a small % in bonds, so the I-Bond yearly limit isn't totally constraining to me. And my entire bond allocation is in I-Bonds and 5-yr CD's right now.
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Re: TIPS Yield: How high before redeem I-Bond?

Postby Noobvestor » Sat Jun 29, 2013 12:52 am

For those of us with EE bonds, those pose an interesting question as well ... though the longer I have them, the more they are 'worth' in terms of doubling.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: TIPS Yield: How high before redeem I-Bond?

Postby yukon50 » Sat Jun 29, 2013 7:44 pm

For me, TIPS yields have already risen higher than they were when I bought I-Bonds so the put option has been good so far. Just have to figure out when TIPS yields have a better risk/reward than 0% I-Bonds.

Would be exchanging I-Bonds with stock index in taxable account, and exchanging stock index for TIPS in IRA.
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Re: TIPS Yield: How high before redeem I-Bond?

Postby z3r0c00l » Sun Jun 30, 2013 9:35 am

I honestly think age is a factor - if you are 50 and know you will want $250,000 in ibonds as you retire, you will have to start building that.
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