TIPS (VIPSX) vs I-Bonds

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TIPS (VIPSX) vs I-Bonds

Postby ps56k » Mon Jul 08, 2013 11:48 pm

Currently holding VIPSX and have been reading about I-Bonds over on the Treas Direct website.

Any comments on investing the $10k limit into I-Bonds vs adding $10k to VIPSX ?
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Re: TIPS (VIPSX) vs I-Bonds

Postby TomatoTomahto » Tue Jul 09, 2013 12:05 am

I max out I bonds, but put the rest of my "inflation adjusted" allocation into tips fund, and sometimes, but not that often, tips bonds.
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Re: TIPS (VIPSX) vs I-Bonds

Postby Kalo » Tue Jul 09, 2013 12:08 am

With rates so low, is the term much of an issue with I-Bonds? Or do people just figure to take the hit after one year if rates have gone up significantly and reinvest in a higher rate I-Bond?

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Re: TIPS (VIPSX) vs I-Bonds

Postby ps56k » Tue Jul 09, 2013 1:45 am

here's a couple of links to the Treasury Direct info for I-bonds -
the basic info is here -
http://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
and the comparison to TIPS is here -
http://www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm
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Re: TIPS (VIPSX) vs I-Bonds

Postby pop77 » Fri Jul 12, 2013 10:05 am

With the short term TIPS fund (VTIP) sporting a negative yield, would it be a good idea to buy I bonds in its place? How does short term TIPS compare with I bonds?

Also, how does a negative yield work practically in a ETF? If the yield is positive say 2% it means the interest/dividend payments from the ETF sums out to be 2% of the current market price. What does the negative SEC yield really mean? Will the owners of the ETF asked to pay additional money to own the ETF after they bought it. It is difficult to understand how this practically works though I get the theoretical concept.
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Re: TIPS (VIPSX) vs I-Bonds

Postby #Cruncher » Fri Jul 12, 2013 3:05 pm

Kalo wrote:With rates so low, is the term much of an issue with I-Bonds? Or do people just figure to take the hit after one year if rates have gone up significantly and reinvest in a higher rate I-Bond?
What "term" and what "hit" are you referring to, Kalo? The holder can make the term anything he wants from 1 to 30 years. And the only "hit" is the forfeiture of the last 3 months interest for I Bonds redeemed before 5 years. It's conventional bonds that will take a "hit" to market value if interest rates rise, not I Bonds.

pop77 wrote:
  • With the short term TIPS fund (VTIP) sporting a negative yield, would it be a good idea to buy I bonds in its place? Yes, I'd only invest in a TIPS fund with a negative real yield after I'd exhausted my allowance for I Bonds.
  • If the yield is positive say 2% it means the interest/dividend payments from the ETF sums out to be 2% of the current market price. Pop, you're referring here to the distribution yield, which by definition can never be negative. It's different than the yield to maturity (YTM) or the SEC Yield -- which is basically the YTM less expenses.
  • What does the negative SEC yield really mean? Will the owners of the ETF [be] asked to pay additional money to own the ETF after they bought it[?] Owners of shares in a standard mutual fund or an ETF are never asked to contribute to the fund to offset losses. The losses, if any are just reflected in a lower Net Asset Value (NAV). A TIPS fund isn't special in this regard. For instance a growth stock fund might not collect enough dividends to cover the expenses. In such a case the the NAV of the fund will simply be decreased by the extent that expenses exceed dividends received.

    Bear in mind that the SEC Yield quoted by Vanguard TIPS funds is based on the real YTM. It excludes the increase in TIPS principal due to a rising Consumer Price Index (CPI). TIPS funds are required to include this "inflation-adjustment' along with the real income in their distributions. So usually even a TIPS fund with a negative real SEC Yield will pay out dividends because the inflation-adjustment will be greater than the negative real yield. *
* But there are exceptions. For example, see my post in the thread, Short-Term TIPS distribution?.
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Re: TIPS (VIPSX) vs I-Bonds

Postby tipswatcher » Fri Jul 12, 2013 3:19 pm

Any comments on investing the $10k limit into I-Bonds vs adding $10k to VIPSX ?


My advice, for what it's worth, is to buy the I-Bonds, and keep buying them to the limit each year.

As for VIPSX, you could dollar cost average your $10,000 in, at say, $1,000 a month. That would protect you a bit if interest rates rise.

I recently returned to VIPSX, after being out for two years of extremely low TIPS yields. But I am going to build my position slowly.

I am a big believer in buying the actual TIPS issues at auction and holding them to maturity. It is a very low-risk strategy and yields are finally getting somewhat 'attractive.'
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Re: TIPS (VIPSX) vs I-Bonds

Postby Mel Lindauer » Fri Jul 12, 2013 3:30 pm

Keep in mind that the composite yield of I Bonds can never go below 0%. That's not true with TIPS, so your first $10k per SS# should probably go to I Bonds.

Regards,

Mel
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Re: TIPS (VIPSX) vs I-Bonds

Postby Kevin M » Fri Jul 12, 2013 3:35 pm

ps56k wrote:Any comments on investing the $10k limit into I-Bonds vs adding $10k to VIPSX ?

  • I used to own VIPSX and some individual TIPS, but not now.
  • I have been buying annual limit of I Bonds for last few years.
  • Annual purchase limit for I Bonds is $20K if you have a living trust, which I do.
  • Real rate on I Bonds is 0%; real rate on VIPSX is negative.
  • VIPSX has significant interest-rate risk; just look at YTD return of -7.7% to see how this has shown up recently.
  • Interest rate risk of I Bonds is limited to the 3-month's of interest penalty if withdrawn in first five years, but of course can't withdraw for one year after purchase

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Re: TIPS (VIPSX) vs I-Bonds

Postby pop77 » Mon Jul 15, 2013 8:19 am

Thanks a lot. Looks like I have overlooked I bonds for a long time. Time to start. :-)
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Re: TIPS (VIPSX) vs I-Bonds

Postby billyt » Mon Jul 15, 2013 8:28 am

Just to clarify, the current yield on the ten year TIPs is positive (0.5% real yield). The yield on the Vanguard TIPS fund is just barely negative (-0.06% real), and may soon break into positive territory. Things have changed this last month, and investing in TIPS is looking more attractive. That being said, there is a lot to be said for purchasing your annual limit in I-bonds each year.
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Re: TIPS (VIPSX) vs I-Bonds

Postby nisiprius » Mon Jul 15, 2013 8:45 am

The characteristics of I bonds and TIPS are very different. The big thing about I bonds is that they are free from interest rate risk. They are virtually a no-remorse investment in the sense that after you've held them a year, if you see anything that looks better you just redeem them. I believe there are no circumstances whatsoever under which the redemption on value of an I bond ever declines, month over month. By almost any definition of risk, they are less risky than TIPS.

People get confused because they are both CPI-indexed, and are both called "bonds," but savings bonds are completely different in the way they work from ordinary marketable Treasury bonds. Traditionally they paid enough less than TIPS that you needed to weigh the lower risk of I bonds against the higher return of TIPS.

Mel can parse the precise details of how the penalty, "forfeit 3 most recent months' interest," works. It's too small for me to have bothered to figure it out. I think it really is more like a bonus for holding five years. Since you can't redeem for a year, by the time you can redeem them you have earned >3 months interest, so I don't think there are any circumstance whatsoever under which you can buy $1,000 of I bonds and have the redemption value be less than $1,000. And since it's interest, and the current fixed rate is zero, well... I'm not even sure there is a penalty these days...
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Re: TIPS (VIPSX) vs I-Bonds

Postby Mel Lindauer » Mon Jul 15, 2013 9:51 am

nisiprius wrote:The characteristics of I bonds and TIPS are very different. The big thing about I bonds is that they are free from interest rate risk. They are virtually a no-remorse investment in the sense that after you've held them a year, if you see anything that looks better you just redeem them. I believe there are no circumstances whatsoever under which the redemption on value of an I bond ever declines, month over month. By almost any definition of risk, they are less risky than TIPS.

People get confused because they are both CPI-indexed, and are both called "bonds," but savings bonds are completely different in the way they work from ordinary marketable Treasury bonds. Traditionally they paid enough less than TIPS that you needed to weigh the lower risk of I bonds against the higher return of TIPS.

Mel can parse the precise details of how the penalty, "forfeit 3 most recent months' interest," works. It's too small for me to have bothered to figure it out. I think it really is more like a bonus for holding five years. Since you can't redeem for a year, by the time you can redeem them you have earned >3 months interest, so I don't think there are any circumstance whatsoever under which you can buy $1,000 of I bonds and have the redemption value be less than $1,000. And since it's interest, and the current fixed rate is zero, well... I'm not even sure there is a penalty these days...


Two comments/replies:
1. No, an I Bond can never go below face value since the composite rate can never go below 0%, even if we experience massive deflation.
2. Even thought the fixed rate is currently zero, the current composite rate is still 1.18% (that's the inflation component), so there would be a loss of the last three months' interest at 1.18% or whatever the current accumulated composite rate is at the time of redemption if redeemed prior to five years.
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Re: TIPS (VIPSX) vs I-Bonds

Postby Ketawa » Mon Jul 15, 2013 10:05 am

Just a thought for those wondering about TIPS vs I Bonds...

Let's say you like the Vanguard TIPS fund, which has a duration about 8.5 years. You're fine with that duration and it meets your goals. However, there's I Bonds out there, and these seem like a good deal in a lot of ways. Some would say they have a duration of almost 0, since they can be redeemed at any time for a very small hit once you meet the holding requirements.

Let's say you have 20k to invest. Why not put 10k in I Bonds, and then put 10k in a long-term TIPS fund, so the average duration of your portfolio is an intermediate term?

I guess what I'm getting at is that one option is to look at the duration of your fixed income investments as a whole, then figure out the best way to meet that duration.
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Re: TIPS (VIPSX) vs I-Bonds

Postby TomatoTomahto » Mon Jul 15, 2013 10:06 am

pop77 wrote:Thanks a lot. Looks like I have overlooked I bonds for a long time. Time to start. :-)


I was late to this party myself. I have owned TIPS and TIPS funds for a long time, but never realized that I could benefit from I bonds. They're good for the kids too :sharebeer
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Re: TIPS (VIPSX) vs I-Bonds

Postby Mel Lindauer » Mon Jul 15, 2013 10:09 am

TomatoTomahto wrote:
pop77 wrote:Thanks a lot. Looks like I have overlooked I bonds for a long time. Time to start. :-)


I was late to this party myself. I have owned TIPS and TIPS funds for a long time, but never realized that I could benefit from I bonds. They're good for the kids too :sharebeer


Yep, they can be used tax-free for qualifying educational expenses. To qualify, the I Bonds must be registered in the parent's name(s). The child cannot be listed as an owner or co-owner.
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Re: TIPS (VIPSX) vs I-Bonds

Postby niceguy7376 » Mon Jul 15, 2013 10:42 am

I am new to this site and has not posted my current portfolio and request recommendations (will be doing it this week once I get the info in the format requested), but was curious about these I Bonds.

In order for me to ask proper and valid questions on portfolio, can someone tell me how I can buy the I Bonds and which type of accounts to be used to buy them?
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Re: TIPS (VIPSX) vs I-Bonds

Postby Grt2bOutdoors » Mon Jul 15, 2013 10:57 am

niceguy7376 wrote:I am new to this site and has not posted my current portfolio and request recommendations (will be doing it this week once I get the info in the format requested), but was curious about these I Bonds.

In order for me to ask proper and valid questions on portfolio, can someone tell me how I can buy the I Bonds and which type of accounts to be used to buy them?


Hello and welcome to the forum!

All your answers can be found under the http://www.bogleheads.org/wiki - just search for I bonds, there is an extensive write-up on them.
After that, head over to TreasuryDirect.gov - the only place you can open an account to purchase and hold I bonds.
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Re: TIPS (VIPSX) vs I-Bonds

Postby hollowcave2 » Mon Jul 15, 2013 11:09 am

I agree with Mel. I-bonds can never return a negative yield, so I-bonds look good right now despite the low rates.

You can't go wrong with I-bonds. You're guaranteed to keep up with inflation, tax deferred, and you cannot lose money. Just remember that you can't redeem them for a year.

So I would max out the I-bond purchase first and then consider other options after that.

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Re: TIPS (VIPSX) vs I-Bonds

Postby rustymutt » Mon Jul 15, 2013 11:18 am

ps56k wrote:Currently holding VIPSX and have been reading about I-Bonds over on the Treas Direct website.

Any comments on investing the $10k limit into I-Bonds vs adding $10k to VIPSX ?


I personally try to max out both. I love my Ibonds, but on my longer investment picture, I hold bonds, I opt for short duration in this interest rate environment. I switched mine to VTIP.
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Re: TIPS (VIPSX) vs I-Bonds

Postby yukon50 » Mon Jul 15, 2013 11:55 am

rustymutt wrote:
ps56k wrote:Currently holding VIPSX and have been reading about I-Bonds over on the Treas Direct website.

Any comments on investing the $10k limit into I-Bonds vs adding $10k to VIPSX ?


I personally try to max out both. I love my Ibonds, but on my longer investment picture, I hold bonds, I opt for short duration in this interest rate environment. I switched mine to VTIP.


Curious as to why? What scenarios will VTIP outperform? Do you need liquidity?
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Re: TIPS (VIPSX) vs I-Bonds

Postby 2beachcombers » Mon Jul 15, 2013 3:15 pm

Kevin M wrote:
ps56k wrote:Any comments on investing the $10k limit into I-Bonds vs adding $10k to VIPSX ?

  • I used to own VIPSX and some individual TIPS, but not now.
  • I have been buying annual limit of I Bonds for last few years.
  • Annual purchase limit for I Bonds is $20K if you have a living trust, which I do.
  • Real rate on I Bonds is 0%; real rate on VIPSX is negative.
  • VIPSX has significant interest-rate risk; just look at YTD return of -7.7% to see how this has shown up recently.
  • Interest rate risk of I Bonds is limited to the 3-month's of interest penalty if withdrawn in first five years, but of course can't withdraw for one year after purchase

Kevin

Kevin--Thanks, just added 10K to my trust. Wish I knew this 5 yrs ago.

jerry
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Re: TIPS (VIPSX) vs I-Bonds

Postby pop77 » Mon Jul 15, 2013 4:11 pm

Yep, they can be used tax-free for qualifying educational expenses. To qualify, the I Bonds must be registered in the parent's name(s). The child cannot be listed as an owner or co-owner.


Another big advantage of I bonds, it frees up your tax deferred accounts for other asset classes. It makes sense to just buy them in regular accounts so that my Roth can be freed up. I wonder why no one has thought of an I bond fund or ETF :-)
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Re: TIPS (VIPSX) vs I-Bonds

Postby Mel Lindauer » Mon Jul 15, 2013 6:27 pm

pop77 wrote:
Yep, they can be used tax-free for qualifying educational expenses. To qualify, the I Bonds must be registered in the parent's name(s). The child cannot be listed as an owner or co-owner.


Another big advantage of I bonds, it frees up your tax deferred accounts for other asset classes. It makes sense to just buy them in regular accounts so that my Roth can be freed up. I wonder why no one has thought of an I bond fund or ETF :-)


It would be pretty hard to have a fund or ETF that could only buy $10k worth of I Bonds per year. Can you imagine what the ER would have to be for the managers to make money? :-) (Google "Steadman Funds" for the answer.)
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Re: TIPS (VIPSX) vs I-Bonds

Postby patrick » Mon Jul 15, 2013 7:55 pm

TIPS in general are no longer negative. See http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2013 for current yields, which are positive for 7 year and higher maturity. The broad TIPS funds (but not the short term ones, of course) have an average maturity over 7 years.
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Re: TIPS (VIPSX) vs I-Bonds

Postby Clive » Mon Jul 15, 2013 8:59 pm

TIPS in general are no longer negative

Yes. Gold gave a hint that positive real yields might return back in mid April 2013

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Re: TIPS (VIPSX) vs I-Bonds

Postby Kalo » Tue Jul 16, 2013 7:15 pm

#Cruncher wrote:
Kalo wrote:With rates so low, is the term much of an issue with I-Bonds? Or do people just figure to take the hit after one year if rates have gone up significantly and reinvest in a higher rate I-Bond?


What "term" and what "hit" are you referring to, Kalo? The holder can make the term anything he wants from 1 to 30 years. And the only "hit" is the forfeiture of the last 3 months interest for I Bonds redeemed before 5 years. It's conventional bonds that will take a "hit" to market value if interest rates rise, not I Bonds.


The term is: the one year before you can get out of it, the five years before you can get out without forfeiting 3 month's of interest.

The hit is the 3 months of interest.

So to rephrase my question:
Since there is a 10K max per year purchase, if I plan to buy 10K per year for the foreseeable future, then if I decide after holding say my first year's purchase for more than a year, and rates have climbed significantly, is the theory that I can just cash it out, lose the 3 month's interest, and buy some other type of bond? (I can't buy another I-Bond because I'm already maxing out my 10K per year.)

Might seem like a dumb question but I haven't seen anyone mention the actual strategy for this scenario.

Thanks,

Kalo
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Re: TIPS (VIPSX) vs I-Bonds

Postby Kevin M » Tue Jul 16, 2013 7:20 pm

^Sure, why not?

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Re: TIPS (VIPSX) vs I-Bonds

Postby yukon50 » Wed Jul 17, 2013 5:03 pm

Kalo wrote:
#Cruncher wrote:
Kalo wrote:With rates so low, is the term much of an issue with I-Bonds? Or do people just figure to take the hit after one year if rates have gone up significantly and reinvest in a higher rate I-Bond?


What "term" and what "hit" are you referring to, Kalo? The holder can make the term anything he wants from 1 to 30 years. And the only "hit" is the forfeiture of the last 3 months interest for I Bonds redeemed before 5 years. It's conventional bonds that will take a "hit" to market value if interest rates rise, not I Bonds.


The term is: the one year before you can get out of it, the five years before you can get out without forfeiting 3 month's of interest.

The hit is the 3 months of interest.

So to rephrase my question:
Since there is a 10K max per year purchase, if I plan to buy 10K per year for the foreseeable future, then if I decide after holding say my first year's purchase for more than a year, and rates have climbed significantly, is the theory that I can just cash it out, lose the 3 month's interest, and buy some other type of bond? (I can't buy another I-Bond because I'm already maxing out my 10K per year.)

Might seem like a dumb question but I haven't seen anyone mention the actual strategy for this scenario.

Thanks,

Kalo


Definitely!

This is why I-bonds have been a good deal for a few years. I wonder how high the yield on VIPSX needs to go to make it a compelling buy again compared to I-bonds?
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Re: TIPS (VIPSX) vs I-Bonds

Postby Kevin M » Wed Jul 17, 2013 6:13 pm

yukon50 wrote:This is why I-bonds have been a good deal for a few years. I wonder how high the yield on VIPSX needs to go to make it a compelling buy again compared to I-bonds?

Bogleheads • View topic - TIPS Yield: How high before redeem I-Bond?

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