10 year TIPS reopening 9/2
- stevewolfe
- Posts: 1676
- Joined: Fri Oct 10, 2008 7:07 pm
10 year TIPS reopening 9/2
All,
I'm considering purchasing the 10 year TIPS (with 9 years and 10 months remaining) at the reopening on 9/2/2010 (CUSIP: 912828NM8). I was discussing this with a co-worker as an attractive alternative to additional I-Bonds I was planning to purchase this year. This would be in a taxable account (Treasury Direct).
I've never purchased TIPS before, just savings bonds at Treasury Direct. So I've been reading up on the subject and *think* I have covered the important details below - looking for feedback from other folks on whether or not this looks like a reasonable buy vs. the I-Bond:
Maturity: 7/15/2020
Coupon: 1.25%
Yield to maturity: 1.005%
Ask: 102.297
Inflation Factor: 0.99951
So there will be a premium paid for the bonds - if I'm doing the math properly, $22.97 / $1000? This will reduce the effective coupon from 1.25% to 1.005% (assuming the auction went off at the rates quoted above).
To me, the trade here is the 0.2% coupon of the I-bond for the 1.005% coupon of the TIP. For the spread, you lose the tax deferral and the built in put of the I-Bond. Is there something else I'm missing? Any comments from others thinking of participating in the auction Thursday? Thanks.
Steve
I'm considering purchasing the 10 year TIPS (with 9 years and 10 months remaining) at the reopening on 9/2/2010 (CUSIP: 912828NM8). I was discussing this with a co-worker as an attractive alternative to additional I-Bonds I was planning to purchase this year. This would be in a taxable account (Treasury Direct).
I've never purchased TIPS before, just savings bonds at Treasury Direct. So I've been reading up on the subject and *think* I have covered the important details below - looking for feedback from other folks on whether or not this looks like a reasonable buy vs. the I-Bond:
Maturity: 7/15/2020
Coupon: 1.25%
Yield to maturity: 1.005%
Ask: 102.297
Inflation Factor: 0.99951
So there will be a premium paid for the bonds - if I'm doing the math properly, $22.97 / $1000? This will reduce the effective coupon from 1.25% to 1.005% (assuming the auction went off at the rates quoted above).
To me, the trade here is the 0.2% coupon of the I-bond for the 1.005% coupon of the TIP. For the spread, you lose the tax deferral and the built in put of the I-Bond. Is there something else I'm missing? Any comments from others thinking of participating in the auction Thursday? Thanks.
Steve
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Re: 10 year TIPS reopening 9/2
That is the appropriate comparison, and you seem to have most of the relevant differences in mind. You might consider that the I-Bond has more flexibility as to term, though.stevewolfe wrote:All,
I'm considering purchasing the 10 year TIPS (with 9 years and 10 months remaining) at the reopening on 9/2/2010 (CUSIP: 912828NM8). I was discussing this with a co-worker as an attractive alternative to additional I-Bonds I was planning to purchase this year. This would be in a taxable account (Treasury Direct).
I've never purchased TIPS before, just savings bonds at Treasury Direct. So I've been reading up on the subject and *think* I have covered the important details below - looking for feedback from other folks on whether or not this looks like a reasonable buy vs. the I-Bond:
Maturity: 7/15/2020
Coupon: 1.25%
Yield to maturity: 1.005%
Ask: 102.297
Inflation Factor: 0.99951
So there will be a premium paid for the bonds - if I'm doing the math properly, $22.97 / $1000? This will reduce the effective coupon from 1.25% to 1.005% (assuming the auction went off at the rates quoted above).
To me, the trade here is the 0.2% coupon of the I-bond for the 1.005% coupon of the TIP. For the spread, you lose the tax deferral and the built in put of the I-Bond. Is there something else I'm missing? Any comments from others thinking of participating in the auction Thursday? Thanks.
Steve
If all in taxable, then the comparison is simpler. If the TIPS would be for a tax-deferred account, then you have to think about the effect of what it replaces there.
The I-Bond tax-deferral only goes so far for me. Do I think its very likely that at no time in the next 30 years will the rate on TIPS be substantially better than the I-Bond's 0.2%. Seems unlikely I'll defer very long then.
All considered, it seems to be there is a fairly good chance that both of these will end up having a negative real return, after taxes.
- market timer
- Posts: 6535
- Joined: Tue Aug 21, 2007 1:42 am
Re: 10 year TIPS reopening 9/2
This is a critical difference.Tramper Al wrote:You might consider that the I-Bond has more flexibility as to term, though.
The positive slope of the real yield curve means the market is pricing in the expectation of rising real rates. The ability to redeem I bonds at some time between now and 2040 is a valuable option, as is the interest rate floor (I bonds never pay a negative semi-annual interest rate, even in periods of deflation).
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Re: 10 year TIPS reopening 9/2
Can TIPS make a negative semi-annual interest payment?market timer wrote:I bonds never pay a negative semi-annual interest rate, even in periods of deflation.
- stevewolfe
- Posts: 1676
- Joined: Fri Oct 10, 2008 7:07 pm
Re: 10 year TIPS reopening 9/2
market timer wrote:This is a critical difference.Tramper Al wrote:You might consider that the I-Bond has more flexibility as to term, though.
The positive slope of the real yield curve means the market is pricing in the expectation of rising real rates. The ability to redeem I bonds at some time between now and 2040 is a valuable option, as is the interest rate floor (I bonds never pay a negative semi-annual interest rate, even in periods of deflation).
Thanks Al and Market Timer. That makes good sense to me. I'll keep it simple and stick with the I-Bonds for now.
- market timer
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- Joined: Tue Aug 21, 2007 1:42 am
Re: 10 year TIPS reopening 9/2
Effectively, by reducing the inflation factor.natureexplorer wrote:Can TIPS make a negative semi-annual interest payment?market timer wrote:I bonds never pay a negative semi-annual interest rate, even in periods of deflation.
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Re: 10 year TIPS reopening 9/2
On the subject, do you have any inking as to what the Nov 1 fixed rate will be? I have not used our 2010 allocation yet, mainly due to lack of enthusiasm. It seems to me, though, that the new rate cannot be expected to be higher than the current one. Then again, it can't be much lower either!stevewolfe wrote:I'll keep it simple and stick with the I-Bonds for now.
- market timer
- Posts: 6535
- Joined: Tue Aug 21, 2007 1:42 am
Re: 10 year TIPS reopening 9/2
Do you use your allotment of EE bonds? For a 20+ year holding period, the 3.6% rate dominates nominal Treasuries.Tramper Al wrote:On the subject, do you have any inking as to what the Nov 1 fixed rate will be? I have not used our 2010 allocation yet, mainly due to lack of enthusiasm. It seems to me, though, that the new rate cannot be expected to be higher than the current one. Then again, it can't be much lower either!stevewolfe wrote:I'll keep it simple and stick with the I-Bonds for now.
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Re: 10 year TIPS reopening 9/2
No, I've not ever used EE bonds, and I am prone to ignoring whole swaths of investable asset classes based on preconception. On that theme, though, I recently discovered inexplicably high CD rates hiding within a 529 in which we were already participating. At 5.0%, that has at the moment outmatched nominal Treasury yields of any maturity, including zero-coupons. So while I'll look at the EEs, I'm probably all set for nominal alternatives at the moment. The 3.6%, does that depend on a 1- or 2-decade holding period, though, rather than the everyday rate offering? Thanks for the suggestion, though.market timer wrote:Do you use your allotment of EE bonds? For a 20+ year holding period, the 3.6% rate dominates nominal Treasuries.Tramper Al wrote:On the subject, do you have any inking as to what the Nov 1 fixed rate will be? I have not used our 2010 allocation yet, mainly due to lack of enthusiasm. It seems to me, though, that the new rate cannot be expected to be higher than the current one. Then again, it can't be much lower either!stevewolfe wrote:I'll keep it simple and stick with the I-Bonds for now.
- market timer
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Re: 10 year TIPS reopening 9/2
Two decades required for 3.6%/year, 1.4% otherwise.Tramper Al wrote: The 3.6%, does that depend on a 1- or 2-decade holding period, though, rather than the everyday rate offering? Thanks for the suggestion, though.
I'm happy to let my EE and I bond allotments expire at present rates, instead funneling new contributions to equities at 2x leverage.
- stevewolfe
- Posts: 1676
- Joined: Fri Oct 10, 2008 7:07 pm
Re: 10 year TIPS reopening 9/2
The "Savings Bond Advisor" has a nice chart on this (http://www.savings-bond-advisor.com/ser ... ase-rates/) and for the most recent rate, the spread between the 10 year TIPS and the I-Bond rate was 109 basis points. If that hold true, the fixed would be 0% or 0.1% for the next period. I think they'd be hard pressed to keep the status quo at 0.2% and we plan to pinch our nose and finish our annual allotment (30% remaining) before November 1.Tramper Al wrote:On the subject, do you have any inking as to what the Nov 1 fixed rate will be? I have not used our 2010 allocation yet, mainly due to lack of enthusiasm. It seems to me, though, that the new rate cannot be expected to be higher than the current one. Then again, it can't be much lower either!stevewolfe wrote:I'll keep it simple and stick with the I-Bonds for now.
The EE is an interesting option. We have a few CD's maturing later in the year and we've broken our ladder and moved into more of a bar bell. We already purchased the longer end over the last 18 months, so the EE bonds might be an option for part of that money. If we get a Japan scenario here and have 20 years of remarkably low rates, the guaranteed double in 20 years (which is the ~3.6% effective vs. the 1.4% coupon) would be a real nice feature. In the short term they are still extremely competitive vs. 1 year CD's. I do expect their rate to fall on November 1 as well (thinking ~1.0% for the new rate - only a guess).
- wintermute
- Posts: 229
- Joined: Mon Mar 15, 2010 10:36 pm
I sold most of my remaining TIPS today.
Hard for me to justify owning much TIPS, Treasuries, Corporates today, in comparison to 5-10yr CDs from Alliant or Penfed credit union or Ally Bank, or 30yr i bonds, all of which can be redeemed before maturity with penalty if rates increase, or held if rates stay low.
Hard for me to justify owning much TIPS, Treasuries, Corporates today, in comparison to 5-10yr CDs from Alliant or Penfed credit union or Ally Bank, or 30yr i bonds, all of which can be redeemed before maturity with penalty if rates increase, or held if rates stay low.
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Do these instituions allow you to buy these CDs in IRAs?lazyday wrote:I sold most of my remaining TIPS today.
Hard for me to justify owning much TIPS, Treasuries, Corporates today, in comparison to 5-10yr CDs from Alliant or Penfed credit union or Ally Bank, or 30yr i bonds, all of which can be redeemed before maturity with penalty if rates increase, or held if rates stay low.
In threads below, all three of those banks are mentioned. Someone said that Ally doesn't do IRAs, and someone said Alliant does. The word "IRA" or "retirement" should be giveaway to figure out for sure on website in product area.
Also see the Discover bank cd--though I don't know if the institution is any good, whereas I've heard great things about penfed,ally,alliant, and great rates on some of their products lately, including some cds.
http://www.bogleheads.org/forum/viewtopic.php?t=59670
http://www.bogleheads.org/forum/viewtopic.php?t=59682
And see grok's warning about some banks not always allowing early redemptions. I haven't seen anything about that for penfed,ally,alliant, except grok says penfed doesn't have the issue. But keep it in mind, and read all the fine print!
Also see the Discover bank cd--though I don't know if the institution is any good, whereas I've heard great things about penfed,ally,alliant, and great rates on some of their products lately, including some cds.
http://www.bogleheads.org/forum/viewtopic.php?t=59670
http://www.bogleheads.org/forum/viewtopic.php?t=59682
And see grok's warning about some banks not always allowing early redemptions. I haven't seen anything about that for penfed,ally,alliant, except grok says penfed doesn't have the issue. But keep it in mind, and read all the fine print!
According to http://www.treasurydirect.gov/RI/OFNtebnd :
yield price cusip:
1.019 102.109188 912828NM8
yield price cusip:
1.019 102.109188 912828NM8
More complete results for this particular auction, including accrued interest, here:
http://www.treasurydirect.gov/instit/an ... 0902_1.pdf
http://www.treasurydirect.gov/instit/an ... 0902_1.pdf
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I like TIPS and have invested in them in the past. (Buying any treasury in the midst of a deep recession gives me cold feet though, for better or worse, as I would expect higher interest rates in a couple of years).
That said, you might want to review the tax issues: investing in TIPS involves mucking around with the 1099-OID. Basically you end up paying taxes on income not yet received in cash.
That said, you might want to review the tax issues: investing in TIPS involves mucking around with the 1099-OID. Basically you end up paying taxes on income not yet received in cash.