new i-bond rate?

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leftcoaster
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new i-bond rate?

Post by leftcoaster » Sun Apr 19, 2015 2:35 pm

Has anyone worked out the CPI-U for the upcoming rate announcement in May? Still likely to stay at 0?

dh
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Re: new i-bond rate?

Post by dh » Sun Apr 19, 2015 3:13 pm

March 2015 is CPI-U = 236.119, down -0.8% from September's 2014 (238.031). So every I-Bond with a fixed rate of 1.6% or less, will have a composite return of 0%.

JimInIllinois
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Re: new i-bond rate?

Post by JimInIllinois » Sun Apr 19, 2015 10:28 pm

The real mystery is the fixed rate on i-bonds sold starting May 1. Anything less than 1.7% fixed will have 0% return for the first six months. What fixed rate would be worth buying anyway? It depends on your anticipated holding period.

John3754
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Re: new i-bond rate?

Post by John3754 » Sun Apr 19, 2015 10:31 pm

JimInIllinois wrote:The real mystery is the fixed rate on i-bonds sold starting May 1.
If it's anything other than 0% I'll be surprised.

JimInIllinois
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Re: new i-bond rate?

Post by JimInIllinois » Sun Apr 19, 2015 10:47 pm

John3754 wrote:
JimInIllinois wrote:The real mystery is the fixed rate on i-bonds sold starting May 1.
If it's anything other than 0% I'll be surprised.
If it's 0% there would be no reason to buy before November.

sawhorse
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Re: new i-bond rate?

Post by sawhorse » Sun Apr 19, 2015 10:47 pm

John3754 wrote:
JimInIllinois wrote:The real mystery is the fixed rate on i-bonds sold starting May 1.
If it's anything other than 0% I'll be surprised.
Logically yes, but this could be very interesting. If it's 0, no one will buy them because it makes absolutely no sense if the inflation rate is 0 or negative. But then the Treasury won't get any money to borrow, so the whole purpose of bonds disappears.

On the other hand, if they make it something like 0.1% to give some reason to buy, even if the overall rate is 0, the whole financial world will be like, OMG interest rates are going up!

I bet the I Bond fixed rate is getting more discussion at the Fed than individual bonds have in a long time.

JDDS
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Re: new i-bond rate?

Post by JDDS » Sun Apr 19, 2015 10:57 pm

sawhorse wrote:
John3754 wrote:
JimInIllinois wrote:The real mystery is the fixed rate on i-bonds sold starting May 1.
If it's anything other than 0% I'll be surprised.
Logically yes, but this could be very interesting. If it's 0, no one will buy them because it makes absolutely no sense if the inflation rate is 0 or negative. But then the Treasury won't get any money to borrow, so the whole purpose of bonds disappears.

On the other hand, if they make it something like 0.1% to give some reason to buy, even if the overall rate is 0, the whole financial world will be like, OMG interest rates are going up!

I bet the I Bond fixed rate is getting more discussion at the Fed than individual bonds have in a long time.
The Treasury sets the I bond fixed rate. It wasn't too long ago that it was 0.20.

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Re: new i-bond rate?

Post by Grt2bOutdoors » Mon Apr 20, 2015 7:16 am

JDDS wrote:
sawhorse wrote:
John3754 wrote:
JimInIllinois wrote:The real mystery is the fixed rate on i-bonds sold starting May 1.
If it's anything other than 0% I'll be surprised.
Logically yes, but this could be very interesting. If it's 0, no one will buy them because it makes absolutely no sense if the inflation rate is 0 or negative. But then the Treasury won't get any money to borrow, so the whole purpose of bonds disappears.

On the other hand, if they make it something like 0.1% to give some reason to buy, even if the overall rate is 0, the whole financial world will be like, OMG interest rates are going up!

I bet the I Bond fixed rate is getting more discussion at the Fed than individual bonds have in a long time.
The Treasury sets the I bond fixed rate. It wasn't too long ago that it was 0.20.
I think they should base the fixed rate on real yields experienced in the actual original TIPs auction market. I don't know what the last 30 year auctions real yield was, but if they wanted to make the I bonds as "like for like", they should do something along those lines.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: new i-bond rate?

Post by Spirit Rider » Mon Apr 20, 2015 12:16 pm

Grt2bOutdoors wrote:I think they should base the fixed rate on real yields experienced in the actual original TIPs auction market. I don't know what the last 30 year auctions real yield was, but if they wanted to make the I bonds as "like for like", they should do something along those lines.
30 year TIPS would be the wrong benchmark. While I Bonds can be held for 30 years, they can be redeemed after one year and without penalty after five. The generally held benchmark basis is the 10 year TIPS.

Then there are significant advantages of I Bonds over TIPS. While TIPS are coupon protected against deflation, their previous inflation gains are not. I Bonds are deflation protected against their principal, their inflation gains, and their composite rate which can never be below zero. I Bonds are principal protected, where TIPS are subject to credit and sentiment risks. I Bonds are by default tax deferred, TIPS are not and even subject to phantom taxation on the inflation component.

Prior to the financial crisis (2003-2008) this was reflected in I Bonds fixed rates averaging 1% and 10 year TIPS yields averaging 2%. This is either a 1% discount or 50% discount depending on your view. It has been difficult to discern any pattern since then.

The 10 year TIPS yield went negative (-0.02) last Friday. Such a low yield does not bode well for any significant fixed rate.

denismurf
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Re: new i-bond rate?

Post by denismurf » Mon Apr 20, 2015 2:51 pm

I'm trying to make sure I understand the big difference between I bonds and TIPS bonds.

Is it true that the redemption value of a TIPS bond can go down, but that, ignoring early redemption penalties, the redemption value of an I bond cannot go down?

Stated differently, if I buy a TIPS bond today and redeem it 5 years later, could I get back less than what I paid for it if inflation rates are negative for all or most of those 5 years? By contrast, if I buy an I bond today and redeem it 5 years later, will I get back at least what I paid for it, regardless of the inflation history during those 5 years, plus interest for any years when the inflation rate was positive?

If these questions look stupid, it's because I'm genuinely ignorant, not because I'm trying to set up trick questions.

Angst
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Re: new i-bond rate?

Post by Angst » Mon Apr 20, 2015 3:10 pm

denismurf wrote:Stated differently, if I buy a TIPS bond today and redeem it 5 years later, could I get back less than what I paid for it if inflation rates are negative for all or most of those 5 years? By contrast, if I buy an I bond today and redeem it 5 years later, will I get back at least what I paid for it, regardless of the inflation history during those 5 years, plus interest for any years when the inflation rate was positive?
As far as the I bond goes, yes, I think you're correct. As far as TIPS goes, it depends. (I think I have this right...) If you purchase in the secondary market, you're vulnerable b/c any accrued inflation adjustments you're paying for above and beyond the par value can be lost to deflation. I think it's probably a fairly extreme scenario, but accurate. If you purchase TIPS at auction however, you should be safe, i.e. you hypothetically could lose all of your accrued inflation adjustments to deflation, but you won't fall below the original purchase price, IF you hold to maturity. If you sell before that in the secondary market though, you only get what the market wants to give you.

Spirit Rider
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Re: new i-bond rate?

Post by Spirit Rider » Mon Apr 20, 2015 4:03 pm

Just a small correction to a TIPS purchased at auction. You are guaranteed the coupon amount which is not usually the same as the purchase price at auction. The coupon fixed rate is set at issue, but the actual purchase price/yield is set by the auction. For example, a $1K bond could end up costing you $995 or $1005, but the face value is still $1K. This is the value that is guaranteed.

FactualFran
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Re: new i-bond rate?

Post by FactualFran » Mon Apr 20, 2015 5:33 pm

denismurf wrote:Is it true that the redemption value of a TIPS bond can go down, but that, ignoring early redemption penalties, the redemption value of an I bond cannot go down?
TIPS have a "redemption value" only in the sense that the Treasury will pay the principal at maturity. Prior to maturity, TIPS have a "market value". The redemption value of an I bond never goes down, even when not ignoring early redemption penalties. Because the penalty excludes the interest for the most recent three months, the redemption value of an I bond is not considered to include the most recent three months of interest until the penalty no longer applies.
denismurf wrote:Stated differently, if I buy a TIPS bond today and redeem it 5 years later, could I get back less than what I paid for it if inflation rates are negative for all or most of those 5 years? By contrast, if I buy an I bond today and redeem it 5 years later, will I get back at least what I paid for it, regardless of the inflation history during those 5 years, plus interest for any years when the inflation rate was positive?
You cannot "redeem" TIPS before maturity, outside of an unprecedented offer by the Treasury to buy them back. If you were to sell TIPS before maturity, the market price might be less than the price you paid. That could happen even if the change in the CPI-U between purchase and sale were not negative. It could happen if real interest rates at the time of the sale are higher than they were at the time of the purchase.

The answer to your question about I bonds is yes. Although, "plus interest for any years when the inflation rate was positive" would be more correct by replacing "years" with "semi-annual earnings period". It is possible for the inflation rate to be negative for a year but positive for a semi-annual earnings period of an I bond during the year.

tenkuky
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Re: new i-bond rate?

Post by tenkuky » Mon Apr 20, 2015 6:21 pm

So this discussion is making me feel like I made a big mistake shifting 10K from checking (earning 0.06%) to I-bonds in February. I just felt I would do better in the long run and perhaps reap tax-deferral and diversify my cash holdings doing this.
I can hold out for 5 years, but wonder if I should have just waited for I-bonds to be more attractive.

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Mel Lindauer
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Re: new i-bond rate?

Post by Mel Lindauer » Mon Apr 20, 2015 6:49 pm

tenkuky wrote:So this discussion is making me feel like I made a big mistake shifting 10K from checking (earning 0.06%) to I-bonds in February. I just felt I would do better in the long run and perhaps reap tax-deferral and diversify my cash holdings doing this.
I can hold out for 5 years, but wonder if I should have just waited for I-bonds to be more attractive.
Remember, I Bonds offer tax-deferral which your checking account doesn't, so that may be worthwhile long-term. And, if you have children, the I Bonds can be used tax-free for their (or your) qualifying educational expenses. So it's possible you didn't make a mistake after all.
Best Regards - Mel | | Semper Fi

tenkuky
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Re: new i-bond rate?

Post by tenkuky » Mon Apr 20, 2015 7:25 pm

Thanks, Mel.
The tax deferral is certainly a plus, but unfortunately MAGI too high to qualify for the tax-free college use.

surfer1
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Re: new i-bond rate?

Post by surfer1 » Mon Apr 20, 2015 7:36 pm

-1.60% for I-Bonds starting 5/1/2015. Deflation? It may be a better deal to put the money in an online savings or CD, than to purchase ibonds at the new rate. I suppose you could buy now before the end of April and be guaranteed 0.81% with interest tax-free from the state.

Alternatively, this may also be an opportunity to exit ibond holdings with no penalty (penalty = last 3 months interest, which would be 0%, if you exit in August).

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Re: new i-bond rate?

Post by #Cruncher » Mon Apr 20, 2015 11:11 pm

surfer1 wrote:... this may also be an opportunity to exit ibond holdings with no penalty (penalty = last 3 months interest, which would be 0%, if you exit in August). (underline added)
This is partially correct. An I Bond held at least one year but less than five can be redeemed with forfeiture of the last three months interest as a penalty. (See Redeeming (Cashing) Series I Savings Bonds.) For I bonds with a 0% composite rate this means there is no real penalty when redeemed 4, 5, or 6 months into the period the 0% composite rate applies. But when this month 4 to month 6 window occurs depends on what month the I bond was purchased -- as shown in the table below, based on When does my bond change rates?.

Code: Select all

           6mo Period   Sell w/o
Purchased    Begins     Penalty
----------   ------     -------
Jan or Jul     Jul      Oct-Dec
Feb or Aug     Aug      Nov-Jan
Mar or Sep     Sep      Dec-Feb
Apr or Oct     Oct      Jan-Mar
May or Nov     May      Aug-Oct
Jun or Dec     Jun      Sep-Nov
For example, what surfer1 says would be true for an I bond purchased in May or November. It will have a new composite rate beginning May 1st. If this composite rate is 0%, its last three months interest will be $0 from August 1 - October 31. But if the I bond was purchased any other month, this three month period will be different.

protagonist
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Re: new i-bond rate?

Post by protagonist » Tue Apr 21, 2015 4:45 pm

John3754 wrote:
JimInIllinois wrote:The real mystery is the fixed rate on i-bonds sold starting May 1.
If it's anything other than 0% I'll be surprised.
Rather than thinking of it as 0%, think of it as "1.6% real". And my 3% CDs are getting 4.6% real. Wow!!

The glass is more fun to drink from when it is half-full.

crowd79
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Re: new i-bond rate?

Post by crowd79 » Sun May 17, 2015 9:55 am

I just checked my bond holdings at TD. I-Bonds I purchased last year in May are already earning nothing 0.00%. Does this make sense? So I would be best cashing these out in early August, correct?

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Re: new i-bond rate?

Post by Xanadu » Sun May 17, 2015 10:07 am

crowd79 wrote:I just checked my bond holdings at TD. I-Bonds I purchased last year in May are already earning nothing 0.00%. Does this make sense? So I would be best cashing these out in early August, correct?
No, I think that's just because inflation is negative for the time being. Wait another six months to see what inflation does. My guess is that it will be positive and you will be earning interest again. I'm definitely not cashing out my bonds.

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Re: new i-bond rate?

Post by crowd79 » Sun May 17, 2015 10:18 am

Xanadu wrote:
crowd79 wrote:I just checked my bond holdings at TD. I-Bonds I purchased last year in May are already earning nothing 0.00%. Does this make sense? So I would be best cashing these out in early August, correct?
No, I think that's just because inflation is negative for the time being. Wait another six months to see what inflation does. My guess is that it will be positive and you will be earning interest again. I'm definitely not cashing out my bonds.
Yes, but I can always repurchase at the end of November if rates go back higher and start earning that period's interest rate right away (Nov-April '16). If anything I can cash out in early August and put it in a savings account and at least earn some interest until the end of November. I haven't bought any I-Bonds this year yet.

Xanadu
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Re: new i-bond rate?

Post by Xanadu » Sun May 17, 2015 10:22 am

That's true as long as you were not planning on on maxing out the $10k limit per year and you have factored in the 3 months of interest penalty for early withdrawal.

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stevewolfe
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Re: new i-bond rate?

Post by stevewolfe » Sun May 17, 2015 11:21 am

crowd79 wrote:Yes, but I can always repurchase at the end of November if rates go back higher and start earning that period's interest rate right away (Nov-April '16). If anything I can cash out in early August and put it in a savings account and at least earn some interest until the end of November. I haven't bought any I-Bonds this year yet.
Or you can remember that these are bonds that measure real rates of return, not nominal and you can look at the 0% and say "Inflation was -1.6% for the six month period. I'd see that reflected as a negative adjustment to my TIPS bonds, but since I own I-Bonds, I can't earn less than 0%. So cool, I'm earning 0% for 6 months in which real return was -1.6%..."

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Re: new i-bond rate?

Post by #Cruncher » Sun May 17, 2015 10:59 pm

crowd79 in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2493541#p2493541]this post[/url] wrote:... I-Bonds I purchased last year in May are already earning nothing 0.00%. Does this make sense? So I would be best cashing these out in early August, correct?
For an I Bond bought May 2014 the composite rate for the six months beginning May 2015 is indeed 0.00% . If you were going to redeem, August would be the best time because the three months of interest you'd forfeit (May, June, & July) would be $0. (See this post above.) However, unless you need the money, I don't recommend you do so. At the current low level of interest rates, it's better to hold on to them, even with their low 0.1% fixed rate.
crowd79 in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2493567#p2493567]this post[/url] wrote:... I can always repurchase at the end of November if rates go back higher and start earning that period's interest rate right away (Nov-April '16). ... I haven't bought any I-Bonds this year yet.
Some points to bear in mind:
  • Because of the current negative semi-annual inflation rate, the next one, to be announced November 1st, could be substantial. For example if the overall CPI increases 2% year-over-year from what it was September 2014, then the March 2015 - September 2015 semi-annual increase would be a whopping 2.83%. (See Sep 2014 and March 2015 CPI from this web page.)

    Code: Select all

    2.83% = (1.02 * 238.031) / 236.119 - 1
  • Your May 2014 I Bonds will begin earning their new composite rate in November, the same time as ones purchased in November.
  • The fixed rate announced November 1st may be 0% which is less than the 0.1% on your May 2014 purchase.
  • Any redemption you make reduces the amount you can increase your I Bond holdings in 2015. For example, if you redeem $4,000 and your purchase limit is $10,000, then you can only increase your holdings by $6,000.

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Re: new i-bond rate?

Post by Tramper Al » Mon May 18, 2015 8:49 pm

#Cruncher wrote:For an I Bond bought May 2014 the composite rate for the six months beginning May 2015 is indeed 0.00% . If you were going to redeem, August would be the best time because the three months of interest you'd forfeit (May, June, & July) would be $0.
I have seen this advice at least once before and am confused on one point. Normally, a bond sold on July 1st would still pay out the July interest, right? So in this example, would not your 3 months of 0% interest (May, June, July) be "up" on July 1st? Why would you have to wait until August 1st, when on that date I would think the last 3 months of interest would be June, July and August.

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Re: new i-bond rate?

Post by #Cruncher » Mon May 18, 2015 10:27 pm

Tramper Al in previous post wrote:Normally, a bond sold on July 1st would still pay out the July interest, right?
No. An I Bond held on the last day of a month will earn interest for that entire month, and that interest will be credited the first day of the following month. So July's interest won't be credited until August 1st. If you redeem an I Bond held less than five years any time during July, the last three months' earnings you'd forfeit would be for April, May, and June. If you wait one month and redeem in August, you'd forfeit the interest earned for May, June, and July.

Here is the interest earned April - July 2015 for a $10,000 I Bond bought May 2014:

Code: Select all

Interest Earned       Credited Value
---------------   ----------------------
                  April  1 2015  $10,164 <-- value if redeemed July 2015
April 2015  $12   May    1 2015  $10,176 <-- value if redeemed August 2015
May   2015   $0   June   1 2015  $10,176
June  2015   $0   July   1 2015  $10,176
July  2015   $0   August 1 2015  $10,176
If sold in July, the redemption value is only $10,164 because it omits the $12 interest earned in April. One has to wait until August to collect the full twelve months interest earned May 2014 - April 2015.

Maybe it's easier to grasp with an I Bond redeemed after five years or more so that the 3 month early redemption penalty doesn't apply. Say one bought a $10,000 I Bond on 5/31/2010. To collect the full five years interest May 2010 - April 2015, one needs to to wait until May 1st 2015 to redeem.

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Re: new i-bond rate?

Post by crowd79 » Tue May 19, 2015 4:11 pm

#Cruncher wrote:
crowd79 in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2493541#p2493541]this post[/url] wrote:... I-Bonds I purchased last year in May are already earning nothing 0.00%. Does this make sense? So I would be best cashing these out in early August, correct?
For an I Bond bought May 2014 the composite rate for the six months beginning May 2015 is indeed 0.00% . If you were going to redeem, August would be the best time because the three months of interest you'd forfeit (May, June, & July) would be $0. (See this post above.) However, unless you need the money, I don't recommend you do so. At the current low level of interest rates, it's better to hold on to them, even with their low 0.1% fixed rate.
crowd79 in [url=http://www.bogleheads.org/forum/viewtopic.php?p=2493567#p2493567]this post[/url] wrote:... I can always repurchase at the end of November if rates go back higher and start earning that period's interest rate right away (Nov-April '16). ... I haven't bought any I-Bonds this year yet.
Some points to bear in mind:
  • Because of the current negative semi-annual inflation rate, the next one, to be announced November 1st, could be substantial. For example if the overall CPI increases 2% year-over-year from what it was September 2014, then the March 2015 - September 2015 semi-annual increase would be a whopping 2.83%. (See Sep 2014 and March 2015 CPI from this web page.)

    Code: Select all

    2.83% = (1.02 * 238.031) / 236.119 - 1
  • Your May 2014 I Bonds will begin earning their new composite rate in November, the same time as ones purchased in November.
  • The fixed rate announced November 1st may be 0% which is less than the 0.1% on your May 2014 purchase.
  • Any redemption you make reduces the amount you can increase your I Bond holdings in 2015. For example, if you redeem $4,000 and your purchase limit is $10,000, then you can only increase your holdings by $6,000.
So if I redeem $8,000 in August, I cannot repurchase $8,000 in November if the new announced semi-annual rate is suddenly 2, 3 or even 4%?

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Re: new i-bond rate?

Post by camaro327 » Tue May 19, 2015 5:49 pm

So if I redeem $8,000 in August, I cannot repurchase $8,000 in November if the new announced semi-annual rate is suddenly 2, 3 or even 4%?
You can make a new purchase of $8,000, but it would count against the $10,000 per year purchase limit. So if you haven't made any new purchases, you would be fine.

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