TIPS and I Bonds

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Paullmas
Posts: 12
Joined: Sun Mar 18, 2018 2:37 pm

TIPS and I Bonds

Post by Paullmas »

Current I Bond:
Fixed rate 0.00%
Semiannual inflation rate 0.53%
TIPS:
Treasury Yield Curve:
DATE 5 YR 7 YR 10 YR 20 YR 30 YR
07/01/20 -0.86 -0.79 -0.68 -0.38 -0.15

I am having a hard time wrapping my head around a fixed rate of 0% and negative yields.

So, one would by an I bond to receive 0% interest why?
TIPS may be losing value(principal) soon?
alluringreality
Posts: 310
Joined: Tue Nov 12, 2019 10:59 am

Re: TIPS and I Bonds

Post by alluringreality »

I bought I Bonds this year and last year before the latest rate drop. Looking at next year, it's possible I might buy I Bonds at current rates. The main selling point would be if 0% real, less taxes, might end up earning more than say online savings accounts or CDs over time. That would essentially mean inflation outpacing near-term rates, although right now most people are betting on there being limited inflation for some time. When I started buying I Bonds, my estimate was that they may have made sense compared to online savings in the years since the 2008 downturn, including the deflationary 0% nominal return months. Tax deferral for I Bonds also came into play in the backwards looking comparisons I attempted before buying.

With rates being so low on near-term investments, it's possible that I Bonds could turn out to be more useful than some alternatives. Earning around $100 per year on $10k has little appeal to me compared to say early 2019 rates. The only reasonable rates locally don't fit personal preferences, and I'm generally not interested in bank bonus chasing, so I figure I might as well just buy inflation protection with the near-term reserves I keep (maturing CDs).

My thinking regarding I Bonds and EE Bonds is generally in line with the reasoning given by David Swensen in Unconventional Success for recommending inflation protected and nominal government bonds. I figure savings bonds seem reasonably in line with that outlook in the current environment. I'm not interested in using my tax-advantaged space for TIPS, and don't have a need for more than I Bond limits, so I don't have any reasons to personally buy TIPS at recent rates. I usually tend to also agree with articles from the following.
https://tipswatch.com/
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
User avatar
jeffyscott
Posts: 9150
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

Re: TIPS and I Bonds

Post by jeffyscott »

Paullmas wrote: Wed Jul 01, 2020 4:57 pm So, one would by an I bond to receive 0% interest why?
It's 0%+inflation. I-Bonds purchased from May to October will pay a composite rate of 1.06%, annualized, for six months.
https://tipswatch.com/2020/05/01/treasu ... -ee-terms/

As for TIPS, 5 year treasury is at 0.31%, so if inflation is greater than 1.17% over the next 5 years the TIPS at -0.86% real will beat nominal treasury bond. The alternatives to accepting these low yields are to add some risk or search for savings accounts and/or CDs that pay more. Even brokered 5 year CD is at about 0.8%, which would increase the break-even inflation rate 1.66%.
The two greatest enemies of the equity fund investor are expenses and emotions. ― John C. Bogle
Robot Monster
Posts: 1530
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: TIPS and I Bonds

Post by Robot Monster »

jeffyscott wrote: Thu Jul 02, 2020 9:06 am As for TIPS, 5 year treasury is at 0.31%, so if inflation is greater than 1.17% over the next 5 years the TIPS at -0.86% real will beat nominal treasury bond.
For reference, the 5-Year Forward Inflation Expectation Rate is currently 1.57%.
https://fred.stlouisfed.org/series/T5YIFR

Edit: Sorry...scratch that, this is what you want to pay attention to:
https://fred.stlouisfed.org/series/T5YIE
Last edited by Robot Monster on Thu Jul 02, 2020 11:01 am, edited 1 time in total.
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
Gufomel
Posts: 548
Joined: Sat Feb 14, 2015 9:52 pm

Re: TIPS and I Bonds

Post by Gufomel »

Robot Monster wrote: Thu Jul 02, 2020 9:33 am
jeffyscott wrote: Thu Jul 02, 2020 9:06 am As for TIPS, 5 year treasury is at 0.31%, so if inflation is greater than 1.17% over the next 5 years the TIPS at -0.86% real will beat nominal treasury bond.
For reference, the 5-Year Forward Inflation Expectation Rate is currently 1.57%.
https://fred.stlouisfed.org/series/T5YIFR
That’s quite a bit different from the 5-year breakeven inflation rate (1.17%), calculated as the spread between 5 year treasuries and 5 year TIPS: https://fred.stlouisfed.org/series/T5YIE

I’m having trouble following from your link exactly how the forward inflation rate is being calculated. What the factor(s) that differentiates it from the breakeven inflation rate? Is the Forward Inflation Expectation Rate generally more predictive of inflation than the Breakeven Inflation Rate?
alluringreality
Posts: 310
Joined: Tue Nov 12, 2019 10:59 am

Re: TIPS and I Bonds

Post by alluringreality »

It's possible that the next 6 months could wind up with a 0% inflation rate for I Bonds. It's difficult to guess at this point. It has happened a couple times in the past. I figure if the inflation rate goes to zero that could potentially lessen the early withdrawal penalty having the last three months at 0%, but of course I Bonds are not necessarily intended as near-term investments. The chance of having a 0% inflation rate didn't deter my prior decisions, but it could delay my 2021 purchase past the rate changes.
https://tipswatch.com/tracking-inflation-and-i-bonds/
https://www.treasurydirect.gov/indiv/re ... s_ifaq.htm
https://www.treasurydirect.gov/indiv/re ... s.htm#past
Last edited by alluringreality on Thu Jul 02, 2020 10:31 am, edited 1 time in total.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
User avatar
vineviz
Posts: 7841
Joined: Tue May 15, 2018 1:55 pm

Re: TIPS and I Bonds

Post by vineviz »

Gufomel wrote: Thu Jul 02, 2020 10:11 am
Robot Monster wrote: Thu Jul 02, 2020 9:33 am
jeffyscott wrote: Thu Jul 02, 2020 9:06 am As for TIPS, 5 year treasury is at 0.31%, so if inflation is greater than 1.17% over the next 5 years the TIPS at -0.86% real will beat nominal treasury bond.
For reference, the 5-Year Forward Inflation Expectation Rate is currently 1.57%.
https://fred.stlouisfed.org/series/T5YIFR
That’s quite a bit different from the 5-year breakeven inflation rate (1.17%), calculated as the spread between 5 year treasuries and 5 year TIPS: https://fred.stlouisfed.org/series/T5YIE

I’m having trouble following from your link exactly how the forward inflation rate is being calculated. What the factor(s) that differentiates it from the breakeven inflation rate? Is the Forward Inflation Expectation Rate generally more predictive of inflation than the Breakeven Inflation Rate?
The different sources are looking at different time periods.

The 5-year breakeven inflation rate (1.17%) for the next 5 years (i.e. 2020 through 2025).

The 5-year forward inflation expectation rate (1.57%) is for the 5 years after that (i.e. 2025 to 2030). That's what the "forward" part of "5-year forward" refers to.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
Robot Monster
Posts: 1530
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: TIPS and I Bonds

Post by Robot Monster »

vineviz wrote: Thu Jul 02, 2020 10:30 am
Gufomel wrote: Thu Jul 02, 2020 10:11 am
Robot Monster wrote: Thu Jul 02, 2020 9:33 am
jeffyscott wrote: Thu Jul 02, 2020 9:06 am As for TIPS, 5 year treasury is at 0.31%, so if inflation is greater than 1.17% over the next 5 years the TIPS at -0.86% real will beat nominal treasury bond.
For reference, the 5-Year Forward Inflation Expectation Rate is currently 1.57%.
https://fred.stlouisfed.org/series/T5YIFR
That’s quite a bit different from the 5-year breakeven inflation rate (1.17%), calculated as the spread between 5 year treasuries and 5 year TIPS: https://fred.stlouisfed.org/series/T5YIE

I’m having trouble following from your link exactly how the forward inflation rate is being calculated. What the factor(s) that differentiates it from the breakeven inflation rate? Is the Forward Inflation Expectation Rate generally more predictive of inflation than the Breakeven Inflation Rate?
The different sources are looking at different time periods.

The 5-year breakeven inflation rate (1.17%) for the next 5 years (i.e. 2020 through 2025).

The 5-year forward inflation expectation rate (1.57%) is for the 5 years after that (i.e. 2025 to 2030). That's what the "forward" part of "5-year forward" refers to.
Quoted from the "5-Year Forward Inflation Expectation Rate" page:
This series is a measure of expected inflation (on average) over the five-year period that begins five years from today.
So yes, you're right!
Thanks for clarifying that! Had not realized!!
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
Gufomel
Posts: 548
Joined: Sat Feb 14, 2015 9:52 pm

Re: TIPS and I Bonds

Post by Gufomel »

vineviz wrote: Thu Jul 02, 2020 10:30 am
Gufomel wrote: Thu Jul 02, 2020 10:11 am
Robot Monster wrote: Thu Jul 02, 2020 9:33 am
jeffyscott wrote: Thu Jul 02, 2020 9:06 am As for TIPS, 5 year treasury is at 0.31%, so if inflation is greater than 1.17% over the next 5 years the TIPS at -0.86% real will beat nominal treasury bond.
For reference, the 5-Year Forward Inflation Expectation Rate is currently 1.57%.
https://fred.stlouisfed.org/series/T5YIFR
That’s quite a bit different from the 5-year breakeven inflation rate (1.17%), calculated as the spread between 5 year treasuries and 5 year TIPS: https://fred.stlouisfed.org/series/T5YIE

I’m having trouble following from your link exactly how the forward inflation rate is being calculated. What the factor(s) that differentiates it from the breakeven inflation rate? Is the Forward Inflation Expectation Rate generally more predictive of inflation than the Breakeven Inflation Rate?
The different sources are looking at different time periods.

The 5-year breakeven inflation rate (1.17%) for the next 5 years (i.e. 2020 through 2025).

The 5-year forward inflation expectation rate (1.57%) is for the 5 years after that (i.e. 2025 to 2030). That's what the "forward" part of "5-year forward" refers to.
Got it. Thanks for clarifying.
User avatar
#Cruncher
Posts: 3057
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

Re: TIPS and I Bonds

Post by #Cruncher »

Gufomel wrote: Thu Jul 02, 2020 10:11 amI’m having trouble following from your link exactly how the forward inflation rate is being calculated.
As vineviz and Robot Monster point out above, the page 5-Year, 5-Year Forward Inflation Expectation Rate (T5YIFR) says
This series is a measure of expected inflation (on average) over the five-year period that begins five years from today. (underline added)
It is calculated from the 5-year and 10-year breakeven inflation rates (BEI) as follows:

Code: Select all

1.17% = current  5-year BEI
1.37% = current 10-year BEI
-----
1.57% = 5-year forward BEI = (1.0137 ^ 10 / 1.0117 ^ 5) ^ (1 / 5) - 1
hoops777
Posts: 3299
Joined: Sun Apr 10, 2011 12:23 pm

Re: TIPS and I Bonds

Post by hoops777 »

Does anyone really have any idea what inflation is going to be like the next 5 years? They get it wrong all of the time during somewhat normal periods. This is not one of those.
K.I.S.S........so easy to say so difficult to do.
beanie
Posts: 53
Joined: Tue Aug 25, 2009 4:40 pm

Re: TIPS and I Bonds

Post by beanie »

Planet Money ran an episode yesterday, https://www.npr.org/sections/money/, about the likelihood of future inflation or deflation. The last six or so minutes of the podcast is an interview with Susan Schadler, coauthor of an article in Barron's, https://www.barrons.com/articles/this-i ... 590065124 , that suggests that the current coronavirus recession is so unique that it is quite unclear whether we will have future inflation or deflation or both.

For that reason, I think that the TIPs breakeven inflation rate is not all that meaningful. Inflation may have been running around 2% for years, and 1.17% looks good compared to that, but that says nothing about the unprecedented uncertainty of the period we're in now. So I personally cannot wrap my mind around buying TIPS at a negative interest rate, knowing that my investment would lose money if inflation is zero.
dbr
Posts: 33842
Joined: Sun Mar 04, 2007 9:50 am

Re: TIPS and I Bonds

Post by dbr »

Paullmas wrote: Wed Jul 01, 2020 4:57 pm

So, one would by an I bond to receive 0% interest why?
TIPS may be losing value(principal) soon?
Why? Because you look at what you are trying to do with your money and see what investments fit that purpose. I bonds or TIPS could well be as good as or a better fit than the alternatives depending on what you are trying to do.

If those choices are not good alternatives compared to other choices for what you want you don't buy them.

I am not aware of anyone saying you must own a position in either or these though there are people that do own those things because they find it to be a suitable option even at the terms.
Robot Monster
Posts: 1530
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: TIPS and I Bonds

Post by Robot Monster »

This is interesting, the idea that inflation is different for the "haves" and "have nots".

"For low-income households, higher prices for groceries and housing are a particular burden, with the bottom 10% experiencing a rate of 1.5%, compared with 1.0% for the highest earners."
https://www.bloomberg.com/news/articles ... ears-chart

Ergo, TIPS may be a better deal for the haves.
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
Robot Monster
Posts: 1530
Joined: Sun May 05, 2019 11:23 am
Location: New York

Re: TIPS and I Bonds

Post by Robot Monster »

beanie wrote: Thu Jul 02, 2020 11:33 am So I personally cannot wrap my mind around buying TIPS at a negative interest rate, knowing that my investment would lose money if inflation is zero.
TIPS are insurance against unexpected inflation. Usually you lose all the money you pay for insurance, e.g. fire insurance when your house doesn't burn down. Inflation at zero is like a well unburned house. :happy

Edit: Your nominal bonds will do very well if inflation spirals down to zero. Maybe that's why David Swenson recommends having both in equal amounts.
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
User avatar
FIREchief
Posts: 5327
Joined: Fri Aug 19, 2016 6:40 pm

Re: TIPS and I Bonds

Post by FIREchief »

Paullmas wrote: Wed Jul 01, 2020 4:57 pm I am having a hard time wrapping my head around a fixed rate of 0% and negative yields.
There's really not much to wrap your head around. The facts are that the Cadillac of safe fixed income in the world (i.e. U.S. treasuries) are currently paying a negative real yield. With TIPS, a buyer knows exactly what the real rate will be. With nominals, it will be either the same, higher or lower than with TIPS depending upon future inflation (which nobody knows). If preserving future buying power is paramount, than there is no alternative.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Lyrrad
Posts: 132
Joined: Sun Jul 27, 2008 10:59 am

Re: TIPS and I Bonds

Post by Lyrrad »

alluringreality wrote: Thu Jul 02, 2020 10:29 am It's possible that the next 6 months could wind up with a 0% inflation rate for I Bonds. It's difficult to guess at this point. It has happened a couple times in the past. I figure if the inflation rate goes to zero that could potentially lessen the early withdrawal penalty having the last three months at 0%, but of course I Bonds are not necessarily intended as near-term investments. The chance of having a 0% inflation rate didn't deter my prior decisions, but it could delay my 2021 purchase past the rate changes.
https://tipswatch.com/tracking-inflation-and-i-bonds/
https://www.treasurydirect.gov/indiv/re ... s_ifaq.htm
https://www.treasurydirect.gov/indiv/re ... s.htm#past
Series I Bonds have deflation protection, since the principal balance can't decrease. If the fixed rate is 0%, and the CPI-U inflation measure decreases by 1% for one six month period, and then increases by 2% for the second six month period, then one would see the balance increase by 2%, whereas inflation would only have increased by ~1% for the year.
The TIPSwatch author describes this "bounce-back" effect in the comments of one of their articles here.
hoops777 wrote: Thu Jul 02, 2020 11:18 am Does anyone really have any idea what inflation is going to be like the next 5 years? They get it wrong all of the time during somewhat normal periods. This is not one of those.
My understanding is that the discussions of the breakeven inflation rate essentially look at the yield differential between TIPS and nominal to calculate market expectations of future CPI-U changes.
Post Reply