Any thoughts on new I-bond rates?

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arbogast777
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Any thoughts on new I-bond rates?

Post by arbogast777 »

With two weeks to go until the new I-bond rates are announced, does anybody have any guesses as to where the fixed rates are headed?
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stratton
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Post by stratton »

The same as before? If they raise rates people will turn in their existing iBonds with lower rates for the new higher rates.

Paul
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Mel Lindauer
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Post by Mel Lindauer »

stratton wrote:The same as before? If they raise rates people will turn in their existing iBonds with lower rates for the new higher rates.

Paul
Hi stratton:

From the feedback I've been getting, lots of folks have already been redeeming their I Bonds with low fixed rates. I'm sure the Treasury has noticed this, so they may decide that there simply isn't a market for low fixed rate I Bonds. On the other hand, they may feel that there are still enough unsophisticated investors that they can continue with the low fixed rates. We'll know soon enough.

With the current wide spread between TIPS and I Bond fixed rates, even in a taxable account the TIPS would most likely provide a greater after-tax return for most investors.

Regards,

Mel
Last edited by Mel Lindauer on Mon Oct 15, 2007 11:40 am, edited 1 time in total.
leftthread
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Post by leftthread »

Mel,

Thanks for your work on I bonds. It got me in on them back in 2000-2001.
All the best.
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tetractys
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Post by tetractys »

A few weeks ago I was wondering if the fed rate would effect the ibond fixed rate, and so asked a similar question in this post:

http://diehards.org/forum/viewtopic.php ... highlight=

An oversimplified summary of the opinions of that post might be: fed rate cut = ibond fixed rate drop; but who knows?

Peace, Tet
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stratton
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Post by stratton »

Mel Lindauer wrote:From the feedback I've been getting, lots of folks have already been redeeming their I Bonds with low fixed rates. I'm sure the Treasury has noticed this, so they may decide that there simply isn't a market for low fixed rate I Bonds. On the other hand, they may feel that there are still enough unsophisticated investors that they can continue with the low fixed rates. We'll know soon enough.

With the current wide spread between TIPS and I Bond fixed rates, even in a taxable account the TIPS would most likely provide a greater after-tax return for most investors.
That's a new song. Allowing for a 33% (?) discount off 2.3x% TIPS rate we're only looking at a 1.5% I-Bond rate. I'm using the break even point example to compute the discount from The Boglehead Guide with 1.5% TIPS vs. 1.0% I-Bonds in the comparison summary at the end of chapter 5 in the 1st ed. HB.

Paul
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Mel Lindauer
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Post by Mel Lindauer »

stratton wrote:
Mel Lindauer wrote:From the feedback I've been getting, lots of folks have already been redeeming their I Bonds with low fixed rates. I'm sure the Treasury has noticed this, so they may decide that there simply isn't a market for low fixed rate I Bonds. On the other hand, they may feel that there are still enough unsophisticated investors that they can continue with the low fixed rates. We'll know soon enough.

With the current wide spread between TIPS and I Bond fixed rates, even in a taxable account the TIPS would most likely provide a greater after-tax return for most investors.
That's a new song. Allowing for a 33% (?) discount off 2.3x% TIPS rate we're only looking at a 1.5% I-Bond rate. I'm using the break even point example to compute the discount from The Boglehead Guide with 1.5% TIPS vs. 1.0% I-Bonds in the comparison summary at the end of chapter 5 in the 1st ed. HB.

Paul
Hi Paul:

Not sure what you mean by "a new song". The point we made in the book was that when the spread between I Bonds and TIPS fixed rates was ~1/2%, it was just about a toss up in after-tax return. However, when the spread got up to ~3/4%, then the TIPS were the winner in all tax brackets.

Fast forward to today. I Bonds have a fixed rate of 1.3% and TIPS are paying ~2.3% for a spread of 1%. That spread favors the TIPS.

Regards,

Mel
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stratton
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Post by stratton »

Thanks Mel,

For some reaon I'm fixating on the relative percent different as oposed to the absolute percent difference.

Paul
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Post by sport »

What are the expectations for the variable component (inflation adjustment) for the next 6 months?

Jeff
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Post by nisiprius »

jsl11 wrote:What are the expectations for the variable component (inflation adjustment) for the next 6 months?
I expect it to be exactly the same as CPI-U.
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Post by DickBenson »

jsl11 wrote:What are the expectations for the variable component (inflation adjustment) for the next 6 months?
CPI-U numbers

March 205.352
April 206.686
.
.
August 207.917

Sept number should be out in a few days.

It looks like the inflation adjustment might reach 2.5%

Dick
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Rager1
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Post by Rager1 »

With the CPI=u for September at the level of 208.49, the inflation adjustment for I bonds for the next six months will be 3.06%.

March 2007 CPI-U 205.352
Sept 2007 CPI-U 208.490

((208.490/205.352)-1)*2 = 3.06%

Ed
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tarkbud
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Post by tarkbud »

Thanks Ed

Regards,

Sandy
I Bleed Purple!
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Mel Lindauer
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Post by Mel Lindauer »

Rager1 wrote:With the CPI=u for September at the level of 208.49, the inflation adjustment for I bonds for the next six months will be 3.06%.

March 2007 CPI-U 205.352
Sept 2007 CPI-U 208.490

((208.490/205.352)-1)*2 = 3.06%

Ed
Thanks for doing the math, Ed.

Best regards,

Mel
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tetractys
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Post by tetractys »

So with the March-September semiannual inflation rate set at 1.528%, and if the fixed rate stays the same at 1.30%, what would the rate of return according to the Treasury's formula be?

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

= 1.30 + (2 x 1.528) + (1.30 x 1.528)
= 1.30 + 3.056 + 1.986
= 6.342%

Is this correct? It seems high.

Tet
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hollowcave2
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you need to actually use the fractions

Post by hollowcave2 »

You need to actually use the fractions for the percent rates:

So the math turns out to be:

0.013 + (2 x 0.01528) + (0.013 x 0.01528) = 0.043758

new composite rate if fixed rate unchanged is about 4.375 %

Steve
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tetractys
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Post by tetractys »

Thanks Steve,

Yea I see. Here's the decimals the way they're shown on treasurydirect.gov:

= .0130 + (2 x .0153) + (.0130 x .0153)
= .0130 + .0306 + .0002
= .0438 or 4.38%

Tet, with a sigh...
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