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Based on the CPI-U data released this morning (4/12/22), & the 6-month CPI-U change from September 2021 to March 2022, the inflation adjustment for I-Bonds from 5/1/22 – 10/31/22 should be 4.81%. If the fixed rate is maintained at 0%, then the new I-Bond rate from 5/1/22 – 10/31/22 should be 9.62%; higher (unlikely) if the fixed rate is bumped up. https://ybbpersonalfinance.proboards.com/post/578/thread
Wow. That’s a hellofa rate. Traveling. Will digest when back home.
ISTM other sectors of the lending market will need to adjust. Less than sterling borrowers (lower rated and junk) should have to pay a very high rate. In fact, wonder if this will have a dampening effect on the economy?
The qualifier here is the $10,000 maximum. But, if enough people buy these it could still have an impact. The nearest thing I can remember is back in the 70s or 80s when you could earn 15-20% in some money market funds. Of course money funds today are a lot more restricted in the credit they own.
They really need to up the maximum $$$ an individual can buy. $10K is a lot to some, chump change to others. If I could load up a hefty slug at these rates, I'd be quite happy. Not sure it's worth the hassle of maintaining another account for 'just' 10K/yr.
There has never been an out-of-stock situation for the US Savings Bonds. Limits are per account. So sales of I-Bonds have ballooned to about 10x, but that is still only low double-digit billions, but Uncle Sam needs/borrows trillions (-:).
It is not $10 K that I think about, but I look at it like $356 now, or $481 soon, of free money found on sidewalk every 6 months. Do I pick it up? Yes. I am a sucker for free coffee too at banks etc, but unfortunately, they found an excuse to do away with those citing Covid risks.
Gifting among close family members & friends is a loophole when one person has lot of spare money but others don't. Then, gifting allows that one person to sort of tap into all those other limits that go away annually (i.e. the limits don't carryover). But one cannot have own cake and eat it too. See details here, https://ybbpersonalfinance.proboards.com/post/577/thread
If one's anticipation of terminal inflation rate during one's anticipated holding period of a new iBond is materially lower than 7.12%, I think it may be better to buy them this month. The Fed members seem to be bent on pushing inflation back down to 2-3%, whatever it takes! Lael Brainard made comments this AM about that too. How soon they would succeed? One can make a wager of their conviction by buying iBonds this month (initial rate 7.12%) or next month (initial rate 9.62%).
(A Guess). I think the Fed will retrench a bit and only raise the overnight lending rate .25% instead of .50% at their next meeting - May 3 & 4. Reason: I think by than the much higher rates we’re witnessing will have begun to slow both the economy and, importantly, the equity markets. Nice market swoon today after starting out hot out of the gate. A close call however. Commodities remain hot.
Just a guess
I know it’s contentious here. But I don’t believe that 8%+ inflation rate is baked in the cake. Someday, but not this year or next. The war in Europe will have a lot to do with it, especially effect on grains. Barron’s recommended BG this week as a play on escalating grain prices. I’m not interested. It’s already up quite a bit. Maybe somebody else is.
@yogibearbull :: How do "generous inflation adjustments" get paid ? Why I'm asking. Vanguard will be rolling their 2015 TRF in the Retirement Fund. I thought about selling or exchanging into another fund , but don't want to lose the "adjustment". This will be done in July so have some time to figure out what to do. This money is in taxable account.
@Derf, it shouldn't matter for funds, so you can sell/exchange VG TDF 2015 whenever you wish.
Individually held TIPS "pay" interest every 6 month from the issue date, like all Treasury bonds. However, the TIPS interest is not actually paid out but is just added to the principal, and all (principal + interest) is paid out on maturity. In the interim, the trading price of TIPS reflects principal and accumulated/accrued interest, but also depends on other market factors (current rate environment and inflation-expectations).
TIPS funds are different. They have to payout inflation adjustment annually, whether earned or not, whether you like it or not. So, a fund may have to sell some TIPS to payout inflation-adjustment if it doesn't have enough cash on hand. Also, the fund NAV will reflect principal + interest at any point of time.
There are problems with how the funds report 30-day SEC yield for TIPS funds. I have posted on this and will try to find the related link and add it here later via Edit. Misleading TIPS Fund Yields https://ybbpersonalfinance.proboards.com/post/301/thread
IMHO too much is made of the way mutual funds handle TIPS. (Though for some, it's these details that makes it interesting)
In a sense, TIPS funds are no different from other funds. A typical coupon bond fund, e.g. VBTLX, stays fully invested. So as it receives coupon payments, it reinvests that money. That income goes on the books as money that must be distributed to investors.
The difference with TIPS is that the interest is imputed, not "real". Funds that get "real" interest reinvest the money by buying more bonds. Funds that get imputed interest implicitly reinvest by holding the same TIPs that are now worth more. In the end, both types of funds have portfolios worth more as time passes. At least until they have to pay out the interest (real or imputed) as divs.
Either type of fund has to raise enough cash to pay out the divs (except for divs that shareholders reinvest). This can be by keeping cash on hand (a bit easier with a fund investing in coupon bonds), raising cash through inflows, or selling securities.
If it helps, one can think of TIPS as a combination of a coupon bond (the fixed rate portion) and a zero coupon bond (the inflation adjustment). It's the zero part where the detail get more complex. Just as with true zero coupon bond funds like BTTRX.
Also, the fund NAV will reflect principal + interest at any point of time
Some TIPS funds, e.g. FIPDX, declare divs daily. It would seem that for such funds the NAV doesn't reflect the interest, just as FTBFX (also declaring divs daily) has an NAV that doesn't reflect the interest declared.
While technically correct, Fido shows monthly distributions for FIPDX at $0.000000001-0.000000002/shr and M* just calls it $0/shr (it tracks dividends to 4 decimal places only). There is a noticeable yearend distribution (from tiny coupon and inflation-adjustment) that gives it 4.91% TTM.
Thanks all for your answers! @yogibearbull Sorry if the following is too elementary of a question for this discussion. I don't understand why TIPs would be a substitute for I bonds. My understanding of TIPs is that you are only rewarded for unexpected inflation, that is inflation that isn't already "baked into" the price of the TIP security. With I Bonds, however, my understanding is that your return would be (approximately) the 9.62% that you mentioned in your initial post.
Would it therefore follow that I Bonds are a better investment because the 9.62% (or so) is likely better than any unexpected inflation reward that you would get with a TIP? Thanks!
@Blitzer, individual TIPS held to maturity will also get CPI-U adjustments. There is monthly index of values that Treasury publishes. But they do trade, and if sell before maturity, then the market valve depends on several factors. Specific details are different from I-Bonds. In response to your question, I simply pointed out that TIPS are available in the wrappers you mentioned (OEFs, ETFs), but I-Bonds are not.
https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_rates.htm "Treasury provides TIPS Inflation Index Ratios to allow you to easily calculate the change to principal resulting from changes in the Consumer Price Index. To determine your inflation-adjusted semi-annual interest payment, simply follow this three step process:
1. Locate your TIPS on the TIPS Inflation Index Ratios page. Follow the link and locate the Index Ratio that corresponds to the interest payment date for your security. 2. Multiply your original principal amount by the Index Ratio. This is your inflation-adjusted principal. 3. Multiply your inflation-adjusted principal by half the stated coupon rate on your security (i.e., 2%). The resulting number is your semi-annual interest payment."
While technically correct, Fido shows monthly distributions for FIPDX at $0.000000001-0.000000002/shr and M* just calls it $0/shr (it tracks dividends to 4 decimal places only). There is a noticeable yearend distribution (from tiny coupon and inflation-adjustment) that gives it 4.91% TTM.
Thanks for looking into this. It seems that Fidelity has muddied things a bit.
To three decimal places, the fund paid $0.531 "distributions from net investment income" for 2021, and $0.000 in "distributions from net realized gain" (per the annual statement). Fidelity's web page shows this distribution under neither dividend history nor under cap gains history.
Contrast that with T. Rowe Price (PRIPX), which also declares daily. Price reports a large dividend payment in December, as you described. At least this makes a little more sense.
Comments
ISTM other sectors of the lending market will need to adjust. Less than sterling borrowers (lower rated and junk) should have to pay a very high rate. In fact, wonder if this will have a dampening effect on the economy?
The qualifier here is the $10,000 maximum. But, if enough people buy these it could still have an impact. The nearest thing I can remember is back in the 70s or 80s when you could earn 15-20% in some money market funds. Of course money funds today are a lot more restricted in the credit they own.
It is not $10 K that I think about, but I look at it like $356 now, or $481 soon, of free money found on sidewalk every 6 months. Do I pick it up? Yes. I am a sucker for free coffee too at banks etc, but unfortunately, they found an excuse to do away with those citing Covid risks.
Gifting among close family members & friends is a loophole when one person has lot of spare money but others don't. Then, gifting allows that one person to sort of tap into all those other limits that go away annually (i.e. the limits don't carryover). But one cannot have own cake and eat it too. See details here, https://ybbpersonalfinance.proboards.com/post/577/thread
If one's anticipation of terminal inflation rate during one's anticipated holding period of a new iBond is materially lower than 7.12%, I think it may be better to buy them this month. The Fed members seem to be bent on pushing inflation back down to 2-3%, whatever it takes! Lael Brainard made comments this AM about that too. How soon they would succeed? One can make a wager of their conviction by buying iBonds this month (initial rate 7.12%) or next month (initial rate 9.62%).
Just a guess
I know it’s contentious here. But I don’t believe that 8%+ inflation rate is baked in the cake. Someday, but not this year or next. The war in Europe will have a lot to do with it, especially effect on grains. Barron’s recommended BG this week as a play on escalating grain prices. I’m not interested. It’s already up quite a bit. Maybe somebody else is.
On the other hand, TIPS are tradable securities and those you can buy from Treasury Direct, brokerages, and as ETFs and mutual funds/OEFs. Their real rates range from -0.65% (5 yrs) to +0.28% (30 yrs). Generous inflation-adjustments will apply to them too. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_real_yield_curve&field_tdr_date_value_month=202204
This will be done in July so have some time to figure out what to do. This money is in taxable account.
Thanks for your time, Derf
PS Off the topic,
sorry about that.
Individually held TIPS "pay" interest every 6 month from the issue date, like all Treasury bonds. However, the TIPS interest is not actually paid out but is just added to the principal, and all (principal + interest) is paid out on maturity. In the interim, the trading price of TIPS reflects principal and accumulated/accrued interest, but also depends on other market factors (current rate environment and inflation-expectations).
TIPS funds are different. They have to payout inflation adjustment annually, whether earned or not, whether you like it or not. So, a fund may have to sell some TIPS to payout inflation-adjustment if it doesn't have enough cash on hand. Also, the fund NAV will reflect principal + interest at any point of time.
There are problems with how the funds report 30-day SEC yield for TIPS funds. I have posted on this and will try to find the related link and add it here later via Edit.
Misleading TIPS Fund Yields https://ybbpersonalfinance.proboards.com/post/301/thread
Good discussion. If I bought an I-bond back in December 2021, am I able to purchase another one at this time? Should I? or should I wait?
Thanks,
peace,
rono
In a sense, TIPS funds are no different from other funds. A typical coupon bond fund, e.g. VBTLX, stays fully invested. So as it receives coupon payments, it reinvests that money. That income goes on the books as money that must be distributed to investors.
The difference with TIPS is that the interest is imputed, not "real". Funds that get "real" interest reinvest the money by buying more bonds. Funds that get imputed interest implicitly reinvest by holding the same TIPs that are now worth more. In the end, both types of funds have portfolios worth more as time passes. At least until they have to pay out the interest (real or imputed) as divs.
Either type of fund has to raise enough cash to pay out the divs (except for divs that shareholders reinvest). This can be by keeping cash on hand (a bit easier with a fund investing in coupon bonds), raising cash through inflows, or selling securities.
If it helps, one can think of TIPS as a combination of a coupon bond (the fixed rate portion) and a zero coupon bond (the inflation adjustment). It's the zero part where the detail get more complex. Just as with true zero coupon bond funds like BTTRX.
Also, the fund NAV will reflect principal + interest at any point of time
Some TIPS funds, e.g. FIPDX, declare divs daily. It would seem that for such funds the NAV doesn't reflect the interest, just as FTBFX (also declaring divs daily) has an NAV that doesn't reflect the interest declared.
Would it therefore follow that I Bonds are a better investment because the 9.62% (or so) is likely better than any unexpected inflation reward that you would get with a TIP? Thanks!
https://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips_rates.htm
"Treasury provides TIPS Inflation Index Ratios to allow you to easily calculate the change to principal resulting from changes in the Consumer Price Index. To determine your inflation-adjusted semi-annual interest payment, simply follow this three step process:
1. Locate your TIPS on the TIPS Inflation Index Ratios page. Follow the link and locate the Index Ratio that corresponds to the interest payment date for your security.
2. Multiply your original principal amount by the Index Ratio. This is your inflation-adjusted principal.
3. Multiply your inflation-adjusted principal by half the stated coupon rate on your security (i.e., 2%). The resulting number is your semi-annual interest payment."
More on I-Bonds vs TIPS https://www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm
To three decimal places, the fund paid $0.531 "distributions from net investment income" for 2021, and $0.000 in "distributions from net realized gain" (per the annual statement). Fidelity's web page shows this distribution under neither dividend history nor under cap gains history.
Contrast that with T. Rowe Price (PRIPX), which also declares daily. Price reports a large dividend payment in December, as you described. At least this makes a little more sense.