iSavings bonds yielding 7.12% currently

[crs223]

When you say “gimmick” are you saying that it is indeed subsidized/above_market return?

 

Clearly I made a huge mistake using the “R” word — everyone wants to jump on the bandwagon about how rich people would not waste their time buying iBonds vs address my question.

 

I learned that in an efficient market, higher yield means higher risk.

 

Obviously iBonds are not risky.  So why is the yield so high?  And why can’t anyone give an answer to that specific question that makes sense?

 

Perhaps it is because I am a moron.  Or perhaps the board is in denial that they are subsidized — but I would expect that all the smart people here could provide an answer that makes sense to a moron like me.

[crs223]

1 hour ago, TwoCitiesCapital said:

The rates are high but you get no price improvement if rates move lower. That's why.

If that is the reason:

 

1. why doesn’t a riskier CD, with the same price-improvement limitation, match (or exceed) the iBond rate?

 

2. Why would the USG offer these “no price improvement” bonds for sale given that they are so much costlier than normal bonds?

 

thank you!

Edited July 21, 2022 by crs223

[Gregmal]

I personally view this similar to the get $2500 for opening a Private Client account at Citi or whatever gimmick type stuff. I can park $250k in a brokerage or savings account and leave after a few months. It’s good for me, my wife, a few kids, etc. But annoying and not scalable. Risk free? I suppose. Not everything has to have a catch. You can open new credit card accounts and get $200 risk free as well for spending $500. I still do it if I need to, but I’m not doing it just cuz. So similarly, I have no use for ibonds, as far as I understand them. When people tend to think they’re great investment options is typically the type of market I want to be navigating for long term assets.

[Spekulatius]

1 hour ago, crs223 said:

If that is the reason:

 

1. why doesn’t a riskier CD, with the same price-improvement limitation, match (or exceed) the iBond rate?

 

2. Why would the USG offer these “no price improvement” bonds for sale given that they are so much costlier than normal bonds?

 

thank you!

As I mentioned before, these bonds are an artifact. The rules for the ibond interest rates were implemented in 1998 when inflation was low and other bond yield with fixed interest were competitive. Then fixed interest rates dropped over time and the interest rate rules for the ibonds stayed the same, making them attractive with the high inflation we have currently.

 

You are overthinking this , imo. Just buy them if you like the setup and it works for you and don’t if you don’t.

https://en.wikipedia.org/wiki/United_States_Savings_Bonds#Series_I

[aws]

I'm sure you could go down many tangents if you try to figure the reasons the government is trying to incentivize particular behaviors, and in the end you would know nothing more about whether i bonds are a good buy right now or not. At the present, I bonds offer favorable terms over other short-term investments, both in terms of yield and tax incentives. Is that because the government is trying to incentivize people of moderate means (those with 10k+ of annual savings) to save more, or an accident of the rules they established that make certain times better to invest than others? Maybe a little of both, but I don't care. 

 

We get mortgage interest deductions because they want us to buy a house, child tax credits because they want us to start a family, retirement tax credits for low income people to save for retirement, so it's not unreasonable to expect they also want people to have a better vehicle for liquid savings than banks, even if it costs them a bit more than selling a few more T-Bills to fund what's covered by those who invest in I Bonds. Knowing whether it's an incentive or an accident doesn't change anything about what you should do with your money though.

 

 

[crs223]

6 hours ago, aws said:

I'm sure you could go down many tangents if you try to figure the reasons the government is trying to incentivize particular behaviors, and in the end you would know nothing more about whether i bonds are a good buy right now or not. At the present, I bonds offer favorable terms over other short-term investments, both in terms of yield and tax incentives. Is that because the government is trying to incentivize people of moderate means (those with 10k+ of annual savings) to save more, or an accident of the rules they established that make certain times better to invest than others? Maybe a little of both, but I don't care. 

 

We get mortgage interest deductions because they want us to buy a house, child tax credits because they want us to start a family, retirement tax credits for low income people to save for retirement, so it's not unreasonable to expect they also want people to have a better vehicle for liquid savings than banks, even if it costs them a bit more than selling a few more T-Bills to fund what's covered by those who invest in I Bonds. Knowing whether it's an incentive or an accident doesn't change anything about what you should do with your money though.

 

 

Thank you.

 

I normally recommend people understand why a particular bond is paying an unusually high rate.  In The case of iBonds I assumed that it was just a free giveaway.  Apparently I’m overthinking it.

 

Carvana bonds are also offered at high rates. Okay to “overthink” that one - probably not a free giveaway!

[crs223]

30 minutes ago, crs223 said:

Thank you.

 

I normally recommend people understand why a particular bond is paying an unusually high rate.  In The case of iBonds I assumed that it was just a free giveaway.  Apparently I’m overthinking it.

 

Carvana bonds are also offered at high rates. Okay to “overthink” that one - probably not a free giveaway!

reading this again I sound snarky - not my intention and I cannot edit it now - thank you all for your responses!  I have a lot to learn!

[KJP]

3 hours ago, crs223 said:

Thank you.

 

I normally recommend people understand why a particular bond is paying an unusually high rate.  In The case of iBonds I assumed that it was just a free giveaway.  Apparently I’m overthinking it.

 

Carvana bonds are also offered at high rates. Okay to “overthink” that one - probably not a free giveaway!

 

It's been said here, but the price of this particular bond is not set by buying and selling in a liquid marketplace.  In theory, if the price is off of what it otherwise would be, you could engage in some type of arbitrage with a publicly traded security and continue to do it until the system broke (or the government sold nothing but I-bonds) or re-sell the security at a higher price.  But the quantity restrictions by buyer type and amount prevent and that, and non-transferability prevents black markets from arising to adjust the price.  That's what creates the possibility of having a security that, to use efficient markets jargon, is perpetually and openly beyond the risk/reward frontier.  (Also an example of why price caps typically require forced rationing or create shortages.)  

Edited July 21, 2022 by KJP

[Pedro]

Is it possible for a CDN investor to buy these ibonds?

Is there a CDN equivalent if the above is big fat no?  

[Red Lion]

So I've been looking for alternatives to the I-Bond to park money for the short term to provide inflation protection but also liquidity. At this point I'm just experimenting in small orders, but at this point, my theory is to focus on short duration TIPS securities maturing around 2025 or 2026 that can be purchased for a positive yield over inflation (by about 20 basis points). 

 

The two things to worry about with buying TIPS on the secondary market, as I see it:

 

1) If the market "real" rate goes up, you can take a short term loss. This risk should be largely mitigated by focusing on bonds maturing in the short term, since even if real rates go up to 2% it would be the 10 and 20 year TIPS taking big losses not ones maturing in a couple years. 

 

2) Even though the bond is guaranteed at PAR, there is an inflation factor that could conceivably go down in the even we had deflation as measured by CPI. 

 

 

I just purchased one, Cusip  91282CCA7, coupon 0.125%, maturity 4/15/2026, inflation factor 1.11222. It's quoted at $99.42, but as far as I can tell, you would then multiply the quote price by the inflation factor to reach the actual market value. 

 

If I'm understanding this correctly, I can place as much money as I want in these, they are guaranteed by US government, I get modestly better yield than I bonds, if I need money right away I can just sell them on the market. My big risk would be a spiking real yield or CPI deflation, but both of these are somewhat mitigated by the short duration. At this point I'm thinking of moving my cash allocation to a combination of these short duration TIPS and a 1 year treasury ladder (yielding about 3% right now). 

 

Has anyone here got a lot of experience with buying/trading individual TIPS bonds? Anything I'm missing? Or do these appear to be a good place to put money if you wish you could buy more I Bonds? 

 

 

 

[ValueMaven]

Tipswatcher is saying that Nov-22 reset rate (which will apply when you buy in Jan-23) is looking to be north of 6%.  This is turning into a heck of a 3-4 period reset rate for these.  Glad I was able to allocate back in Dec-21 and Jan-22.  

[ValueMaven]

1Yr just touched 4% ... FYI

[Red Lion]

It also seems like there's an argument to be made right now for TIPS over the iBond. 

 

There are real yields of over 1-1.5% over the full set of durations. 

 

If you planned to hold until maturity, I think you would do better with the tips, and if you want to use the money short term, you can focus on shorter durations with no early redemption penalty, and most importantly, no $10,000 limit. 

 

 

[ValueMaven]

What is the best way to do that then @RedLion ... I know almost nothing about TIPS

[Red Lion]

17 hours ago, ValueMaven said:

What is the best way to do that then @RedLion ... I know almost nothing about TIPS

I just search by Schwab for tips with a ytm > 1 % and focus on the shorter duration bonds. However there are some almost juicy yields around 1.5% on the longer term bonds. I’m tempted to get some of those too. Schwab does free trades for treasuries. 

[ValueMaven]

@RedLion what about the TIP ETF?  Or you dont like the 20bps management fee??

[Red Lion]

On 9/17/2022 at 8:58 AM, ValueMaven said:

@RedLion what about the TIP ETF?  Or you dont like the 20bps management fee??

 

I like the ability to control duration and yield and prefer to buy the bonds individually. But I also don't like the 20 basis fee. Free trading and infinite liquidity make this pretty easy to manage.

[rohitc99]

 

 

On 7/25/2022 at 2:23 PM, RedLion said:

So I've been looking for alternatives to the I-Bond to park money for the short term to provide inflation protection but also liquidity. At this point I'm just experimenting in small orders, but at this point, my theory is to focus on short duration TIPS securities maturing around 2025 or 2026 that can be purchased for a positive yield over inflation (by about 20 basis points). 

 

The two things to worry about with buying TIPS on the secondary market, as I see it:

 

1) If the market "real" rate goes up, you can take a short term loss. This risk should be largely mitigated by focusing on bonds maturing in the short term, since even if real rates go up to 2% it would be the 10 and 20 year TIPS taking big losses not ones maturing in a couple years. 

 

2) Even though the bond is guaranteed at PAR, there is an inflation factor that could conceivably go down in the even we had deflation as measured by CPI. 

 

 

I just purchased one, Cusip  91282CCA7, coupon 0.125%, maturity 4/15/2026, inflation factor 1.11222. It's quoted at $99.42, but as far as I can tell, you would then multiply the quote price by the inflation factor to reach the actual market value. 

 

If I'm understanding this correctly, I can place as much money as I want in these, they are guaranteed by US government, I get modestly better yield than I bonds, if I need money right away I can just sell them on the market. My big risk would be a spiking real yield or CPI deflation, but both of these are somewhat mitigated by the short duration. At this point I'm thinking of moving my cash allocation to a combination of these short duration TIPS and a 1 year treasury ladder (yielding about 3% right now). 

 

Has anyone here got a lot of experience with buying/trading individual TIPS bonds? Anything I'm missing? Or do these appear to be a good place to put money if you wish you could buy more I Bonds? 

 

 

 

for the Cusip  91282CCA7, i checked with merril lynch. the minimum orders seems to be 100K+. do you have the same limitation for Schwab ? treasuries dont seem to have that limit ...around 1000

 

dont know if i am looking at this right. Do Tips have a higher minimum orders in general ?

Edited September 19, 2022 by rohitc99

[fareastwarriors]

Why not buy tips at treasurydirect? 

[rohitc99]

33 minutes ago, fareastwarriors said:

Why not buy tips at treasurydirect? 

agree ..just that the interface is quite bad. is there is minimum threshold or can buy smaller lots

[fareastwarriors]

4 minutes ago, rohitc99 said:

agree ..just that the interface is quite bad. is there is minimum threshold or can buy smaller lots

Yes, the interface is clunky but it gets the job done. 

 

$100 min, with $100 increments.

 

 

Original Issue Rate:	The yield determined at auction. See rates in recent auctions
Minimum purchase:	$100
Maximum Purchase (in a single auction):	Non-competitive: $10 million Competitive: 35% of offering amount (See types of bidding in "Auctions in Depth")
Investment Increment:	Multiples of $100
Issue Method:	Electronic
https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

Edited September 19, 2022 by fareastwarriors

[rohitc99]

4 minutes ago, fareastwarriors said:

Yes, the interface is clunky but it gets the job done. 

 

$100 min, with $100 increments.

 

 

Original Issue Rate:	The yield determined at auction. See rates in recent auctions
Minimum purchase:	$100
Maximum Purchase (in a single auction):	Non-competitive: $10 million Competitive: 35% of offering amount (See types of bidding in "Auctions in Depth")
Investment Increment:	Multiples of $100
Issue Method:	Electronic
https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

thanks !

[Red Lion]

2 hours ago, rohitc99 said:

 

 

for the Cusip  91282CCA7, i checked with merril lynch. the minimum orders seems to be 100K+. do you have the same limitation for Schwab ? treasuries dont seem to have that limit ...around 1000

 

dont know if i am looking at this right. Do Tips have a higher minimum orders in general ?

With Schwab it lets you look at market depth, sometimes if you try to execute at the best price (by fractions of a penny) you will only get stacked up against a 100k bid size, but I've had no problem buying individual bonds in the $1,000 par range on Schwab. 

 

If you're on Schwab click on trade bonds, then click on cd and treasury ladder builder, then click one tab to the left Find Bonds and Fixed income, I select bond type "treasuries", maturity date through 2030, include only TIPS, min YTM 1%.

 

This pops up a bunch of cusips, on the far right of any cusp that you want to look at you can click view market depth. Then a whole stack of bid and asks pop up usually with minimums transactions down to 1 ($1,000). 

 

So then for example I can buy TIPS that are maturing in 2025 with a 1.45% real yield, commission free, and then unload those at any time if I need liquidity. My corporation has a large cash position, and I've been thinking about splitting the money between short term T-bills in the 4% YTM range and short term TIPS like described above. 

[Red Lion]

2 hours ago, fareastwarriors said:

Why not buy tips at treasurydirect? 

Is there a way to sell the treasuries that you buy at treasury direct without transferring them to a brokerage account? Liquidity would be my main reason to do this in a brokerage account, but I do have a treasury direct account and did buy some $100 increments of TIPS just to see that it could be done. For me this is a cash/money market substitute that I want to be readily liquid, so I really like being able to sell them right away commission free through Schwab. 

[lnofeisone]

59 minutes ago, RedLion said:

Is there a way to sell the treasuries that you buy at treasury direct without transferring them to a brokerage account? Liquidity would be my main reason to do this in a brokerage account, but I do have a treasury direct account and did buy some $100 increments of TIPS just to see that it could be done. For me this is a cash/money market substitute that I want to be readily liquid, so I really like being able to sell them right away commission free through Schwab. 

There is not. You have to transfer to a brokerage.