iSavings bonds yielding 7.12% currently

[aws]

I didn't think you were allowed to buy ibonds in an LLC.

[TwoCitiesCapital]

5 hours ago, FCharlie said:

But as nice as it feels to get paid 7% or 9% on reserves, I must say, all I can think about is that I'm not actually gaining wealth, this is just the amount that everyone who's holding cash is actually losing via decreased purchasing power. Wow.

 

Meh. It's a calculation of a fixed basket of assets - it doesn't do a great job at calculating actual changes to cost of living. 

 

Like, we'd all agree that a large portion of the inflation index right now is elevated due to energy costs. And oil going from $20/barrel to $100/barrel was a large part of that. But oil was also $150/barrel 14 years ago...so what inflation? 

 

Inflation calculations don't factor in the ability to select a cheaper alternative, or that mortgages remain a fixed cost for the duration of ownership, or consumer behavior changes to drive to a local vacation destination instead of fly, etc.

 

Does fiat currency lose value every year? Most likely. Does it lose value by more, or less, than official calculations? Depends on who you are and how flexible you are in swapping to alternatives. 

 

My cost of living isn't up 8% this year. I'm sure others are. But you hold the ability to manage that better than any central banker tinkering with interest rates IMO. 

[patience_and_focus]

43 minutes ago, TwoCitiesCapital said:

 

Meh. It's a calculation of a fixed basket of assets - it doesn't do a great job at calculating actual changes to cost of living. 

 

Like, we'd all agree that a large portion of the inflation index right now is elevated due to energy costs. And oil going from $20/barrel to $100/barrel was a large part of that. But oil was also $150/barrel 14 years ago...so what inflation? 

 

Inflation calculations don't factor in the ability to select a cheaper alternative, or that mortgages remain a fixed cost for the duration of ownership, or consumer behavior changes to drive to a local vacation destination instead of fly, etc.

 

Does fiat currency lose value every year? Most likely. Does it lose value by more, or less, than official calculations? Depends on who you are and how flexible you are in swapping to alternatives. 

 

My cost of living isn't up 8% this year. I'm sure others are. But you hold the ability to manage that better than any central banker tinkering with interest rates IMO. 

 

+1

 

Run a tight ship and most households can minimize impact. A productive nation like US will be able to adjust and absorb this high inflation for some time at least. Also, I think 30 year fixed mortgage is a blessing in US. God bless US of A! I am left with 20 years on my loan at 1.99% APR (after last refinance). In the meantime my house value has risen more than two and half times. Cannot ask for a better deal.

 

[aws]

I've never been 100% clear on how the rule works for interest rate resets. I know that when you buy you are guaranteed to get the current rate for 6 months, so it's beneficial to buy right before the rate is going to tick down as you lock in the old rate. But is the reverse true where when the rate is going up (like now) you should avoid buying until the reset?

Basically my confusion is when you buy in the middle of a cycle, say 5 months in, are you always five months behind on the rate resets? So you get the full six months of interest for every cycle, just a bit later than those that bought earlier on the year? So buy now and get 6 months of 7%, then in October you get 6 months of 9%, then next April get 6 months of whatever the next reset is?

 

Or does it give you six months of the current rate, but then cut the next cycle off so you only get one month of the next one, and then it syncs you back up with the actual reset periods?

 

It's not really relevant for me but I have some family members asking which way is better. If you were guaranteed the full amount of each cycle I think you definitely want to buy before the reset, and then just cash in early to cut off a future period where the rates are near zero again.

[lnofeisone]

3 hours ago, aws said:

I've never been 100% clear on how the rule works for interest rate resets. I know that when you buy you are guaranteed to get the current rate for 6 months, so it's beneficial to buy right before the rate is going to tick down as you lock in the old rate. But is the reverse true where when the rate is going up (like now) you should avoid buying until the reset?

 

Basically my confusion is when you buy in the middle of a cycle, say 5 months in, are you always five months behind on the rate resets? So you get the full six months of interest for every cycle, just a bit later than those that bought earlier on the year? So buy now and get 6 months of 7%, then in October you get 6 months of 9%, then next April get 6 months of whatever the next reset is?

 

Or does it give you six months of the current rate, but then cut the next cycle off so you only get one month of the next one, and then it syncs you back up with the actual reset periods?

 

It's not really relevant for me but I have some family members asking which way is better. If you were guaranteed the full amount of each cycle I think you definitely want to buy before the reset, and then just cash in early to cut off a future period where the rates are near zero again.

The plumbing on this one is interesting. Few things to keep track of:

1) The main rate resets happen May 1st and Nov 1st. (every 6 months).

2) When you buy iBonds for the first time, you are given the current rate. Your rate will reset every 6 months. So if you buy in April 2022, you will get the rate that was set on Nov 1st of 2021. Your bond rate will reset on Oct 1st, 2022 to the rate that was set up on May 1st of 2022. If you buy the ibond in May 2022, you get May 2022 rate and the next rate will be reset to Nov 1st rate (this isn't very advantageous if you think inflation is gonna tick down). This is why it's advantageous to buy this bond in April because you get the current 7.xx rate for 6 months until Oct 2022 and you will get the next 9.xx rate until Apr 2023.

3) Treasury credits you interest for the entire month when you made the purchase. So if you buy ibonds today, Treasury looks at it as if you bought it on Apr 1st. This is done so that the rate resets are easy to calculate. 

4) The composite interest consists of fixed and floating rates. Fixed has been set at 0 for a while. There are some ibonds out there (circa early 2000s, and 1990s) that have fixed rate of 1-3% and are now getting additional 7.xx% in floating  rate for a total yield of 10+%. 

[zippy1]

"The composite rate for I bonds issued from May 2022 through October 2022 is 9.62 percent. This rate applies for the first six months you own the bond."
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

[ValueMaven]

Yes - most people here allocated in Dec-21 and Jan-22 and have benefited; it was a unique period not likely to be repeated ... personally I'm using this has a semi-illiquid emergency fund.

[fareastwarriors]

iBonds getting some love from Bloomberg today:

 

There’s a Low-Risk Way for Investors to Earn 9.62% Returns Right Now

[TwoCitiesCapital]

On 12/28/2021 at 7:08 AM, gfp said:

 

 

I'm not following this super closely, but I think you derive the 7.12% by taking the 6 month change from the data dates you state above and double it to annualize it  -

 

274.31 minus 264.877 is 9.433, which is a 3.56127561% increase over 6 months.  Double that and it is 7.12255%

 

 

With the new print, we're already at over 6+%  using the above methodology and still have 3-months to be additive before we reset. 

 

And here's the thing that's got me reconsidering my skepticism on inflation being sticky. This is the inflation we're experiencing with the USD being near 20+ year highs. What happens if it weakens from here? 

 

 

Edited July 13, 2022 by TwoCitiesCapital

[bizaro86]

15 hours ago, TwoCitiesCapital said:

 

With the new print, we're already at over 6+%  using the above methodology and still have 3-months to be additive before we reset. 

 

And here's the thing that's got me reconsidering my skepticism on inflation being sticky. This is the inflation we're experiencing with the USD being near 20+ year highs. What happens if it weakens from here? 

 

 

Bank of Canada raised 100 basis points today and the Canadian dollar barely moved against the USD. I'm not sure what it'll take for the USD to meaningfully weaken. I would have thought the news about China/Australia doing an iron ore deal in Yuan might have hurt the USD. 

[TwoCitiesCapital]

7 hours ago, bizaro86 said:

Bank of Canada raised 100 basis points today and the Canadian dollar barely moved against the USD. I'm not sure what it'll take for the USD to meaningfully weaken. I would have thought the news about China/Australia doing an iron ore deal in Yuan might have hurt the USD. 

 

Probably seemed that way in 1999 with the US being the center of internet revolution and a robust economy. DXY still went from 120 down to 75 over the next 10 years in what we a largely undisturbed downtrend. 

 

I'm not betting on the imminent failure of the USD, but we're already seeing the weakening of the petrodollar and the weaponization of reserves may lead to a "small" reduction in its global dominance - but would still be measured in hundreds of billions of orphaned dollars over an intermediate time frame.

 

Not too mention any naturally occurring reversion from a vertical climb or a catch down once the US follows the rest of the world into recession in the short term. 

 

Edited July 14, 2022 by TwoCitiesCapital

[changegonnacome]

Came across this little additional trick which seems like a way to get more cash into these above and beyond annual limits when the rates are so juicy as they are now...............effectively using a giftbox with a future delivery date for your spouse in the next fiscal year but trick is interest starts to accrue on day 1 of the 'giftbox' creation even though delivery date might be six months away. Anybody doing this?

 

Thread below here:

 

https://www.early-retirement.org/forums/f28/the-i-bond-thread-113668-46.html#post2793413

 

Looks like a way to leverage the current high rate & skirting the annual thresholds (it still uses up thresholds in later years)....so effectively if your team transitory......you like this alot I guess.

Edited July 17, 2022 by changegonnacome

[scorpioncapital]

On 7/14/2022 at 7:22 AM, bizaro86 said:

Bank of Canada raised 100 basis points today and the Canadian dollar barely moved against the USD. I'm not sure what it'll take for the USD to meaningfully weaken. I would have thought the news about China/Australia doing an iron ore deal in Yuan might have hurt the USD. 

 

I think there are some strange issues with how each country can set their rates.

Look at the margin rates at ibkr - https://www.interactivebrokers.com/en/trading/margin-rates.php

Notice the cad rate is 0.5% higher than the US rate. After a 100 bps hike. And US will hike 0.75 to 1% next week.

There seems to be some mechanism issues in the actual market rate vs what the central banks are targeting? I wonder if this may be the focal point of the next crisis where some bank sets a rate of x but they can't get it within some % of x?

 

[RedLion]

Anyone looking at TIPS now that the real yields have come up over the last year? I've been maxing out I bond allocations, but I have a lot more money I'd like to put into something like this. Looking at 5 year TIPS, and if I'm understanding right they're paying a 0.5% annual yield adjusted for inflation. When this thread was opened I believe all the TIPS were in the negative yield territory. 

[gfp]

9 minutes ago, RedLion said:

Anyone looking at TIPS now that the real yields have come up over the last year? I've been maxing out I bond allocations, but I have a lot more money I'd like to put into something like this. Looking at 5 year TIPS, and if I'm understanding right they're paying a 0.5% annual yield adjusted for inflation. When this thread was opened I believe all the TIPS were in the negative yield territory. 

 

Bill Gates' personal money manager Michael Larson just purchased some TIPS closed end funds with his personal money.  He is on the board of these CEFs because Cascade holds very large positions in them.  FWIW ->

 

https://www.sec.gov/Archives/edgar/data/1254370/000091485122000031/xslF345X03/wf-form4_165827071113239.xml

 

https://www.sec.gov/Archives/edgar/data/1267902/000091485122000029/xslF345X03/wf-form4_165826937071579.xml

[ValueMaven]

nice find @gfp - why is it down -20% YTD though??  Mostly in TIPS as well ... these CEF always scare me... some EMD exposure, but still Western is generally considered a more conservative CEF manager 

[RedLion]

Maybe I'm making this too difficult, but I prefer the idea of owning individual bonds to manage my maturity and risk profile.  

 

If the numbers on Schwab are correct, all the TIPS cusips that mature on or after October 15 2024 are trading at a positive yield, so one idea I've had is to load up on individual TIPS with close maturities that are still in the positive yield territory, for my purposes I'm thinking maybe the January 2025 TIPS which are about a .25% real yield and shouldn't have much downside if real rates keep spiking. 

 

 

[RedLion]

3 minutes ago, ValueMaven said:

nice find @gfp - why is it down -20% YTD though??  Mostly in TIPS as well ... these CEF always scare me... some EMD exposure, but still Western is generally considered a more conservative CEF manager 

 

A lot of the TIPS are down this year since the coupons have sky rocketed. So the 20 year tips are up to a 1% yield now started the year negative. So if you were loaded up with those with leverage I can see a 20%+ loss for sure. 

[crs223]

Why do iBonds pay so much more than other bonds?

 

a) iBonds are risky and the extra yield compensates for this risk

 

b) iBonds are welfare for the rich, subsidized by the US Govt

Thank you!

[Spekulatius]

22 minutes ago, crs223 said:

Why do iBonds pay so much more than other bonds?

 

a) iBonds are risky and the extra yield compensates for this risk

 

b) iBonds are welfare for the rich, subsidized by the US Govt

Thank you!

 Neither of the above is true. The rich don't bother with putting 10k in an account, it doesn’t move the needle. I think these ibonds are more or less and artifact that sort of exists. Very

 few people bothered about them for decades.

[TwoCitiesCapital]

39 minutes ago, crs223 said:

Why do iBonds pay so much more than other bonds?

 

a) iBonds are risky and the extra yield compensates for this risk

 

b) iBonds are welfare for the rich, subsidized by the US Govt

Thank you!

 

You're giving up price risk (upside/downside) in exchange for illiquidity and rate reset risk as rates can move meaningfully lower. 

 

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

Edited July 20, 2022 by TwoCitiesCapital

[crs223]

Why does the US Govt sell iBonds at 9% when it could just sell regular 10 year bonds at 3%?
 

a) USG pays a penalty rate because iBond holders can call back the loan at any time

 

b) iBonds are a gift/subsidy to those who purchase

 

if I were selling a bond, why would I sell a callable iBond at 9% vs a fixed rate bond at 3%??

 

Thank you!

Edited July 20, 2022 by crs223

[RedLion]

2 minutes ago, crs223 said:

Why does the US Govt sell iBonds at 9% when it could just sell regular 10 year bonds at 3%?
 

a) USG pays a penalty rate because iBond holders can call back the loan at any time

 

b) iBonds are a gift/subsidy to those who purchase

 

c) because iBond purchasers are giving up price risk, and the USG must pay a penalty to compensate for this loss

 

Thank you!

 

 

 

I think iBonds are fine, I bought mine, but honestly are they all that much better than other government bonds on the market? 

 

For example, you can get 20 year TIPS and get 100 basis points more yield if held to maturity vs. the iBond.

 

I think the iBond is great for holding onto money over a few years as an alternative to a CD or bank account, but not that great long term honestly. 

 

 

[crs223]

Why does USG limit iBond purchases to $10k/year?

 

a) USG is trying to reduce debt outstanding.  Why not start with iBonds?

 

b) iBonds are subsidized and pay above-market yields; and USG doesn’t want them to turn into a transfer of wealth to the rich

[Gregmal]

27 minutes ago, crs223 said:

iBonds are subsidized and pay above-market yields; and USG doesn’t want them to turn into a transfer of wealth to the rich

I don’t know how anyone gets rich on $10k. Even those massive Hassidic Jewish family with like 14 kids. It’s not meaningfully scalable enough to be of any benefit to real rich folks. Mainly just a gimmick for marginally rich folks to entertain themselves with.