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The old rate was 1.2% over inflation.
The new rate is 0.0% over inflation.
Seriously. You can now lock in a 0.0% rate for up to 30 years. Get out the party hats. *heavy sarcasm*
Well, I have been saying that 1.2% wasn't all that bad in comparison to what I thought was coming next. I never dreamt of 0.0% though. Wow. That makes it absolutely impossible for the I-Bonds you buy today to keep up with inflation unless you can find a way to pay zero taxes once you cash them. Good luck on that one!
The government might just as well put an ad in the paper telling us to begin hoarding hard assets in earnest.
First they stick a fork in the quantity of I-Bonds we can buy (as of January 1st of this year), now they stick a fork in the quality of the I-Bonds we can buy. Go figure. Somebody really doesn't want us saving.
May 1, 2007
Bernanke Advocates More Saving
Federal Reserve Chairman Ben Bernanke said that U.S. lawmakers should aim economic policies at boosting U.S. savings, the lack of which is the primary source of the U.S. trade deficit.
“Saving is critical,” Bernanke said in response to questions after a speech at Montana Tech. He said the trade deficit isn’t a reflection of the quality of U.S. goods and services but rather a result of the fact that the U.S. invests more than it saves and the rest of the world is a “net saver.”
“That saving is sloshing around the world,” Bernanke said, and is one reason that U.S. real long-term interest rates remain “very, very low.” “We won’t always have that,” Bernanke said in reference to the high rates of foreign saving that are coming into the U.S. That’s why it’s important for the U.S. to find ways to boost domestic saving, he said.
If domestic saving is critical, then the patient just flatlined.
See Also:
Extremely Bad News for I-Bonds!
Christmas Shopping Made Easy (An I-Bond Story)
The Death of Real Yields Continues
Source Data:
I Savings Bonds Rates & Terms
9 comments:
Three things I must comment about.
1) I find it incredibly galling I-bonds are taxed. Words escape me.
2) People seem incredibly quick to disparage I-bonds (and TIPS). Yet, I-bonds nominal rate (4.84%) is still above all(?) other Treasury yields (TLT is 4.36%, which I suppose can be justified for the extra liquidity one gets).
3) Doesn't CPI-U include "volatile food and energy"? That's not so bad. All the carping about inflation ex-inflation doesn't matter to an I-bond investor.
AllanF,
Great points.
1a) At least I-Bonds are tax deferred, unlike most other treasuries.
1b) I have similar thoughts about the taxation of gold and homes. It could be worse I suppose. It can always be worse I suppose. It probably will get worse I suppose.
2) I-Bonds, at least until today, were pretty much the least worst option in treasury land. Unfortunately, it is possible that they still might be the least worst option (i.e., if inflation skyrockets). As for liquidity, I-Bonds are actually the most liquid as I see it. You never have to worry about what a buyer is willing to give you for them. You know EXACTLY what the government will pay you when you cash them out. It is impossible to lose money based on their being too few buyers when you wish to sell (which is quite possible if you own TLT). That being said, you won't make extra money if people suddenly want what you've got either. I can't exactly sell my 3.4% fixed rate I-Bonds to others (if I could, I'd get a nice reward no doubt). Fortunately, I don't want to sell them. I'm planning to hold until they mature.
3) Yeah, there seems to be a lot of investors who think that food and energy aren't included in the CPI-U. In addition to energy being included in the CPI directly (which it most certainly is), it also seeps into the the "core" CPI (i.e., higher fuel prices will raise the price of toasters at some point, if only due to transportation costs to get them on the shelves and the power needed to manufacture them).
The real yield on the 20-Year TIPS is now 2.0%. That trade has not gone my way so far. In January, I locked in 1.8%. I'm holding until maturity so it really doesn't affect me much one way or another. However, that's still a 4% loss on paper (0.2% x 20 years) so it does make me question my declining real yield mindset.
It will be interesting to see where the yields on TIPS heads next. Do they begin sympathizing with the lousy I-Bond rate?
I'm hoping the 10-Year TIPS yield holds up. I'll be participating in the auction in July (and an auction a year for the next decade more than likely as I continue to build a bond ladder). The current 1.46% is plenty good enough for me these days.
If the stock market improves (as we have seen lately), one would expect real yields to rise (as money flows out of treasuries).
On the other hand, rising real yields would put additional pressure on the crumbling housing market.
No easy answers to any of the difficult questions, but what's new?
Long-term I'm sticking to the theory that real yields will be weak though, and I think this new I-Bond rate tends to support that theory (as does the history of the stagflationary 1970s).
Good editorial over at the Asia Times regarding inflation:
The twilight of irredeemable debt
http://www.atimes.com/atimes/Global_Economy/JE02Dj05.html
http://tinyurl.com/3pb2x7
So Mark when you buy TIPS are you saving are investing?
Anonymous,
That's really hard to say. My goal is saving.
Here's the back of envelope calculation.
With a 1.5% 10-Year TIPS and a 20% tax rate I'd break even if inflation averages 6%.
I'd earn 7.5% per year, pay 20% of it as taxes (1.5% of it), and have 6% leftover. If inflation is 6% I'd therefore breakeven.
Therefore...
If inflation averages less than 6% over the next 10 years I'm investing. The purchasing power of my investment would grow. If inflation averages exactly 6% then I'm saving. If inflation averages more than 6% then I'm losing. If we hyperinflate, then I lose everything.
I suspect I will be slightly losing. If I do end up losing, then those without inflation protection will really be losing.
Anonymous,
I enjoyed reading your link.
If the thief is thieving modestly, then he will not be detected. It never occurred to the professors of economics and financial journalists that a modest thief is an oxymoron, a contradiction in terms.
Based on current I-Bond yields, the thief is attempting to hide under the floodlight with the sound of shrill sirens approaching.
This is sadly hilarious:
Bernanke Still Waiting
"Below are excerpts from two years worth of FOMC policy statements from the Ben Bernanke-led Federal Reserve on the subject of the future course of inflation in the U.S."
http://tinyurl.com/56duus
http://seekingalpha.com/article/75353-bernanke-fed-still-waiting-for-inflation-to-moderate
Anonymous,
I especially enjoyed the commentary!
There appears to be no theoretical limit on how long you can continue to expect something to happen, however, practically speaking, at some point in time, people stop believing what you say.
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