Here's what we know or think we know.
1. 0.3% stinks. That's a given.
2. We can only buy so many I-Bonds in a given calendar year.
3. The rate is not determined by the free markets.
4. I-Bonds are tax-deferred investments that are tied to the inflation rate. If inflation gets out of control, both of these facts could be very important.
5. I-Bonds offer excellent deflation protection. They can never go down in value. During deflation, they are every bit as good as cash.
Here's what we'd like to know.
1. Will that 0.3% fixed rate go higher or lower on May 1st?
2. Is there any chance the rate could be higher when it resets on November 1st?
The 5-Year TIPS rate was 0.61% on April 15th. If that same rate is still here on May 1st and we also assume we are still in "crisis" mode, then that would imply the rate may reset to roughly 0.1% on May 1st.
The 10-Year TIPS rate was 1.49% on April 15th. If that same rate is still here on May 1st and we also assume we are still in crisis mode, then that would imply the rate may reset to roughly 0.1% on May 1st.
Both charts imply that 0.1% is the most likely rate on May 1st if we assume that we're still in crisis mode. The stock market may disagree with me, but I tend to think we're in permanent crisis mode now. I'm therefore not convinced that November's rate has a chance of being much higher.
I'm opting to take a bird in the hand and lock in this pathetic 0.3% rate on I-Bonds. I'll be making my purchase by the end of the month. I've stated earlier that I was thinking of waiting until November, but these charts do not imply that I should.
So what does a 0.3% real I-Bond rate mean? It means that if I hold it for 30 years that it will have grown by roughly 9% in inflation adjusted terms. All of that inflationary growth will be taxed and it will hurt. On the other hand, in 30 years I will no doubt be that much closer to being broke. My tax rate therefore might not be all that bad.
This is not the way to get rich clearly. Relatively high safety comes at a price. It is a price I'm willing to pay.
Even though I am locking in the 0.3% rate, I still hope that I-Bond rates go much higher in the coming years. I will be buying every year, just like I have since 2000. This is mostly just an exercise in timing. At what point in 2010 do I wish to buy? I've decided that the answer is now. Sigh.
Source Data:
I-Bond Rates
FRB: Selected Interest Rates
I should also point out that I-Bonds may do better than I suggest.
ReplyDeleteI-Bonds would be vastly superior to many investments if we continually toggled between extreme deflation and extreme inflation.
During the inflationary periods they would grow in value. During the deflationary periods they would not fall in value. Win win.
I can't think of any other investment that could do that.
"I can't think of any other investment that could do that."
ReplyDeleteWell I would think you should revist the trash bag investment plan, you were "cleaning up" on that one!
GYSC,
ReplyDeleteI'm not quite convinced I should be writing a book titled, "Garbage Bags for the Long Run". You know I do love them though. For those just tuning in, my garbage bag hoard has outpaced overall inflation by a large margin. Might have something to do with garbage bags being a petroleum product.
Stocks for the Long Run (Hardcover)
In summing up his approach to investing, Siegel writes, "Poor investment strategy, whether it is for lack of diversification, pursuing hot stocks, or attempting to time the market, often stems from the investor's belief that it is necessary to beat the market to do well in the market. Nothing is further from the truth. The principle of this book is that through time the after-inflation returns on a well-diversified portfolio of common stocks have not only exceeded that of fixed income assets but have actually done so with less risk. Which stocks you own is secondary to whether you own stocks, especially if you maintain a balanced portfolio."
You've got to hand it to Jeremy Siegel for helping everyone get into stocks in 1998.
I mean really. Which would you have preferred owning in 1998 for the long run?
1. Locking in the 30-Year Treasury bond paying 5.6% in 1998 and watching today's investors only earn 4.7% on the same investment? Hint: You'd still be earning 5.6%.
2. Locking in the S&P 500 at 1,100 in 1998 and now watching it trade at 1,192? Hint: Holy crap is that pathetic.
One last thought. Just because my garbage hoard has done well doesn't mean it will continue to do well. I'm not all that bullish on the price of oil at these levels. I've felt since November that $80 oil might be the top in this cycle. It's currently at $83 and struggling.
I think you see bubbles in your sleep Mark. Just because trash bags have gone up, does not mean they will ever stop going up! Get on board the bubble train my man. Go buy some GOOG or AAPL and let it ride. Or buy hefty bags by the load. 10% returns per yrar are guaranteed!
ReplyDeleteSarcasm on WAY HIGH!
So sick of this economic debacle
For fun. how about a little "Dark Crystal" dollar jam:
http://www.youtube.com/watch?v=Frzaasghhrw
Nice!
GYSC,
ReplyDeleteI HAD to use your "Dark Crystal" dollar jam in my latest post. TOO funny!