Comments on: How, why, and when to rollover I bonds

by: Tom Adams

Mon, 18 Dec 2006 20:05:07 +0000

Bobby - your calculations are off. You don't earn interest for a month on the first of that month, but on the first of the next month.

So you'd have to wait until February before January's interest would become a factor.

That said, you are correct that the longer you wait to cash your bond, the more valuable it will be.

by: bobby

Mon, 18 Dec 2006 19:34:23 +0000

I have a bond with a Jan issue date. If I cash it now, I lose Dec, Nov and Oct (3 months @ 2%). If I wait until Jan to cash it, I gain Jan int (4%), and then lose Jan(4%), Dec(2%), and Nov(2%).
Is that correct? This would imply its better to cash in Jan due to extra month int.

by: Tom Adams

Sat, 04 Nov 2006 19:37:05 +0000

Mario - according to Standard & Poor's, which provides investors with ratings for government bonds around the world, 60% of the variability in inflation-indexed bond rates is linked to the credit-worthiness of the government issuing the bonds. I wrote about this report on August 3 - S&P report says yields on inflation bonds track national credit ratings. So asking for the rates to go up is kind of a two-edged sword. Yes, you earn more, but you take more risk, too. As it happens, on June 28 I reported that S&P had recently said that the US credit rating could drop within 10 years. Put those two reports together and you see higher TIPS rates. In the short term, however, TIPS rates are more complicated than that. For example, right now the rates are inverted; 5-year TIPS pay more than 10- or 20-year TIPS. From a credit-rating perspective, this makes no sense at all. But that's where supply and demand is causing the rates to settle right now. In regard to your second question, I think a case can be made that the Treasury hasn't "widened the gap" between I bonds and TIPS, if you look specifically at 10-year TIPS rates. As you can see in the table near the bottom of my Series I Savings Bond fixed base rates post, the gap is typically about 100 basis points, although in certain situations the Treasury has temporarily narrowed it.

by: Mario

Sat, 04 Nov 2006 04:34:08 +0000

Tom, thanks for the interesting analysis, i.e. only $5 loss for $4 annual gain. So (without tax consequences) it almost makes sense to do this even if you think you might switch again to a higher I bond rate after perhaps a year and a half.

But here is the million dollar question (I know it's very hard to answer, all I want is your opinion really), where might fixed rates be headed in the future (i.e. next several years)? This is really a two part question … (1) Where are real interest rates headed, for example TIPS yields, and (2) what might prompt the Treasury to stop widening the gap between I bond and TIPS yields? In my understanding we are still at a fairly low level of real interest rates right now as compared to the last decade.