TIPS rates plunge
Wednesday, November 28th, 2007
Categorized as: TIPS
The interest rate on TIPS, which is equivalent to the fixed base-rate on Series I Savings Bonds, has plunged in November as investors have moved their money into safer investments. The flight to safety has actually driven 5-year TIPS rates below the 1.20% fixed base rate on I bonds. On Monday the 5-year rate was 0.98%; yesterday it recovered to 1.11%. You can follow daily TIPS rates on the Treasury's web site.
As recently as July 20 the rate on 5-year and 10-year TIPS was exactly the same, 2.64%. Now the spread between the two is about 50 basis points, as the 5-year rates have fallen much faster than the 10-year rates. You can see a graph of the changes on our page about I bond fixed base rates.
The Treasury would like the I bond rate to be about 100 basis points below the 10-year TIPS rate, but since the rate announcement in November the spread has declined to about 25 basis points.
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If you cash an I Bond before 5 years, you lose 3 months interest, that doesn't apply to the inflation adjustment correct?
In other words @ 1.2% you would lose .30% or 10k in I bonds would only lose $30 interest?
Hi Charles - the 3 month penalty applies to the total I bond interest rate, not just the fixed base-rate portion. Because I bond rates are relatively volatile, it's possible to time redemptions to minimize the penalty. This was an issue a year ago - you can read the details here.
Tom Adams
Tom,
Do you think that the falling TIP rates make I-bonds more attractive? I am looking at Treasury bills, MM, and savings bonds to park my money for a year.
The new PPI (12/13/07) showed very large rate of increase in inflation. The entire bond marker has gone mad as bond rates are continue to fall in spite of rising inflation. I thought I would never say it before, but the existing fixed rate of I-BONDS is getting much more attractive.
There is a chance that we are in for a surprised Fixed rate reduction to .8%
Should I buy some more I-bonds before end of this year, or do you think that the 28-day bills are still better deal in terms of ROI?
Hi Mike - yesterday's 10-year TIPS rate was 1.78%, just 58 points above the I bond's 1.20%. So compared to TIPS, I bonds are a better deal than usual right now.
Because of the new limits on I bond purchases after Jan 1, my thinking is that you should put the money you have now in I bonds.
The Federal Reserve Board seems to have lost its focus on controlling inflation and instead seems mostly concerned about preventing a stock market crash now and worrying about inflation later.
Tom Adams
Tom, do you have a primer on TIPS vs I-Bonds somewhere?
Hi Ernie - yes, my book, Savings Bond Advisor, has the details on the differences between TIPS and I bonds and also has a 100+ year overview of the history of inflation.
Tom Adams