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iShares TIPS Bond Message Board

  • markm0722 markm0722 Apr 27, 2011 9:51 PM Flag

    I-Bonds

    In my opinion, there are no good ideas right now so we're stuck choosing the least worst option.

    Since inflation has been running hot for the past few months, I'm predicting that the composite I-Bond rate will be 4.6% on May 1st. It is reset every 6 months. I'm also predicting that the fixed rate will be 0.0%.

    I buy I-Bonds every year and am choosing to buy them in May this year.

    Here's what I will most likely get.

    1. I-Bonds will pay 0.0% over inflation tax deferred for up to 30 years. In other words, they will simply track inflation and when I cash them in I will have to pay tax on the inflationary gains. However, that's still better than the rates short-term TIPS are paying. The most recent 5-year TIPS auction actually had a negative rate. The rate is also comparable to what TIP investors can expect.

    2. I-Bonds cannot deflate. They will always be worth at least as much as they were the previous month. If commodity prices crash again, then I-Bonds are at least as good as cash.

    3. If inflation hits 20% the tax deferral will become very important. I do not have to pay any tax on them until I cash them. Instead of losing 7% of that 20% each and every year to taxation, I can simply lose 30% all at once at the end of the 30 years. Thanks to compounding, the latter is MUCH, MUCH better. Here's the math to show why that is.

    0.93^30 = .11

    If I lose 7% per year in purchasing power for 30 years, then you only have 11% left.

    I'm not saying inflation will hit 20% and/or stay there. I'm simply saying that if inflation picks up in a serious way then I-Bonds do a much better job at protecting me.

    This is not investment advice. I'm simply saying what I am doing.

 
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