This WSJ article explains why the value of TIPS has dropped along with regular Treasuries. The author neglects to mention I-Bonds, which are inflation-adjusted like TIPS but whose principal is always returned in full whenever the bond is redeemed, regardless of prevailing interest rates. This is an important advantage of the I-Bond compared with TIPS and Treasuries when rates are rising.
The I-Bond rate will be adjusted on November 1. Buying an I-Bond now (maximum $10,000) will guarantee the current rate for 6 months. The composite rate for I bonds issued from May 2022 through October 2022 is 9.62%. The bond must be held for at least one year. https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
Why Are My Inflation-Protected Bonds Falling When Inflation Is So High?
A look at how a popular postpandemic investment works and how you can benefit
By Matt Grossman, The Wall Street Journal, Oct. 8, 2022
Since practically every sentence in this article is useful, I won’t excerpt it. The key point is that TIPS, like Treasuries, lose value on the secondary market if interest rates are rising but return full par if held to maturity.
“For investors who value predictability, bond funds and ETFs have some drawbacks. Their price rises and falls with the prices of the bonds they own. Unlike individual bonds, they don’t have a maturity date, so there is no date on which you are guaranteed to get your principal investment back. If you need to cash out of your TIPS fund at a time like now, when bond prices have fallen, you might not get back as much as you originally invested.”
I never invest in bond funds for that reason. But I might consider investing in a TIPS bond fund when the Fed’s rate raising campaign is done since it’s easier to sell shares of a bond fund than selling a bond on the secondary market.
My thoughts are the true advantage is buying equities in 2023. As a stop gap the strategy of holding some I-Bonds is much safer than most. As a longer term buy and hold in a portfolio much better than treasuries in the vanilla state.
When to buy the I-Bonds would be closer to now if trying to time the best return. The reason goes back to the IRA. The FED’s work is done here. The FED’s target might be more appreciating the dollar against China than heading off inflation. The RMB peg to the USD cuts China off in part as the third world’s top supplier of goods and services.
We need to focus on the IRA affects on inflation to understand best timing for investing.
I think the reason financial writers ignore I-Bonds, despite their obvious advantages, is that the maximum annual investment of $10,000 is frankly too small for many heavy hitters to bother with. That said, I’ve maxed out our limit for the past couple of years as the rate of return is better than a sinking stock portfolio
A person can place an I-Bond into a “gift box” on TreasuryDirect. The recipient doesn’t have to open it right away but can wait until next year.
DH and I have already maxed out our I-Bond purchases for 2022. But we can gift I-Bonds to each other since we have different Social Security numbers. We expect the rate to decline since the Fed is working so hard to quell inflation. By buying our “gift” I-Bonds in October 2022 we will lock in the higher rate which we expect to go down on November 1 with the rate reset. Then we can open our “gifts” in 2023. That will count against the maximum in 2023 (we won’t be able to buy more in 2023).
Process is well explained on the above link. Both my wife and myself are maxed for this year nd I tried the deferred gift idea, but it didn’t work for me and I got a message that I had exceeded the allowed amount. I’m not sure whether they were referring to the gifter or giftee.
I think it was Yogi Berra (or maybe Einstein) who said “In theory there is no difference between theory and practice, but in practice there is”.
I think it was a concept that “should” work, but the Treasury Direct software doesn’t anticipate the strategy.
A few weeks ago, I sent them an email. They returned my e-mail to their “customer support” department saying it would be 13 weeks before they could answer it. On this matter, they returned my email saying they were too busy and were no longer answering emails.
Their office is open from 8:30AM to 5PM. A phone call at 3:30PM got a message that they already had people on hold until the end of the day and to try back another day. So today I called at 9AM and was told “You call is very important to us, your expected wait time is over two hours”. Maybe I’ll time things to ring their phone at 8:30:01AM and only have to wait 30-30 minutes - we’ll see.
So many investors are scrambling to buy inflation-adjusted bonds, known as I Bonds, which pay a 9.62% interest rate if purchased by Friday, that the Treasury Department said it cannot guarantee orders made before the deadline will be processed in time.
The government’s Treasury-Direct site, the only place investors can directly purchase securities such as I Bonds and Treasury bills, this week became one of the most visited federal sites on the web, officials said, and has experienced intermittent outages.
I’ve made I-bond and T-note purchases on Treasury Direct over the last few years, never had an issue. I can’t even get logged onto their website today, wanted to see if an order I previously placed for today got filled.
Their site has always felt a little clunky, but not a big deal to sort/sift thru it. But if they have been having issues for over 24 hours, then I might need to rethink my plan to buy T-bills instead of CD’s. I print out order/purchases, so not worried about getting took, but it’s not really worth a whole lot of extra hassles. (The main benefit is no State tax on T-bill/note interest)
Very true. One function that I cannot locate anywhere on the site is how to update my password. I created (as I usually do) a very long complex password for my TD account. Most places allow you to paste your password into their web page, on TD, you need to type each character - it’s quite prone to error on my part due to the complexity and length of my password. I’d like to change it to something a bit less complex but cannot locate the link to update my password.
I’m going to try to log in again first thing tomorrow AM EST. I’d say I won’t be competing with (m)any West Coast folks at that time.
I remember reading somewhere, a few years ago, that you never want to lose/forget your TD pw. I haven’t tried updating mine, feel good with the uniqueness of it, so far. If you ever do find out how to update your pw, please post it here. ( thanks in advance )
I updated my password on TreasuryDirect because my mouse click often doubles the letter when I type that infernal screen keyboard. Then I have to start over! Drat!
Type in your account number and password. You will get a screen showing your contact info. Verify. That will take you to your Account Summary. The web site just locked up on me but the password should be in either the “ManageDirect” or the “Account Info” tab.
Ironic that Treasury reduced the maximum investment amount for a savings vehicle intended to counter inflation. Treasury should be increasing the maximum in the same way that other limits are adjusted for inflation (e.g., annual 401k contribution limits).