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Re: TIPS Yield Turns Negative
I-bonds had been one of the few shelters against inflation. They were a substitute for gold, and you were paid a real rate of return on the bonds. The Federal Reserve Bank issued the bonds in various denominations, and each denomination had a hero on it. So, I collected heads of important American heros. If my memory serves me correctly, Albert Einstein was on one denomination, Rosa Parks on another denomination, Dr. Martin Luther King on another, etc.
Beside heros to collect and a real-rate of return on your savings, i-bonds gave you a PASSIVE income. So you could slooooooooowly grow an income that was legal, tangible in the sense of being something that you could hold in your hand and collect, registered, helpful to the U.S. Treasury, risk-free, real in the sense of being inflation-proof, and the income was TAX-DEFERRED until the bonds matured or were cashed-in prior to maturity.
The risk with i-bonds in the U.S. was slight: 1.) Would the inflation rate be calculated honestly by the govn't? 2.) How much of a real-rate of return would the bonds pay in future? 3.) Would there be a sudden de-valuation or de-monetization of the dollar, for the first-time ever in U.S. history?
When I began collecting i-bonds, they paid 3% real interest, so I earned 3% real return while I slept. All and all, i-bonds were a good investment for savers. If inflation was 5% in the CPI in the U.S. and the i-bonds paid 3%-real, then the nominal rate of return on i-bonds would be 8%. An 8% nominal-return beat most other bonds, and it was risk-free.
And now enters Ben Bernanke and his zero interest-rate policy at the Fed. I-bonds now pay zero real-interest, and inflation is accelerating and therefore eating the principle of the bonds. This makes i-bonds a death-trap for savers. Fed policy is now destroying confidence in the U.S. dollar.Last edited by Starving Steve; October 25, 2010, 11:08 PM. -
Re: TIPS Yield Turns Negative
What does this mean? Does it mean that the bonds are selling for a premium over par?
Does it mean they automatically take principle away, and give it back if inflation prints positive?
So is it , or is not a good time to buy TIPS.
I have been watching ticker STPZ, which are 1 -5 year tips. What does a negative yield mean for this fund?
Its price has really shot up over the last month. Now I am waiting for a price pull back. I have a large cash
postion at ZIRP which is making me nervous.Comment
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Re: TIPS Yield Turns Negative
If my memory serves me correctly, physical i-bonds (meaning the i-bonds sold to you directly by the Fed) NEVER lose principle. But it has been years since I read the Fed's brochure on i-bonds. I think the brochure said that in case of de-flation, the bonds do NOT lose principle.Originally posted by charliebrown View Post
Am I correct, or am I wrong on this? Thanks for the question, Charliebrown, and maybe someone could answer this question at the Fed? Bond funds and derivatives of i-bonds are an entirely different matter. Or are they different?
Alan Greenspan, what were you doing at the Fed when you allowed derivatives to be invented and traded on computers????????????????????????????????????????? ????????????????? Is Sir Alan here to-day in class, or is he at home and sick?
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Re: TIPS Yield Turns Negative
I think we're all thinking too hard about this.Originally posted by charliebrown View Post
Bottom line is, people are willing to pay a premium to have their principal inflation-protected.
There is a whole other can of worms to open if you consider the fact that the government can decide to change the definition of CPI pretty much overnight.
The market has spoken: inflation ahoy.Comment
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Re: TIPS Yield Turns Negative
Not sure.Originally posted by Starving Steve View Post
I-Bonds current rates are 1.74%. A paltry return for the potential inflation risk. There is a penalty for redemption before five years.
Source: TreasuryDirectI Bonds have an annual interest rate that reflects the combined effects of a fixed rate and a semiannual inflation rate.Comment
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