Some qualifications and updates follow.
I wrote: "If I-bonds or TIPS are held to maturity, unlike typical
bond funds, or even the TIP ETF, no principle can be lost, and they
probably gain a lot of interest. I-bonds can be held beyond maturity
and still earn interest which is tax sheltered until redemption.
Their current interest rate is 4.29 percent." That assumes no
premium or commission is paid, i.e. the bonds purchased through the
treasury, which repays the principle in full at maturity, and pays
interest in addition. The interest rate earned on I-bonds I
purchased around that time, early 2008, has since increased to over
6%. I expect that to drop if/as deflation sets in for a bit. There
has been a huge appetite for US bonds of all types, so they demand a
high premium in the open market presently, so some principle is at
risk if bonds are purchased in that manner.
The current I-bond rates are at:
http://www.treasurydirect.gov/indiv/research/indepth/ibonds/
res_ibonds_iratesandterms.htm
http://tinyurl.com/284vou
The current fixed rate portion (of interest) is only 0.7% (it was
1.2% last year this time.) To that rate the CPI inflation rate is
added (which at the moment is 4.92% annually, giving over 6% interest
when added to a fixed rate of 1.2%.) However, the inflation could in
fact go negative at some point. The interest paid is not allowed
below zero, but I-bonds could actually end up yielding no interest in
a significantly deflating economy. The purchasing value of the bonds
would still be increasing even if that happened. Since some US
bonds are selling at negative yields, a fixed rate of 0.7%, which
will remain in effect for a bit, is a real bargain basement deal in
this kind of market.
Best regards,
Horace Heffner
http://www.mtaonline.net/~hheffner/
