The Unknown Ideal

Sorry it has been so long, gentle reader, my tender friend. I'll save my excuses for my coming appointment at the gates of heck.

Meanwhile Tom Adams has been kind enough to spell out what this morning's CPI report means for Series I savings bond investors:

December's CPI of 201.8 was up 2.5% from a year ago and it was up .15% from November's level. However, it's still below September's 202.9, which is the number I bond investors watch. That's because the I bond inflation component is based on the level of the CPI in March and September.

Investors already seem worried about the possiblity. Since the government's fiscal year began in October, new investments in Savings Bonds have barely recovered from the all-time lows seen over the summer.

Posted by The Unknown at 12:49 PM | Permalink

Tom Adams has calculated that, come the semi-annual savings bond rate adjustment November 1, the inflation component of the I Bond yield will be 3.1%, so judging what Treasury decides to do with the fixed component of the yield, new I Bonds will likely yield between 4.1% and 4.5% (that last part is me talking). Older I Bonds will yield anywhere between 4.1% and around 6.7%, depending on what the fixed yield component was when they were purchased.

Says Adams:

The Consumer Price Index fell during September to 202.9 from August's 203.9. The Series I Savings Bond inflation component is based on the level of the CPI in March and September. In March the index was at 199.8. This means the next I bond inflation component will be 3.10%.

To determine what your own I bonds will earn during their next six-month rate period, you have to add their fixed base-rate to 3.10%. The fixed-base rate for your I bonds can be anywhere between 1.0% and 3.6%, depending on when the I bond was issued.

Meanwhile, older variable rate EE savings bonds (those issued between May 1997 and April 2005) seem on track to earn about 4.4% come the November readjustment, given the recent relatively high yields on the 5 Year Treasury (these older EE savings bonds are pegged to 90% of the fiver's average yield for the six months preceding the readjustment).

Where Treasury will set the rate for new fixed-rate EE bonds is anybody's guess.

Posted by The Unknown at 10:10 AM | Permalink

Tom Adams opined, following this morning's CPI report that Inflation-linked Savings Bonds, known as I Bonds will be bouncing back from their current 2.41% rate to yield somewhere in the neighborhood of 5 or 6% come the November adjustment.

This morning's CPI release for August showed inflation up 3.8% from a year ago. We now have CPI data for five of the six months between March and September that will be used to calculate the next I bond inflation component, which will likely end up somewhere between 4% and 5%.

Add that to the fixed base-rate of your own I bonds to determine what rate you'll get for the next six-month rate period. New I bonds will likely have a fixed base rate in the 1.0% to 1.4% range, for a composite rate that's most likely somewhere in the 5% to 6% range.

Posted by The Unknown at 10:27 AM | Permalink

Some older issues of I Bonds will pay as much as 9.4%. More about this later.

Happy Fed Watch, by the way. Today's ISM manufacturing report practically ensures further rate increases beyond today's hike to 4%.

Posted by The Unknown at 7:50 AM | Permalink | Comments (1)

As noted previously, the past six months of consumer inflation imply that new issue I Bonds will probably be yielding at least 6.7% for the next six months, come Tuesday, and some older issues will be paying around 9.4%.

Tom Adams thinks the rates will be even higher.

Some of the older EE Bonds, which before May 2005 were pegged to 90% of a six-month average of the Five Year Treasury Note yield, will probably adjust to around 3.6% on Tuesday, given that the average close of the Fiver's yield for the past six months has been 4%. I'll continue to hold my old EE Bonds, whose earnings are still compounding nicely enough without losing principle, but I won't be buying any new ones. The earnings on these bonds haven't beaten inflation over the past year, but the long-term record of EEs in preserving purchasing power has been good.

Treasury may set the new issue EE Bond yields a little higher than 3.6%, but the newer EEs, whose arbitrarily set rates do not adjust over the life of the bond, strike me as a pretty bum deal in a rising interest rate environment. Let foreign central banks loan the Federal Government money for extended periods at low interest rates. That's not your job.

Posted by The Unknown at 11:01 AM | Permalink | Comments (2)

Series I Savings Bonds are indexed to inflation, and pay rates that are adjusted every six months. They don't trade on the open market, and unlike open market bonds, they don't lose value when interest rates go up. They're good for small savers because you can buy them in increments as small as $50, and you can have the purchases auto-debited from bank accounts if you like.

And if the consensus is right about Friday's Consumer Price Index (CPI) report, brand new I Bonds are likely to start paying at least 6 percent come November 1, when rates are adjusted. Without getting into the boring explanation of how I Bond rates are adjusted by Treasury, we'll say that there are two wildcards going into the November rate adjustment: the fixed component and the inflation component.

Treasury may just lower the current 1.2% fixed component to 1%, so it won't have to pay small savers so much interest to finance the gargantuan Bush/Frist/Hastert deficits, but even if Treasury does that, if the inflation forecast comes through, buyers of new I Bonds will still probably earn a 6% compound interest rate for the next six months. Otherwise, 6.23% is the new rate.

Of course if the top-line CPI isn't so bad as we are all thinking it is while we buy groceries and fill gas tanks, the rate could be a bit lower. For example, if the semi-annual inflation rate turns out to be 2.3% instead of the expected 2.5%, the I Bond buyer will only earn 5.8%. But guess what? That's a hell of a lot more than the big shots (and the Chinese central bank) are earning on Ten-year Treasury Notes. And it's also a lot more than the S&P 500 stock index has earned so far this year.

The really good news will probably be for holders of I Bonds that were purchased when the fixed component, which lasts for the life of the I Bond, was higher, say 2%, 3% or even 3.6%. Those Savings Bond holders may find themselves earning as much as 8.6% on their homely old I Bonds, at least for the next six months.

The bad news is, of course, that this is all driven by inflation, the erosion of our purchasing power. There are also some serious concerns about how the Labor Deparment computes the Consumer Price Index, concerns that DOL underestimates the actual impact of inflationary pressures upon Americans.

I Bonds may not be for everybody, but they have done me no wrong. Unlike the other assets in my portfolio, there has not been a single investment period in which both the nominal and "real" (as conventionally measured: as against CPI) values of my I Bond holdings have not gone up.

More information about how I Bonds work (minimum holding periods, rate calibrations, investment minimums and maximums) is at Treasury Direct.

The Consumer Price Index for September 2005 will be announced Friday. If it is 0.9% over August, we will have a semi-annual inflation rate of 2.5%. Treasury will announce the new fixed and composite rates for I Bonds on November 1. We'll be back on this subject then.

Posted by The Unknown at 4:10 PM | Permalink

My strategic asset allocation is a bit of of mishmash of models provided by Burton Malkiel in the last edition of A Random Walk Down Wall Street and Jeremy Siegel in The Future for Investors, and some independent "efficient frontier" analysis, along with considerations forced by my own personal circumstances.

As we head into another market week, with oil prices backing off a bit, and some relief over Rita's relative mildness (vs. Katrina) abutting a dour and unsettled national mood (and with reads on the real estate market coming Monday and Tuesday), I'm happy to put forward for scrutiny where I am and where I want to be in my personal investments:

	         9/25/05	 target
US Stocks	         40.41%	38.00%
reits	          9.67%	10.00%
int'l	         25.12%	26.00%
prv stock	          3.53%	 3.00%
bonds	         17.86%	22.00%
cash	          3.41%	 1.00%

Perhaps this pre-formatted text won't please all browsers, but you get the idea, and maybe that will do until I decide to produce some nice pie-charts for the next update.

So what about it? The private stock is an accident of my employment. My 401k is my largest pot, and it's actively managed with a home-country bias (a tiny 10% allocation of the stock portfolio dedicated to international equities), and less of a regard for the diversification and income benefits of REITs than my strategy indicates. So in my IRAs, I'm buying chiefly international stocks (split amongst EAFE regions and emerging markets) and REITs. Note that when possible, my various asset pots are invested in low-cost indexed mutual funds or ETFs.

My bond portfolio gets really chump-changy, but its composition pleases me greatly in this environment when open-market bonds are poised to lose value as interest rates rise: more than a third of my bond portfolio is in US Savings Bonds, split between old-style floating EE bonds and the newer inflation-indexed I bonds. The I bonds, in particular, are paying very well these days. And the principal of these savings bonds, though it may succumb to other threats, is not subject to the whims of the bond market.

I'll unveil another asset allocation strategy, from the portfolio of a relative with a less complex circumstance, hence a more versatile strategy, later.

Posted by The Unknown at 6:44 PM | Permalink

Online banking pioneer Ing Direct has turned five years old. And they have bumped their Orange Savings Account rates up to 3.4%, lagging the Fed by 35 basis points.

Upstart Emigrant Direct is now offering a bold 4% for their own no-fee savings accounts.

Q: With FDIC-insured rates like this, and with five- and ten-year Treasury note rates bracketing 4%, how much sense does it make to buy any of of what our President likes to call "worthless IOUs?"

Posted by The Unknown at 10:58 AM | Permalink