Treasury Inflation-Protected Securities

• Buyers had a pay a big premium for the 1.00% coupon rate, about $110.67 for $101.65 of value, when accrued inflation is added in.
• The inflation breakeven rate came in at about 1.83%, 31 basis points higher than at the originating auction in February.
• The trend in breakeven rates indicates rising expectations for inflation.

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• The data support a drop to a 0.0% fixed rate, but wouldn’t the Treasury be sending an awful message?
• You can buy now to lock in the I Bond’s current 0.1% fixed rate, or wait until November 1 and get the higher variable rate immediately.
• A bigger question: Does a fixed rate of 0.1% really matter?

A lot of readers have been asking me why I think the Treasury could drop the I Bond fixed rate to 0.0% on November 1. I’d say if it were purely a data-driven decision, the Treasury will go with a 0.0% fixed rate. But I am hoping it will stick with 0.1% as a nod to small investors who rely on I Bonds for inflation-protected savings.

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• This variable rate will be the highest for an I Bond in 5 years.
• All investors in I Bonds will get the new variable rate for six months, the timing depends on the month the I Bond was purchased.
• One question remains: What rate will the Treasury set for the fixed rate on November 1?

Prediction: I Bonds are going to a hot investment from November 2016 to April 2017. They will have variable rate of 2.76% over six months. Even if you earned zero the next six months, that’s a return of at least 1.37% in one year, beating all super-safe investments.

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Also, I have updated my Tracking Inflation and I Bonds page with this new information.

And here are the new TIPS inflation indexes for November.

• CUSIP 912810RR1 has a coupon rate of 1.00%, but the yield is going to come in much lower, meaning buyers will have to pay a high premium.
• 30-year TIPS are highly volatile. Investors at the original auction in February have seen their investment climb more than 10% in eight months.
• The inflation breakeven rate of 1.77% is attractive, but it has been climbing off deep lows seen earlier this year.

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• Buyers will pay about $101.11 for $100.40 of value, after accrued inflation is figured in.
• The Fed’s decision to hold off on an interest rate increase drove TIPS yields lower.
• The inflation-breakeven rate of 1.56% makes this an attractive issue for big-money investors.

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Sorry about my delay in posting this. The news cycle is a bit hectic in my home town of Charlotte these days. But I am safe, no problems. Just sad for my city.