Treasury Inflation-Protected Securities

Sometimes it seems that way. I invested in EE Bonds in 1992 and I’m still holding them. They doubled in value in 12 years, and are still paying 4% interest until they drop dead in 2022.

I admit I haven’t bought EE Bonds since then but when I look at them right now, I’d say they are attractive enough to at least look at as part of your super-safe allocation.

Today, they pay a fixed rate of 0.1%, and that’s the permanent fixed rate. But that’s irrelevant. Under the current EE Bond terms, your original face value automatically doubles after 20 years. That’s equals a 3.5% return, tax deferred. Not exciting, but better than the 2.3% currently paid by a 20-year Treasury, and also better – by 80 basis points! – than the 2.7% currently paid by a 30-year Treasury.

I have been wondering for awhile why the Treasury retains the 20-year doubling term. Is it out of whack with the market. Is it possible the terms of EE Bonds could change?

I’ve posted an analysis of my thinking over at SeekingAlpha.com:

Yes, EE Bonds Are A Good Investment, But If You’re Interested, Buy Them Before May 1

• Update: Treasury Maintains The I Bond’s Fixed Rate At 0.1% from May to October

Yeah, I know. I have been in the wait-until-November camp, especially when it looked like the I Bond’s variable rate could fall to the negative on May 1. Instead it will reset to 0.16%, which was determined by the March inflation report.

The other factor was watching yields on the 5-year TIPS – an investment I consider very similar to an I Bond – dropping into negative real returns. When that happens, even a fixed rate of 0.0% on an I Bond is preferable to a 5-year TIPS. Plus you get tax-deferred income, a flexible maturity date and better protection against deflation.

Today’s auction of a new 5-year TIPS resulted in a real yield to maturity of -0.195%. Do the math. That’s 29 basis points lower than the I Bond’s current fixed rate of 0.10%  So I Bonds have suddenly gotten attractive again, even with a fixed rate of 0.1%.

But here’s the problem: that fixed rate might to drop to 0.0% on May 1. I think the odds are 50/50, and there’s no chance the fixed rate would rise to 0.2% or higher (my opinion – and I don’t work for the Treasury.)

Read my analysis on SeekingAlpha.com:

I Bond Investors: Is April The Month To Pull The Trigger On Your 2016 Allocation?

The Treasury will be creating CUSIP 912828Q60 today – a new 5-year TIPS. The coupon rate and real yield to maturity will be set at the auction.

Here’s how the auction is shaping up:

• The Treasury’s Real Yields Curve page estimates that a full-term 5-year TIPS would have yielded -0.17% at the market close Wednesday. For a new issue, this is the estimate I trust the most, but you have to also add in today’s open market trends.
• Bloomberg’s Current Yields page shows that a TIPS with 4 years remaining to maturity is trading this morning with a real yield of -0.29%. That’s substantially lower than the Treasury estimate, but the term is also one-fifth shorter.
• The Wall Street’s Closing Prices page shows that this 4-year TIPS, which matures in April 2016 – closed Wednesday with a yield of -0.294% and price of about $101.62 for $100 of value. That’s very close to Bloomberg’s real-time quote.
• The TIP ETF is trading down very slightly this morning, which would indicate slightly higher yields.

I can say with certainty that this new 5-year TIPS will get a coupon rate of 0.125%, the lowest the Treasury will go. The yield will end up negative to inflation, I would guess somewhere around -0.20%. So buyers at today’s auction will have to pay a premium for the 0.125% coupon rate.

I would argue that investing in a US Savings I Bond with a fixed rate of 0.1% – available through April 30 – is easily the better investment. Do the math: 0.10% above inflation beats 0.20% below inflation.