Treasury Inflation-Protected Securities

I posted the Treasury’s breaking news this morning at SeekingAlpha.com. Here is the summary:

• I Bonds purchased from May to October will pay a composite rate of 0.26%.
• EE Bonds held for 20 years will still double in value and pay an effective interest rate of 3.5%.
• I Bond investors will get another shot with November’s rate reset.

I think this is pretty good news for investors in I Bonds and EE Bonds. The Treasury didn’t scale back on the terms of either bond.

Read my analysis at SeekingAlpha.com

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?