Question to those in the know about bonds.

Need to fatten my AA mileage account but would also like to get the best possible interest.

Are there any opinions out there about the prospect of rates improving for the May issues? And if planning to cash out in less than a year, are I bonds still the best choice?

Thanks in advance for sharing your knowledge and opinions.

[This message has been edited by sk3 (edited 03-14-2002).]

VolleyballFerd

Posts: 91
From: Santa Monica, CA, USA
Registered: Jun 2001
posted 03-12-2002 05:29 PM
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quote:
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Originally posted by sk3:

Are there any opinions out there about the prospect of rates improving for the May issues? And if planning to cash out in less than a year, are I bonds still the best choice?
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You might want to check this link.

http://www.savingsbonds.gov/sav/sbieevsi.htm

If I understand it correctly, buying before or after the end of April really won't make a difference, because the rate will be adjusted then regardless. If you buy an I bond now, you will get the current interest only until the rate changes.

I think the most important thing is (whether you buy I or EE) is to time the purchase within the month. Always buy at the end of the month - but not the last day - to get bonds issued for that month. And if your credit card closes late in the month, make sure it is after the closing date. This gives you close to 2.5 months from the issue date (March 1) to earn interest before you have to pay for the bonds.

I certainly don't know if I bonds will remain with a higher rate than EE come April - but I would guess they will. If you want a lot of them, you have a higher maximum purchase of I bonds.

alexwuk

Posts: 32
From: LON/LCY - LH Silver, BA Silver
Registered: Feb 2002
posted 03-12-2002 05:48 PM
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quote:
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Originally posted by sk3:
Question to those in the know about bonds.
Need to fatten my AA mileage account but would also like to get the best possible interest.

Are there any opinions out there about the prospect of rates improving for the May issues? And if planning to cash out in less than a year, are I bonds still the best choice?

Thanks in advance for sharing your knowledge and opinions.


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US High Yeild is looking very encouraging. If the recovery is indeed a V-shaped one, current default rates show BB or lower rated Bonds (Junk) to be an attractive investment. Just make sure the company doesn't go bust
Regards,
Alex


Plato90s

Posts: 2077
From: Boston, MA AA EXP, UA 2P, HHonor Gold, SPG Gold
Registered: Feb 2000
posted 03-12-2002 06:32 PM
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Both the fixed and the inflation rate will change on May 1st.
Last November, the fixed rate was adjusted downwards by 1%. So during the same 6 month period, people who bought before Nov. 1st got an additional 1% interest.

If you think that the Treasury will adjust the fixed rate downwards, buy before May 1st to lock in the higher fixed rate.

SameerUCLA

Posts: 80
From: Los Angeles, CA; temporarily in Pensacola Beach, FL; no, I have NO elite status in ANYTHING yet - but working on AA Lifetime GLD!
Registered: Dec 2001 posted 03-12-2002 08:51 PM
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I would imagine that with the economy recovering, the Fed is done lowering interest rates... so the rates right now are likely not to worsen.

- Sameer

johnep1

Posts: 335
From: Bethesda, MD, USA
Registered: Sep 2001 posted 03-13-2002 01:28 AM
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I believe that now is a terrible time to buy bonds. Rates are the lowest they've been in a long time. Also, Greenspan declared last Wednesday that we are out of the recession. That means that the economy will likely pick up within the next year. Since interest rates are weakly procyclical with respect to the health of the economy, rates are likely to rise soon after the economy starts its recovery. Also, Greenspan might be tempted to raise rates as a defensive measure before the economy takes off too much.

I would recommend that you keep your money in bonds if you are getting a good rate. Otherwise, wait a while before buying any.

This information might all turn out to be incorrect.

dgordon

Posts: 1526
From: Chicago, IL
Registered: Apr 99 posted 03-13-2002 09:47 AM
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The question is really whether or not the fixed portion will change and I don't know how you would find that out - what factors determine it. I am still getting a good rate on the bonds I bought a few years ago because the fixed rate is higher. I think it only matters if you are planning to keep the bonds for 5 years. If you are planning to cash them in at the 6 month mark I don't think it matters that much because you will be forfeiting 3 months interest anyway and the sooner you get the purchase made, maybe the better. You could hedge your bets by buying half of what you want now (close to but before the end of March) and buy the other half after May 1st. That way if you only want to cash in some but not all you could cash in the ones that have the lower fixed rate.

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DtG

Kim

Posts: 27
From:
Registered: Dec 1999 posted 03-13-2002 11:31 AM
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How does the semi-annual interest change affect I Bonds that I already own? If I bought I Bonds back in Nov 2001 with an interest rate of 4.40%, and the interest rate for new I Bonds in April 2002 goes down, will my November I Bonds still earn 4.40% or will it earn the new April interest rate?

sk3

Posts: 35
From: Los Angeles, CA USA
Registered: Jan 2002 posted 03-13-2002 04:05 PM
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my question was aimed at trying to discern if the fixed rate portion of the I Bond might possible go up do to the turn in the economy and that to wait til May might mean greater interest earned. I will be cashing out in 6 months, but would still appreciate as much interest as possible. I asked this question to those that buy EE and I bonds on a regular basis for mileage accrual thinking that they may be more informed than the average Joe, but I realize this isn't a website for financial planners.

Thanks again to you all.

Frequent Freak

Posts: 432
From: ORD... 1P... 33778 miles and counting
Registered: Apr 2001 posted 03-14-2002 08:21 AM
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The fixed-rate portion will almost certainly go down on May 1, not up. The fixed portion is based on the avearge spread of short-term Treasuries over the CPI from the preceding six months, and this spread has narrowed to pretty much zero (arguably it has even gone negative).

Count on the Fed to be a bit more tolerant of inflation than it usually is over the next year or so, while it does everything within its power to get the economy fully recovered. This will work to keep the fixed portion of I-bonds low, but any inflation from here will cause the floating portion to increase. So the current 2% + CPI is still a good deal.

I-bonds are still the best place for long-term cash. I wouldn't sell stocks to buy I-bonds, but they beat the pants off any CD or money market you can find.

Matthew53

Posts: 8
From: New Haven, CT, USA
Registered: Jan 2002 posted 03-14-2002 08:43 AM
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Frequent Freak: You write: "The fixed portion is based on the avearge spread of short-term Treasuries over the CPI from the preceding six months. . . ."

What is your source?

sk3

Posts: 35
From: Los Angeles, CA USA
Registered: Jan 2002 posted 03-14-2002 09:13 AM
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Thanks Frequent Freak for the info - this is very helpful.

There is some useful information in here. But how do I contact any of the posters, as TravelAssist has reposted the threads and removed the emails of the posters?

Search a username and for most there will be an e-mail address elsewhere. I wrote the moderator saying that I thought this belonged right here - not in OMNI, and I guess they listened. The fixed portion remains the same for the life of the bond. The inflation rate portion changes every six months. It's been going down every six months, and given the economy, I don't think it will go back up so fast, but I'm not a "finance" person.

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DtG

That or simply contact one of us - we're actually here to help and can furnish an email address to you for any member who has elected to allow it to be know. Who would you like to contact?

I'm particularly fond of Series I bonds, but there is an item worth noting:

1) CPI for Nov-Jan was zero. The consensus number for Feb CPI is 0.2%. It looks like the inflation number used next quarter might be only 0.5% or lower. (They use the previous 6-month inflation number to dtermine the rate for the next 6 months.)

Now for the good news:

1) Series I bond holders pay no taxes until they are redeemed and pay no state taxes at all. (In my state, that's worth about 0.25% alone.)

2) Series I and EE "bonds" are, in fact, not really bonds at all. Why? Because after 6 months, they can be redeemed at any time for the accreted amount of the bonds (less a 3 month interest penalty).

You get the best of both worlds. Your interest rates are determined by long-term rates (usually higher than short-term), but after 6 months the instruments can always be redeemed. If the rate on the bond is unattractive versus the bank or a new Series I bond, cash 'em in and put your money to better use.

This "option value" is quite significant and is probably one of the reasons that the government limits purchases to $30,000 face.

3) The miles (or cashback) feature of the card used to purchase the bonds adds about 2% to the yield of the bonds. That alone is better than the money market rate I currently earn.

Thanks for the help Randy

I used search as suggested.