Investing in Bonds

IMO, closed-end funds offer some excellent opportunities especially when end-of-year tax loss selling results in fund discounts larger than the fund's average. You might check out

http://www.cemfo.com/orphanage.html

for some ideas. I don't think many closed-end funds work well for short-term trading though. The bid/ask spreads tend to be high.

Interesting thread. Thank you!
 
Quote from Bob111:

I bonds @ 6.73

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_i_rates.htm

very nice, if you compare them with AAA corporates. and terms are better. can i buy them thru IB?
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I Bonds are a great investment, but I think that TIPS are better yet.

TIPS and I bonds have very similar interest paying mechanisms. That is, both have a fixed interest component and inflation compensation component. Both inflation compensation components are tied to the CPI therefore their applicable returns are very similar. However, the fixed component of the I-bond is 1% where the fixed component of the TIP is about 2%. Therefore the TIPS is a better deal.

One problem with TIPS is that the interest is taxable in the year it is earned even though the inflation component is not paid to you until maturity. So it might be better to hold TIPS in an IRA.

BTW, you cannot buy I bonds through IB or any broker that I know of. Also, and hard to believe, you cannot buy treasuries yet through IB, only corporate bonds are available. I understand treasuries are coming, but not there yet.

Don
 
Quote from andrasnm:

in rising interst rate market I would wait to rates peak before I touch bonds...
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Yes, that might be good advice, but if you buy short term bonds and hold them to maturity you cannot lose money. Longer term bonds don't have much better yield anyway.

Don
 
Don:

If you definitely want TIPS, the easiest and most diversified way to go is simply purchasing i-shares TIPS ETF.

Keep in mind...you are exchanging potential partial inflation hedge against slightly longer term (intermediate) exposure on the yield curve.

Very short treasuries (non-inflation protected) may yield even more right now.

IMHO, agency bonds give a little more juice in the yield without any real added risk.
 
2 other big differences between the I Bonds and TIPS. Tips have fluctuating principal. I Bonds do not. Secondly, I Bonds have a $30k purchase limit per person per year, TIPS do not.

Quote from Don87109:

I Bonds are a great investment, but I think that TIPS are better yet.

TIPS and I bonds have very similar interest paying mechanisms. That is, both have a fixed interest component and inflation compensation component. Both inflation compensation components are tied to the CPI therefore their applicable returns are very similar. However, the fixed component of the I-bond is 1% where the fixed component of the TIP is about 2%. Therefore the TIPS is a better deal.

One problem with TIPS is that the interest is taxable in the year it is earned even though the inflation component is not paid to you until maturity. So it might be better to hold TIPS in an IRA.

BTW, you cannot buy I bonds through IB or any broker that I know of. Also, and hard to believe, you cannot buy treasuries yet through IB, only corporate bonds are available. I understand treasuries are coming, but not there yet.

Don
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Quote from craigatelite:

Don:

If you definitely want TIPS, the easiest and most diversified way to go is simply purchasing i-shares TIPS ETF.

Keep in mind...you are exchanging potential partial inflation hedge against slightly longer term (intermediate) exposure on the yield curve.

Very short treasuries (non-inflation protected) may yield even more right now.

IMHO, agency bonds give a little more juice in the yield without any real added risk.
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"If you definitely want TIPS, the easiest and most diversified way to go is simply purchasing i-shares TIPS ETF."

I view these I shares the same as a TIPS bond fund. That is there is interest rate direction risk. Buying short term TIPS in the secondary market eliminates this risk.

"Very short treasuries (non-inflation protected) may yield even more right now."

More than what? I can't see you meaning more than TIPS unless you see inflation falling significantly. BTW, broker commissions reduce the yield significantly on very short term bonds.

"Keep in mind...you are exchanging potential partial inflation hedge against slightly longer term (intermediate) exposure on the yield curve."

You might be talking over my head on this, but I am looking at buying TIPS with 1 year left to maturity. Perhaps this softens your above "yield curve" concern. Again, you might be over my head.

"IMHO, agency bonds give a little more juice in the yield without any real added risk."

Good point, although if agency bonds are state taxable then they are not much better than treasuries. Although in an IRA they would clearly be better.

Thanks,
Don
 
Quote from USAtrader:

2 other big differences between the I Bonds and TIPS. Tips have fluctuating principal. I Bonds do not. Secondly, I Bonds have a $30k purchase limit per person per year, TIPS do not.
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Good info, although actually I Bonds have a 60k limit per individual. That is, you can buy 30k paper and another 30k online.

I don't think that TIPS have a fluctuating principle perhaps you mean they have a fluctuating inflation component. If you buy them at auction you cannot lose principle. However, if you buy them in the secondary market you have to pay for the accrued inflation component and if inflation falls you can indeed lose money which then looks an awful lot like losing principle. Although it's hard to believe that net inflation will fall over any period greater than 6 months. So if you buy TIPS with at least a 6 month maturity (I'm looking at 1 year) I doubt that you can lose any of your original investment.

Also I Bonds are not as liquid. You cannot sell them in a secondary market, not can you redeem them prior to one year. Further, if you redeem them prior to 5 years there is a penalty of 3 months interest.

Good stuff.

Don
 
I am looking at some Federal Farm Credit Bank notes which pay about 4.7% for a 1 year maturity. I think that these are agency notes and I am told that they are state tax free.

1) How can I confirm they are state tax free?

2) Any gotchas associated with this type of note?

Don
 
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