WSJ article: One Safe Haven With Attractive Yields

jkom51October 28, 2008

I thought some folks here might find this article useful:

Here's One Safe Haven With Attractive Yields

WSJournal October 28, 2008

Amid the flight to safety, yields on government securities have plummeted. But there's at least one safe haven that's still paying attractive yields: inflation-linked savings bond, or I Bonds. Starting next month, the yields on these bonds are expected to rise to nearly 5% for at least six months.

The increase in the I Bond's yield is due to the rise in inflation over the past six months, reflecting the summer's higher oil and commodity prices. Based on the change in the consumer-price index from March to September, the new annualized inflation adjustment will be 4.92%, up from the current yield of 4.84%. The overall rate could be higher if the Treasury decides to raise the fixed rate, currently 0%.

I Bond yields have two parts: a fixed rate that lasts for the 30-year life of the bond, and the inflation adjustment. For investors, the most important rate over the long term is the fixed one because it is constant for the life of the bond; the inflation adjustment, by contrast, changes twice a year, on May 1 and Nov. 1.

It's likely, though, that the Treasury Department will leave the fixed rate at zero since the I Bond's yields are already relatively attractive, says Tom Adams, author of the book "Savings Bond Advisor."

For now, savers can lock in close to 5% for at least a year, but only if they buy I Bonds before Nov. 1. If they do, they can get the current rate of 4.84% from October through the end of March 2009, plus the new rate of at least 4.92% for the following six months after that. After that, if inflation is lower, then the yields on I Bonds are likely to fall.

One strategy is to cash in the bonds after their one-year minimum holding period, suggests Mr. Adams. Although investors will pay a penalty of the most recent three months' interest if they sell within the first five years, they will still be earning 3.68% after that penalty if they hold the bonds for 12 months, he says.

Although the Treasury cut the investment limits on savings bonds to $5,000 per Social Security number from $30,000 in January, savers can sock away more by buying different types of bonds or by getting their spouse to buy bonds. Investors can buy up to $5,000 in paper I Bonds from their bank and $5,000 in electronic I Bonds through, for a total of $10,000 each calendar year.

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I'm not crazy about I bonds except for the long term. Selling them on the open market after a year if the interest rate environment or inflation rate changes dramatically may mean taking a loss.

Muni bonds are also attractive now, but the bond market is tricky -- you have to pay attention to too many things like bond ratings (AAA is the best) recall provisions, maturity, etc.) But bond index mutual funds from fidelity or vanguard are a reasonable bet.

    Bookmark   October 28, 2008 at 3:05PM
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Chemocurl zn5b/6a Indiana

Not meaning to highjack, but the 'Big Board' is up over 700 points for today at the moment.


Here is a link that might be useful: MAJOR U.S. INDICES

    Bookmark   October 28, 2008 at 3:56PM
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About today's uptick in the markets: it's too soon to tell if the wide fluctuations we've been having are coming to an end. There may be some more big jolts to the markets: hedge funds collapsing when they have to sell good stocks at a loss to pay for redemptions; credit default swaps ("toxic" holdings); GM bankruptcy; continuing downslide in real estate values; prolonged unemployment of up to 8%; loss of consumer confidence.

There is therefore every reason to believe that this recession will not be similar to recent ones, but will be longer and deeper. That said, the markets will begin a sustained climb when they "anticipate" a recovery within a few months or a year. I do not think we are there yet. But I'm sitting on a pile of cash because I sold half of our stocks about 4 months ago, and I'm gradually putting money back in stocks, a little bit every 3 months or so.

    Bookmark   October 28, 2008 at 11:09PM
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Has Proud's strategy looks to me like a good way to fly.

ole joyful

    Bookmark   October 29, 2008 at 2:51AM
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