IBond Alternatives

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bpkasl
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IBond Alternatives

Post by bpkasl »

What is an example of an IBond alternative through Vanguard when your assets are all in a retirement 55/45 AA account?
dbr
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Re: IBond Alternatives

Post by dbr »

bpkasl wrote: Fri Jan 21, 2022 7:03 am What is an example of an IBond alternative through Vanguard when your assets are all in a retirement 55/45 AA account?
In general if you can't or don't want to hold I bonds then a TIPS bond fund also offers inflation indexing of the principal. For long term investing that is a possibility. If you are going to get wrapped up in short run dislocations related to current real yield on TIPS and so on, then there is no exact alternative. It might be fair to say that I bonds are the cash of real return assets and TIPS are the bonds of real return assets, with all the differences that apply. In a given period of time bonds can return less than cash but over long times return more. No one can say what history will deliver. You aren't going to be able to run out today and get the same deal in TIPS as you can in I bonds for the moment. What you can do is invest as much as you want in TIPS when you want to.
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nisiprius
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Re: IBond Alternatives

Post by nisiprius »

Just be clear on one thing. There is nothing else that is a true I Bond alternative. There may be things that are as good or better for your needs. But series I savings bonds are absolutely unique. There's nothing else like them.

TIPS are NOT like I bonds.

The biggie is that I bonds do not have interest rate risk, and TIPS do. If you hold a series I savings bonds, its dollar redemption value never goes down ever. (With some theoretical rare possible exceptions, its inflation-adjusted value never goes down either.) It is cashlike. Once you've waited out the first year, you can redeem the bond any time you like for the fixed-plus-inflation amount, regardless of what interest rates do.

TIPS funds do have short-term fluctuations, like other bond funds. As with all bond funds, you can minimize interest rate risk by holding for a period of time roughly similar to the bond fund's duration. But there have been many times when you could have put money into, say, the Vanguard short-term TIPS index fund, VTIPX--details--and had less money a year later. Not a lot less, but less. This can't happen with series I savings bonds.

The reason why this is possible is that series I savings bonds are not marketable securities. They can't be traded. You can't hold them in a brokerage account. Nobody can create an I bond ETF. (And for the ingenious economist types, you cannot legally use them as loan collateral, either). The only way you can get money from an I bond is to redeem it at the Treasury according to the Treasury's rules, and the rules simply specify fixed interest rate, plus inflation, minus a small penalty for the first five years. Interest rates are not part of the formula.

(Added: but CletusCaddy's remark, below, is correct. The "fixed rate" is fixed for an individual bond once bought, but is changed every six months and tends to reflect current rates.)

Because they aren't marketable, as far as I know they can't be held in street name, and there is no way to hold them in a tax-advantaged account. This is partly offset by the fact that you do not need to pay taxes until you redeem the bonds, and also by the fact that they are tax-exempt if used to pay for qualified educational expenses.
Last edited by nisiprius on Fri Jan 21, 2022 9:54 am, edited 5 times in total.
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Re: IBond Alternatives

Post by CletusCaddy »

nisiprius wrote: Fri Jan 21, 2022 9:45 am Interest rates are not part of it.
Of course interest rates influence how much I bonds are paying. The only unique feature of I bonds is that it can’t go down in value.
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Re: IBond Alternatives

Post by dbr »

nisiprius wrote: Fri Jan 21, 2022 9:45 am Just be clear on one thing. There is nothing else that is a true I Bond alternative. There may be things that are good or better for your needs.

TIPS are NOT like I bonds.

The biggie is that I bonds do not have interest rate risk, and TIPS do. If you hold a series I savings bonds, its dollar redemption value never goes down ever. (With some technicalities, its inflation-adjusted value never goes down either.) It is cashlike. Once you've waited out the first year, you can redeem the bond any time you like for the fixed-plus-inflation amount, regardless of what interest rates do.

TIPS funds do have short-term fluctuations, like other bond funds. As with all bond funds, you can minimize interest rate risk by holding for a period of time roughly similar to the bond fund's duration. But there have been many times when you could have put money into, say, the Vanguard short-term TIPS index fund, VTIPX--details--and had less money a year later. Not a lot less, but less. This can't happen with series I savings bonds.

The reason why this is possible is that series I savings bonds are not marketable securities. They can't be traded. You can't hold them in a brokerage account. Nobody can create an I bond ETF. (And for the ingenious economist types, you cannot legally use them as loan collateral, either). The only way you can get money from an I bond is to redeem it at the Treasury according to the Treasury's rules, and the rules simply specify fixed interest rate, plus inflation, minus a small penalty for the first five years. Interest rates are not part of it.
Well said. What is at issue here is what the investor is trying to do. Today most people asking that question are trying to find a way to invest cash at 7% interest. Nothing else does that and I bonds don't do that either because that interest rate is variable.
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Re: IBond Alternatives

Post by Da5id »

nisiprius wrote: Fri Jan 21, 2022 9:45 am Just be clear on one thing. There is nothing else that is a true I Bond alternative. There may be things that are as good or better for your needs. But series I savings bonds are absolutely unique. There's nothing else like them.

TIPS are NOT like I bonds.
I agree with all the differences you give. And many are quite significant. Nonetheless, I'd say TIPS are "like" I-bonds. The most important property that they both have in my portfolio is that they are both inflation indexed fixed income products. I'd argue that that similarity makes them more "like" than any other part of my holdings. I have an allocation that is "TIPs + I-bonds", and that seems sensible to me.
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Re: IBond Alternatives

Post by smectym »

Da5id wrote: Fri Jan 21, 2022 12:19 pm
nisiprius wrote: Fri Jan 21, 2022 9:45 am Just be clear on one thing. There is nothing else that is a true I Bond alternative. There may be things that are as good or better for your needs. But series I savings bonds are absolutely unique. There's nothing else like them.

TIPS are NOT like I bonds.
I agree with all the differences you give. And many are quite significant. Nonetheless, I'd say TIPS are "like" I-bonds. The most important property that they both have in my portfolio is that they are both inflation indexed fixed income products. I'd argue that that similarity makes them more "like" than any other part of my holdings. I have an allocation that is "TIPs + I-bonds", and that seems sensible to me.
True that TIPS share some common features with I bonds. Still, nisiprius is right that what sets I bonds apart makes them unique. If an investor with $10,000 were struggling with whether to buy I Bonds or TIPS, I wouldn’t advise “Oh, either way, both great…they both do the same thing basically.” I’d say, “Buy I bonds, not TIPS.”
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Re: IBond Alternatives

Post by Mel Lindauer »

smectym wrote: Fri Jan 21, 2022 10:47 pm
Da5id wrote: Fri Jan 21, 2022 12:19 pm
nisiprius wrote: Fri Jan 21, 2022 9:45 am Just be clear on one thing. There is nothing else that is a true I Bond alternative. There may be things that are as good or better for your needs. But series I savings bonds are absolutely unique. There's nothing else like them.

TIPS are NOT like I bonds.
I agree with all the differences you give. And many are quite significant. Nonetheless, I'd say TIPS are "like" I-bonds. The most important property that they both have in my portfolio is that they are both inflation indexed fixed income products. I'd argue that that similarity makes them more "like" than any other part of my holdings. I have an allocation that is "TIPs + I-bonds", and that seems sensible to me.
True that TIPS share some common features with I bonds. Still, nisiprius is right that what sets I bonds apart makes them unique. If an investor with $10,000 were struggling with whether to buy I Bonds or TIPS, I wouldn’t advise “Oh, either way, both great…they both do the same thing basically.” I’d say, “Buy I bonds, not TIPS.”
And that's what I'd say, too.
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Re: IBond Alternatives

Post by Da5id »

Mel Lindauer wrote: Sat Jan 22, 2022 2:10 am
smectym wrote: Fri Jan 21, 2022 10:47 pm
Da5id wrote: Fri Jan 21, 2022 12:19 pm
nisiprius wrote: Fri Jan 21, 2022 9:45 am Just be clear on one thing. There is nothing else that is a true I Bond alternative. There may be things that are as good or better for your needs. But series I savings bonds are absolutely unique. There's nothing else like them.

TIPS are NOT like I bonds.
I agree with all the differences you give. And many are quite significant. Nonetheless, I'd say TIPS are "like" I-bonds. The most important property that they both have in my portfolio is that they are both inflation indexed fixed income products. I'd argue that that similarity makes them more "like" than any other part of my holdings. I have an allocation that is "TIPs + I-bonds", and that seems sensible to me.
True that TIPS share some common features with I bonds. Still, nisiprius is right that what sets I bonds apart makes them unique. If an investor with $10,000 were struggling with whether to buy I Bonds or TIPS, I wouldn’t advise “Oh, either way, both great…they both do the same thing basically.” I’d say, “Buy I bonds, not TIPS.”
And that's what I'd say, too.
I'd agree with you both in a vacuum. Currently at least, TIPs may again some day have positive real yields that make them competitive. And if better yielding TIPs would lead you to (sometimes at least) suggest TIPs over I-bonds in the future, that reinforces my view that they are "like" more than not.

In the context of this thread, suggesting I-bonds over TIPs would actually not be useful advice though. Apparently the OPs assets available to invest are located in a *retirement* account. Where one can't buy an I-bond. If one wants something that is comparable to an I-bond, but must be placed in a retirement account, seems like a TIPs fund is perfectly reasonable choice. And would for the purposes of their portfolio serve as a similar product to an I-bond if what they are looking for is an inflation indexed fixed income product.
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Re: IBond Alternatives

Post by dbr »

Da5id wrote: Sat Jan 22, 2022 8:04 am

In the context of this thread, suggesting I-bonds over TIPs would actually not be useful advice though. Apparently the OPs assets available to invest are located in a *retirement* account. Where one can't buy an I-bond. If one wants something that is comparable to an I-bond, but must be placed in a retirement account, seems like a TIPs fund is perfectly reasonable choice. And would for the purposes of their portfolio serve as a similar product to an I-bond if what they are looking for is an inflation indexed fixed income product.
That was the context of my answer as well. Otherwise there is the simple answer that there is no alternative. But to that we can also answer "so what?" For a long term retirement investor there is no special need to jump all over I bonds inspired by someone posting "I bonds paying 7%"

Surely if a person wants a couple of $10K in I bonds today they can manage that in a taxable account.
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