TIPS rates plunge

Wednesday, November 28th, 2007
Categorized as: TIPS

The interest rate on TIPS, which is equivalent to the fixed base-rate on Series I Savings Bonds, has plunged in November as investors have moved their money into safer investments. The flight to safety has actually driven 5-year TIPS rates below the 1.20% fixed base rate on I bonds. On Monday the 5-year rate was 0.98%; yesterday it recovered to 1.11%. You can follow daily TIPS rates on the Treasury’s web site.

As recently as July 20 the rate on 5-year and 10-year TIPS was exactly the same, 2.64%. Now the spread between the two is about 50 basis points, as the 5-year rates have fallen much faster than the 10-year rates. You can see a graph of the changes on our page about I bond fixed base rates.

The Treasury would like the I bond rate to be about 100 basis points below the 10-year TIPS rate, but since the rate announcement in November the spread has declined to about 25 basis points.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

6 Comments

On November 28th, 2007 Charles said:

If you cash an I Bond before 5 years, you lose 3 months interest, that doesn’t apply to the inflation adjustment correct?

In other words @ 1.2% you would lose .30% or 10k in I bonds would only lose $30 interest?

On November 29th, 2007 Tom Adams said:

Hi Charles – the 3 month penalty applies to the total I bond interest rate, not just the fixed base-rate portion. Because I bond rates are relatively volatile, it’s possible to time redemptions to minimize the penalty. This was an issue a year ago – you can read the details here.

Tom Adams

On December 13th, 2007 Mike said:

Tom,
Do you think that the falling TIP rates make I-bonds more attractive? I am looking at Treasury bills, MM, and savings bonds to park my money for a year.

The new PPI (12/13/07) showed very large rate of increase in inflation. The entire bond marker has gone mad as bond rates are continue to fall in spite of rising inflation. I thought I would never say it before, but the existing fixed rate of I-BONDS is getting much more attractive.

There is a chance that we are in for a surprised Fixed rate reduction to .8%

Should I buy some more I-bonds before end of this year, or do you think that the 28-day bills are still better deal in terms of ROI?

On December 13th, 2007 Tom Adams said:

Hi Mike – yesterday’s 10-year TIPS rate was 1.78%, just 58 points above the I bond’s 1.20%. So compared to TIPS, I bonds are a better deal than usual right now.

Because of the new limits on I bond purchases after Jan 1, my thinking is that you should put the money you have now in I bonds.

The Federal Reserve Board seems to have lost its focus on controlling inflation and instead seems mostly concerned about preventing a stock market crash now and worrying about inflation later.

Tom Adams

On December 13th, 2007 Ernie said:

Tom, do you have a primer on TIPS vs I-Bonds somewhere?

On December 14th, 2007 Tom Adams said:

Hi Ernie – yes, my book, Savings Bond Advisor, has the details on the differences between TIPS and I bonds and also has a 100+ year overview of the history of inflation.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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