Date: Fri, 17 Sep 2004 03:57:24 CST
From: "JD" 
Newsgroups: misc.invest.financial-plan
Subject: Re: Buying I/EE Bonds
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> One thing to keep in mind about I-bonds is that the fixed rate right now
> is only 1%, meaning you'll earn (1% + inflation) for as long as you hold
> it. That may be OK, at least you'll earn more than the inflation rate
> which isn't bad for a completely safe investment. But the early I-bonds
> came with higher fixed rates - here's the history:
> http://www.publicdebt.treas.gov/sav/sbirate2.htm
>

I'm considering I-bonds as well, and I'm thinking the penalty for selling
before the 5 year holding period is really not that bad. Every time I think
about it I change my mind on inflationary and deflationary pressures, but
the bottom line is I'm only guessing and I don't know which will prevail.
(Regarding the effects of rapid credit expansion I see it different than
some with rapid credit expansion, *sometimes followed historically by
liquidity problems and a deflationary period.  On the contrary most agree
rapid rise in money supply is inflationary).

With the I-bonds I feel safe against inflation until stocks, bonds, and dare
I say real estate return to more historically average valuations.  (15 pe,
or 4.3% dividend yield for the s&p 500, and 3.7 X median household income
for housing)

Anyway, am I missing something with cashing the bonds early?
Also what would happen in a deflationary situation when the cpi would
actually be a negative number?

 From the treasury website:

http://www.publicdebt.treas.gov/sav/sbifaq.htm#sbifaq2
"You can cash Series I bonds after 12 months. When you cash the bonds, you
will receive the original investment plus the earnings. However, I Bonds are
meant to be longer-term investments. So, if you redeem an I Bond within the
first five years, there is a 3-month earnings penalty. For example, if you
redeem an I Bond after 18-months, you'll get 15 months of earnings."

So if interest rates are much higher in say 2-1/2 years, I can sell them and
loose just 3 months of interest, and then I assume buy I-bonds (or other
bonds) at the higher rate, if it makes sense.

Regards,
JD