Question on Treasury Bonds

[NathanTurner]

I have a question on treasury bonds for those who know more about these matters than I do... which is probably most of you at this point.

I was reading about various methods of investment, and I came across the subject of treasury bonds. There are certain bonds that are designed to protect one's assets against inflation (the TIPS and I Savings bonds, if I remember correctly.) My question is whether or not investing a portion of one's savings into one of these types of bonds would be a good idea at this time, especially if these funds are simply sitting around in a savings account, being eaten away by inflation anyway. If not (aside from investing in PMs), what would you recommend as a (relatively) safe investment that will protect one's holdings and even earn a small bit of profit in the process?

 

[Zippyjuan]

This series of articles has a lot of good information on TIPS.
http://news.morningstar.com/classroom2/course.asp?docId=5480&page=1&CN=com As inflation goes up, the payments you receive on your bills goes up. You are taxed on whatever you get back over and above your initial investment so you are paying taxes on the inlfation adjustment. It counts as normal income and is payable each year rather than when the note matures and you actually get your money. This can eat into your actual return if inflation is high. The page on that : http://news.morningstar.com/classroom2/course.asp?docId=5480&page=6&CN=com No investment has a guaranteed- beat inflation- return but these will do pretty good. The after taxes and inflation return will probably be fairly low though. Rates are set via auction.

 

[AceNZ]

There are certain bonds that are designed to protect one's assets against inflation (the TIPS and I Savings bonds, if I remember correctly.) My question is whether or not investing a portion of one's savings into one of these types of bonds would be a good idea at this time, especially if these funds are simply sitting around in a savings account, being eaten away by inflation anyway. If not (aside from investing in PMs), what would you recommend as a (relatively) safe investment that will protect one's holdings and even earn a small bit of profit in the process?

The government wants you to believe that TIPS and I-bonds protect you from inflation. Unfortunately, they don't. Not even close. The rates paid are even less than the CPI, which, as you may know, badly understates inflation. Terrible investment.

If you want to avoid PMs (why?), then other income-producing possibilities you might consider include things like foreign currency CDs (see EverBank) or foreign dividend-paying stocks (yields of up to 10% are possible). For currencies, I like the AUD and NZD. The Yen and the Swiss Franc are good, too, but CDs tend to pay little or no interest.

 

[scooter]

If you are looking for short-term savings that you need quick access to, then short-term CD's or online savings accounts are pretty good. They lose value due to inflation and current interest rates, but not quite as quickly as leaving your money in straight cash.

For long-term investments, stocks are just about the only thing that will beat inflation.

 

[acptulsa]

Savings bonds are basically a portion of the national debt, and inflationary policies are basically a way to minimize the interest paid on them. Every debtor nation issues treasury bills and some of them (many of them, actually) base them on currencies that are holding their value much better than the dollar is (such as the Euro). They're also liable to be at least as safe as the next bond. The smart money right now is staying away from anything that's based on the dollar...

 

[NathanTurner]

Thanks for all the information. I should have known that any government-issued "hedge against inflation" would be too good to be true; after we take into account the manipulation of the CPI and the taxes paid on the inflation adjustment, there doesn't seem to be much of an incentive to invest.

I do like the idea of investing in a foreign-currency CD; I've always thought it prudent to diversify a portion of one's assets across a couple of stronger, foreign currencies; I never realized there were simple online solutions to do just that. I'll definitely have to look into it.

I'm not avoiding PMs; currently I'm buying silver because it's relatively cheap and I believe the demand for it will rise considerably in the future. Yesterday I read an article on the topic of replacing platinum in catalytic converters with silver because of the cheaper price. If this is feasible and done on a larger scale, the price should skyrocket. I'm also going to buy into gold once the price drops a bit. Evidently the IMF is starting to sell off their gold reserves in order to drop the price so that they can grab up even more on the market at a profit. I'll be watching the price within the next 90 days, and if it drops even close to the predicted $500/oz (?!?!) I'll be buying with both hands.

Thanks again for all the information. I should have started taking these topics seriously earlier in my life; now I have a lot of catching up to do.