Financially speaking.. which is a better deal? TIPS or I-Bond?

Question

Assuming inflation will rise over the next 5 years, which will be a better deal?

Answer 1

It somewhat depends on what kind of account they are deposited in. TIPS are taxed annually even though you do not receive the inflaction adjustment until the bonds come due. They are great for a Roth IRA which is not taxable or a traditional IRA but for a taxable account they are not so good. tips are marketable in the secondary market.

I bonds however are not taxed until redeemed. Not the interest or the inflation adustment. That can be a great advantage in a taxable account--a GREAT advantage. However, if you do desire you can report the interest annually. Of course if your were to cash in a very large amount at one time, it may bump you into a higer tax bracket. They can not be redeemed for 5 years without a 3 month interest penalty.


TIPS pay a somewhat higher rate of interest, about 0.2% higher in general.

Answer 2

While the coupon on an IPS tends to be materially lower than the coupon on a normal bond, the IPS coupon pays interest on the inflation-accrued principal rather than on the nominal principal. Therefore, both principal and interest are inflation-protected.

The time to purchase IPSs over normal bonds really depends on the market's expectations on inflation and whether those expectations are realized. An increasing rate of inflation, however, does not necessarily mean that IPSs will outperform normal bonds. The attractiveness of IPSs depends on their price relative to normal bonds.

For example, the yield on a normal bond may be high enough to beat the yield on an IPS even if there is a future increase in inflation. For example, if an IPS is priced with a 3% real yield and a normal bond is priced with a 7% nominal yield, inflation would have to average more than 4% over the life of the bond for the IPS to be a better investment. This inflation rate at which neither security is more attractive is known as the break-even inflation rate.

Many sovereign governments of developed markets issue an IPS (for example, TIPS in the U.S.; Index-Linked Gilts in the U.K.; and Real Rate Bonds in Canada). IPSs can be purchased individually, through mutual funds, or through ETFs. While federal governments are the main issuers of IPSs, issuers can also be found within the private sector and other levels of government.

Answer 3

Don't you mean T bonds? I'm no financial wizard!

Answer 4

I'm sorry, What are TIPS?