The Treasury Department is making noises that its regular inflation-adjusted bonds may go the way of the dodo.
The problem, of course, in targeting inflation is in deciding which indexes and market indicators (such as inflation-adjusted Treasury bonds) to use.
Clough likes bonds because he thinks that inflation is even lower than the figures show, and thus inflation-adjusted yields on bonds are higher than most people assume.
Inflation adjusted 10 year bonds are yielding negative rates.
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As a result, current yields and future inflation-adjusted returns on government bonds fall.
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Deputy Governor Harun Rashid Khan said last month that the interest rates on the bonds would be adjusted every six months.
There are investments like TIPS and Series I savings bonds that are adjusted for inflation but few people can live off their low yields.
The payoff for putting up with these hurdles is a potentially higher tax-adjusted yield. (Muni bonds offer tax advantages over other types of bonds and are most beneficial when held in a taxable account.) You may have to dig, but short-term fears can create opportunities for those who are astute and selective.
Or put it this way: The equity risk premium says that stocks have compounded four times as fast as bonds in real (inflation-adjusted) terms.
In its budget presented late February, the government had announced that it will issue bonds whose coupon rate will be adjusted to reflect changes in inflation.
According to the Deutsche Bank Long-Term Asset Return Study, the last time interest rates were near current levels, in the 1950s, Treasury bonds lost 40% of their inflation-adjusted value over the following three decades.
The Barclays Capital U.S. Aggregate Bond Market Index and the newer U.S. Aggregate Float Adjusted Index are composed of investment grade U.S. bonds.
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Series I Savings Bonds are currently yielding 1.76% and the interest rate is adjusted every six months for inflation.
"Traditional trusts don't take into account that the inflation- adjusted, long-term return from stocks is almost four times the return from bonds, but this does, " says Stephan Leimberg, an adjunct professor at the Villanova University School of Law and author of the New Book of Trusts.
Using historical returns and assuming a portfolio of 60% stocks and 40% bonds, he worked out three rules for determining a "safe" initial withdrawal rate and then adjusted for inflation annually.
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