.55% 3 Year Rates - More I-bonds? And maybe some EE's?

[moda0306]

The recent debt-limit fiasco has sent the yield curve a-twisting a bit.  Short-rates are up and long-rates are down, but apparently 1-3 years are part of the "long" in terms of the direction their heading.  Instead of .3%-1% for 1-3 year treasuries, respectively, we're now looking at .16%-.55%.

If you've been using SHY as cash for money you won't need to get to right away, I think it's time to try to i-bonds or maybe EE bonds... not that we haven't discussed them already.  

With I bonds yielding what looks like will be about 3.2-3.6% in your first year, with a minimum of 2.3% guaranteed, it's the obvious steal.

Even EE bonds, though, will hold their principal plus give you a guaranteed 1.1% every year.

With even 5-years at 1.32%, these i/ee bonds are a real steal if you can part with your cash for a year.  At .55% on a 3-year bond, SHY could actually easily deliver some negative returns if/when rates rise.  If rates DON'T rise, you'll still be handily beating it, tax-deferred, at 1.1% with your EE bonds, and your i-bonds will continue to track CPI.

Your SHY has served you well, but if there's ever been a time to shoot for some i-bonds, now is it... and if you max those out... maybe some EE's wouldn't be so bad either.

[moda0306]

EE BONDS:

If you've maxed out your I-bonds for the year, I'd still consider some EE bonds.  1.1% (5-year treasury is at .91%) guaranteed for 30 years, with a doubling of value at 20-years (Implied 3.5% rate).  This is all tax-deferred, but illiquid until the 1-year mark.

With yields looking ridiculously low right now, it looks to be a decent option to take.  

http://www.treasury.gov/resource-center ... data=yield

It's just a pathetic time for interest rates, but with commodity inflation a possible fear, a bunch of I-bonds and even EE-bonds can give you a great tax-deferred tax cushion.

It really is starting to look like EE bonds could be a great instrument for many folks after they've maxed their i-bonds out.  You've got 30-years guaranteed 1.1% interest, which is higher than 5-year treasuries nowadays.  Also, with an implied 3.5% rate if held for 20-years, you're beating the current 20-year treasury bond rate of 3.17% (see above).  If one were to buy their ee-bonds in small denominiations, so they could be redeemed in smaller chunks if cash-flow issues arise, this could be a great option for deep cash, or maybe even some of it as deep LTT's, because at 20-years at 3.5%, you've got what appears to be a relatively long-term asset on hand.  This could prevent any interest-rate risk of owning LTT's, and you could just sell them if rates become unappealing again.  It may seem ridiculous to hold these for 20-years, but if rates stay low enough for long enough (a la Japan), the EE bond could be a very appealing option as a quasi-cash, quasi-bond instrument, offering a bit of the best of both worlds.

[Pkg Man]

Moda, good point regarding EE bonds.  I haven't considered them in the past since FDIC savings account rates were higher, and I Bonds included inflation protection.  Now that short treasuries yield near zero, and savings account rates are typically no more than 1%, maybe we should take another look at EE bonds.  Do you know what the annual combined maximum for I Bonds + EE Bonds is?  Can an individual invest $10K in each?

Yes. 10K in each (at least until the paper version is eliminated, not sure after that).