New I Bond Rate 11/1/18 to 4/30/18

Discussion of the Cash portion of the Permanent Portfolio

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barrett
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by barrett » Mon Nov 19, 2018 12:50 pm

sophie wrote:
Sat Nov 10, 2018 9:52 am
You've tried running simulations with the iORP calculator, right? What did that program recommend?
Just re-ran everything with varying parameters and it seems that i-ORP is recommending to NOT do Roth conversions no matter when we take our gains on savings bonds. Hmm. I guess maybe our tax-deferred accounts are just not that high relative to taxable and Roth accounts. To be continued.

ETA: Uh, nix that. i-ORP only tells me not to do Roth conversions if that is one of my inputs! It actually has me doing them quite aggressively (and paying less in taxes over the years) whether I cash those I-Bonds in before or after RMDs start. Looks like it's kind of a wash. Time to go find something else to obsess about!
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by ochotona » Fri Dec 07, 2018 6:53 pm

I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by sophie » Sat Dec 08, 2018 7:04 am

I bought my I bonds before the end of November. Not so sure about inflation receding.

So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Sat Dec 08, 2018 4:18 pm

ochotona wrote:
Fri Dec 07, 2018 6:53 pm
I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.
ochotona,
Wait until mid-April 2019, when the latest figures on of the CPI-U are announced. That will give the new variable rate component for I bonds purchases for the next six months starting 5/1/19. It will probably also give the best indication of any change in the fixed rate component will be (if any).

Having said the above, I looked back up this thread where you expressed concern about a potentially shaky job situation in the oil business. If that is still the case in April 2019, I would forego “deep cash” in favor of a more liquid “shallow case” position.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by barrett » Tue Dec 11, 2018 5:06 pm

sophie wrote:
Sat Dec 08, 2018 7:04 am
So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!
Hey sophie,

It seems that the best course of action based on current assumptions and multiple i-ORP runs is to keep income low for now to take advantage of ACA subsidies, and then go really aggressive on Roth conversions for five year after Medicare kicks in and before RMDs do. My best I-Bonds will in that scenario be held to maturity and cashed out in my early 70s. Some of them have 3.6% fixed yields but tax liabilities force us to think about doing things that aren't very intuitive. Too much information??
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by Kbg » Wed Dec 12, 2018 8:36 am

jhogue wrote:
Sat Dec 08, 2018 4:18 pm
ochotona wrote:
Fri Dec 07, 2018 6:53 pm
I'm wondering whether to buy my 2019 I-Bonds before May 1, if inflation expectations are receding.
ochotona,
Wait until mid-April 2019, when the latest figures on of the CPI-U are announced. That will give the new variable rate component for I bonds purchases for the next six months starting 5/1/19. It will probably also give the best indication of any change in the fixed rate component will be (if any).

Having said the above, I looked back up this thread where you expressed concern about a potentially shaky job situation in the oil business. If that is still the case in April 2019, I would forego “deep cash” in favor of a more liquid “shallow case” position.
Put this in the useless forecast bucket but...I have two macro economic tracking models I use and both of them have dropped significantly. One is even negative. Not a particularly good climate for expecting interest rate bumps.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Wed Dec 12, 2018 2:56 pm

The great thing about buying I bonds right now is that the composite yield is fixed at 2.83% until 5/1/2019. That easily beats a 5 year Treasury at 2.76% (yesterday’s close). But if Treasury rates should continue to rise over the next five years, the I bond variable interest rate will reset upwards ten times. However, should rates decline-- as kbg’s models indicate-- you will know that by mid-April and still be able to lock in the current fixed rate component (currently 0.5%, the highest in about ten years).
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by boglerdude » Wed Dec 12, 2018 11:02 pm

Who sets the fixed rate, and how. Why should they pay us anything...competing with foreign bonds? Private sector bonds?
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by sophie » Thu Dec 13, 2018 7:30 am

barrett wrote:
Tue Dec 11, 2018 5:06 pm
sophie wrote:
Sat Dec 08, 2018 7:04 am
So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!
Hey sophie,

It seems that the best course of action based on current assumptions and multiple i-ORP runs is to keep income low for now to take advantage of ACA subsidies, and then go really aggressive on Roth conversions for five year after Medicare kicks in and before RMDs do. My best I-Bonds will in that scenario be held to maturity and cashed out in my early 70s. Some of them have 3.6% fixed yields but tax liabilities force us to think about doing things that aren't very intuitive. Too much information??
Sounds like a perfectly good plan! Maybe it would simplify things to just do this. List the ibonds that will mature before you hit age 65. Just hold onto the rest. Every year about this time, figure out how much income space you have before you hit the Obamacare cliff, and allocate that space toward cashing out I bonds from that before-65 pile, doing Roth conversions, and tax-gain harvesting. You could also cash them out earlier in the year for money to live on. Unlike a 401K withdrawal, only part of the proceeds will be taxable - so they will actually be a big help to you in staying under the ACA cap.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by Kbg » Thu Dec 13, 2018 2:16 pm

.
Last edited by Kbg on Fri Dec 14, 2018 7:03 am, edited 1 time in total.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Thu Dec 13, 2018 2:23 pm

boglerdude wrote:
Wed Dec 12, 2018 11:02 pm
Who sets the fixed rate, and how. Why should they pay us anything...competing with foreign bonds? Private sector bonds?
Oddly enough, Treasury has never announced how it determines the I bond fixed rate. The I bond composite rate is composed of both a fixed rate and a variable rate (from the CPI-U estimate for inflation). Once an I bond is purchased, the fixed rate remains unchanged until final maturity of the bond (currently 30 years). The U.S. Treasury Department can adjust the I bond fixed rate for new purchases twice per year, on 1 May and 1 November.

I am not sure I understand your second question. Historically, the US Treasury has been borrowing money to fund the government in exchange for interest-bearing bonds ever since Alexander Hamilton became secretary of the Treasury. EE and I series savings bonds originated in the popular war bond drives directly marketed to the public for the first time during World War II. They are distinguished by the fact that they are redeemable, but cannot be bought or sold on the secondary market. As a consequence their price and yield never fluctuates.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by boglerdude » Thu Dec 13, 2018 11:50 pm

Was wondering whats wrong about MMT: "interest from issuance of govts is a corporate subsidy"

http://mikenormaneconomics.blogspot.com ... -rich.html

edit2 https://www.thenation.com/article/beyond-austerity/
edit1 http://bilbo.economicoutlook.net/blog/?p=41133
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Fri Dec 14, 2018 10:06 am

I don’t claim to be up on the latest debates over Modern Monetary Theory, but there are some gaping holes in the blogpost you referenced:

Mike Norman’s claim that Treasury bonds are “welfare for the rich” strikes me as misleading—perhaps deliberately so. Sure, Warren Buffet’s company has billions in T-bonds, but the total market cap value of Berkshire Hathaway is far greater. Simply put, Warren would rather own shares in his company rather than an equivalent pile of T-bonds because their expected return is greater.

More to the point for us here—who do not necessarily think of ourselves as “rich”-- practically anybody can buy Treasury debt at market rates on the secondary market. Millions of ordinary citizens do. The minimum purchase for I bonds is only $25. Fidelity brokerage will sell you a Treasury of any duration from 3 months to 30 years for as little as $1,000.

Oh, and by the way: If you don’t like the interest T bills are currently paying, you can always buy corporate debt instead. AAA-rated corporate bonds will pay you more interest, but that reflects a market-adjusted return of capital risk premium. Treasury has never defaulted on its debt, which is why its bonds always pays less interest.

See TreasuryDirect website for more info on the history of savings bonds
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by barrett » Fri Dec 14, 2018 10:22 am

sophie wrote:
Thu Dec 13, 2018 7:30 am
barrett wrote:
Tue Dec 11, 2018 5:06 pm
sophie wrote:
Sat Dec 08, 2018 7:04 am
So barrett, are you all good with your plans for your I bonds? They've turned out to be pretty darned good investments!
Hey sophie,

It seems that the best course of action based on current assumptions and multiple i-ORP runs is to keep income low for now to take advantage of ACA subsidies, and then go really aggressive on Roth conversions for five year after Medicare kicks in and before RMDs do. My best I-Bonds will in that scenario be held to maturity and cashed out in my early 70s. Some of them have 3.6% fixed yields but tax liabilities force us to think about doing things that aren't very intuitive. Too much information??
Sounds like a perfectly good plan! Maybe it would simplify things to just do this. List the ibonds that will mature before you hit age 65. Just hold onto the rest. Every year about this time, figure out how much income space you have before you hit the Obamacare cliff, and allocate that space toward cashing out I bonds from that before-65 pile, doing Roth conversions, and tax-gain harvesting. You could also cash them out earlier in the year for money to live on. Unlike a 401K withdrawal, only part of the proceeds will be taxable - so they will actually be a big help to you in staying under the ACA cap.
Doing all of the above, sophie. The pre-65 pile are actually EEs but that doesn't change anything. Just send me a bill for your advice!
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by sophie » Sat Dec 15, 2018 8:36 am

boglerdude wrote:
Thu Dec 13, 2018 11:50 pm
Was wondering whats wrong about MMT: "interest from issuance of govts is a corporate subsidy"

http://mikenormaneconomics.blogspot.com ... -rich.html

edit2 https://www.thenation.com/article/beyond-austerity/
edit1 http://bilbo.economicoutlook.net/blog/?p=41133
Don't know why I just spent about 10 minutes reading that tripe.

I would ask Mike Norman exactly how he proposes to fund the national debt for zero cost. And, if he's aware that foreign investors (e.g. in China, Russia, and Europe) hold a large proportion of outstanding Treasuries. I'm pretty sure they wouldn't be interested in loaning us money for free, and that we wouldn't be able to fund the debt purely within the U.S. The Nation article was pure word salad. I gave up after the first few paragraphs.

I guess as long as the interest payments are held to 10% or less of the federal budget (currently it's ~7%) it's liveable. If by some miracle the debt were to be suddenly paid off, I wonder what would happen...probably something surprisingly bad. The world of finance is highly dependent on Treasury debt.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Sat Dec 15, 2018 10:05 am

sophie,
Do you not find it passing strange that some investors fret over whether the US Treasury will make its interest payments on time, but don’t think twice about buying bond funds littered with paper issued by Puerto Rico or Enron?
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Mon Apr 15, 2019 2:19 pm

Completed buying my full allocation of I bonds for 2019 last week. The 2.83% composite rate looked too good to pass up. In comparison, the 1 year Treasury is currently 2.43%, while the 5 year Treasury stands at 2.37%.

The Treasury yield curve inverted in December 2018 and has since gotten wider and deeper. This points both to lower interest rates ahead, and also serves as a leading indicator of an economic recession.

For anyone still sitting on the fence, you have until May 1 to think it over. On that date the Treasury will reset the rate, almost certain to be lower.

Happy Easter!
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by sophie » Tue Apr 16, 2019 7:34 am

I also think that the fixed rate could drop in May. I bought my I Bond quota at the end of March.

The 2.83% interest rate could drop after November, depending on what happens with the CPI-U, so that's not really the best reason to buy. The tax-deferral and future inflation protection are more important. But it is awesome that I bonds are, after tax, currently beating the socks off every other cash investment including the best 5 year CDs, if you don't mind locking your money up for 11-12 months.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Tue Apr 16, 2019 6:52 pm

You are probably right that for the long term holder of I-bonds, 30 year tax deferral and inflation protection might prove more valuable than their current yield. But given the propensity for politicians of all stripes to tinker with the tax code, anything is possible.

That said, I think that the I bond fixed rate (currently pegged at 0.50% ) will almost certainly be cut on May 1, and maybe again in November if the Fed refrains from raising short term interest rates before then.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by Pet Hog » Wed Apr 17, 2019 3:22 am

We already have the CPI-U data for March: 254.202. Last September it was 252.439. So that gives a new variable rate of 1.40% from May 1. So if the fixed rate stays at 0.50% we're looking at 1.90% combined.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Wed Apr 17, 2019 8:59 am

Yup.

With the 1 year T bill currently at 2.43%, I bonds purchased after May 1 do not look appealing.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by Kbg » Thu Apr 18, 2019 11:25 pm

Of course this is all individual tax rate dependent but for my federal and state tax rates I get the following return order after taxes.

I-Bonds
ST Investment Grade Corporate
ST US Govt
ST Munis

Assumes 2.83 on I-bonds and tonight's 30 day SEC yields on VCSH, VGSH, VWSTX, as adjusted for various tax treatments

Now of course we can defer I-bond interest tax for a VERY long time...but I'll let someone else do the time value of money calcs.

What I really learned this evening is that perhaps folks should take on some rating risk.
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by jhogue » Mon Apr 22, 2019 10:22 am

Kbg,

Can you explain your interest in corporates and munis? I think there is more than ratings risk involved in them.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: New I Bond Rate 11/1/18 to 4/30/18

Post by Kbg » Mon Apr 22, 2019 10:03 pm

Well they are major bond classes so I monitor them. Generally munis only work well for certain tax situations and I rarely invest in them. I’m a fan of investment grade ST corporates however. I’ve held VCSH for a very long time. A little more risk, yep. A huge risk jump over STTs, nope. Compare the CAGR of vcsh vs vgsh for the past 5 years. Individuals will have to determine if the risk reward is for them.
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