May 2012 I Bond Rates

[moda0306]

https://www.treasurydirect.gov/indiv/re ... dterms.htm

1.1% for May-forward I-Bonds... and that's only 6 months of interest.  Still at 0% fixed, but I-bonds, once again, prove to be a great cash-like instrument for those who can keep them deep in their cash portion (or VP) until thier 1-year redemption period.

One would have to buy about a treasury bond with a duration of about 15 years to get 2.2%.  It's much higher than most savings accounts, quite a bit higher than most longer-term CD's, and about the same as short-term corporate debt of high quality.... but it's tax-deferred and state non-taxable.

[hoost]

Have you ever redeemed an I-bond?  How liquid are they?  I've heard a lot of people discussing them here but haven't really looked into them.

[MediumTex]

Have you ever redeemed an I-bond?  How liquid are they?  I've heard a lot of people discussing them here but haven't really looked into them.

I've redeemed them, though it's been a while.  Just take it into a bank that sells bonds and they look up the value and pay you.  I don't know how many banks are still selling them now, though.

[Greg]

(Correct me if I'm wrong in my understanding)

Since the Cash Portion of the Portfolio is meant for deflationary, shouldn't you be using the potential EE savings bonds instead of an I bond. The Gold portion of your portfolio would already be accounting for the fact of a future that potentially might have inflation to it.

The EE bond is guaranteed to double in value in 20 years which using the rule of 72 brings it to a 3.6% yield. That seems pretty good if you can hold it to at least 20 years and that yield is higher than historical inflation rates so would potentially beat the I Bond.

Granted the EE bond only pays .6% interest on its bond and the government will put in a one-time bonus at the 20 years mark if it has not doubled in size by then. It still is state and local tax exempt and like the I bond, if you are not in a super high income bracket when you sell the bond, the proceeds can be pulled out without federal tax if you use them for qualified education expenses for children, etc.

Just a thought.

[MachineGhost]

Since the Cash Portion of the Portfolio is meant for deflationary, shouldn't you be using the potential EE savings bonds instead of an I bond. The Gold portion of your portfolio would already be accounting for the fact of a future that potentially might have inflation to it.

Gold is for negative real interest rates, i.e. government misnagement or political/economic uncertainty.

So I-Bonds are a bonus on top of gold for the cash portion (why take continual losses if you can avoid it?).  I believe moda successfully examined the EE bonds elswhere but in context of replacing some of the LT bonds, but I think compared to I-Bonds it would be inferior for cash portion.

[Greg]

I was reading up a bit on what Moda was saying about having EE bonds as part of the Bond portion of the PP.

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4

As part of the cash portion though, if you assumed that inflation would be below 3.5-3.6% than you would be doing better with an EE bond over an I bond due to the implied doubling of the value of the EE bond over 20 years. As also pointed out in the thread I just linked to, the EE bond also pays a fixed 0.6% interest (regardless of the 20 year doubling) which still isn't too bad for a non-FDIC-insured product by the U.S. Government. My ING Direct Savings account pays 0.8% right now but that's at a risk for FDIC.

If however inflation over the next 20 years runs higher than 3.6%, then I-bonds would be better but Gold could potentially make up for the fact one might purchase more EE bonds than I bonds.

The EE bonds then could act as either a non-FDIC insured savings account of 0.6% a year as a liquid investment or as a 3.6% "20 year bond" as a illiquid investment. If desired, you could get a bunch of smaller EE bonds so if needed can only "cash-out" small portions for rebalancing. This then retains both the liquid 0.6% savings account rate and the 3.6% illiquid "20 year bond" rate.

I agree that the cash portion of the portfolio is meant for rebalancing and as a financial damper to other portfolio pieces but for those that are in the very early stages of accumulation, EE bonds (or I bonds as well for that matter), could be very useful in building up a cash portion with higher yields than just Treasury Money Markets/Short Term Treasuries alone.

[moda0306]

I've persistently been a bigger fan of EE bonds than most, though I still think that in the short-to-medium term, I-bonds are the sweeter deal.

For a 20/30-something who has maxed out their retirement accounts, I think EE's are a great "deep-bond" if used correctly.  I've already stated my case, and I understand the drawbacks, but if I don't tinker here it's bound to be somewhere more dangerous... so I don't let perfect be the enemy of awesome.

[Greg]

I guess I'm just trying to think of which of the two (EE or I bonds) to invest into for the Tax Year 2012. My salary isn't high enough right now that I can afford to put $20,000 into savings bonds ($10,000 for each bond) so that argument for tax-deferred doesn't really work for me. I'm trying then to say if I have $10,000 that I'm allocating towards adding to my Cash portion of my portfolio and already have a sufficient amount in gold, would it be more advised to weight more towards I-Bonds or towards EE-bonds? I could just do a 50/50 of $5,000 in each but as I outlined above, for 0 - 19 years, I bonds will win out. For 20+ years, EE bonds would win out if inflation is below the 3.6%.

Thoughts?

[moda0306]

To me, at this point, the LTT arbitrage opportunity with EE bonds for an accumulator is worth more the higher probable rate in years 1-19 in I-bonds.  I mean 20 year treasuries are at 2.4% right now.

Maybe 75/25 EE/I with some of the EE counting towards cash (to make up for the lower duration), and the rest of the EE counting towards LTT's.

You're really getting down to two very good choices, IMO... it can be tempting to over-analyze it once you've discovered that you're beating the market, but you're probably over-analyzing if it's stressing you out trying to decide how to use your savings bond allocation.

[Lone Wolf]

I started a thread a while back where we took a study of EE-series bonds: http://gyroscopicinvesting.com/forum/ht ... ic.php?t=5

With interest rates this low, I choose to hold some EE's (although I like the I's better in an environment of negative real rates.)  The 0.6% interest rate that they pay is almost as good as a 5-year Treasury, making the "doubling opportunity" mostly gravy.

The trick is knowing when to let them go if rates rise.  That's not a problem that I've fully solved yet.

[moda0306]

This board will someday turn into a savings bond counseling session, methinks.  That's not admission to thinking rates will rise much, btw! 

[MachineGhost]

As part of the cash portion though, if you assumed that inflation would be below 3.5-3.6% than you would be doing better with an EE bond over an I bond due to the implied doubling of the value of the EE bond over 20 years. As also pointed out in the thread I just linked to, the EE bond also pays a fixed 0.6% interest (regardless of the 20 year doubling) which still isn't too bad for a non-FDIC-insured product by the U.S. Government. My ING Direct Savings account pays 0.8% right now but that's at a risk for FDIC.

I assume you're comparing to the current I-Bond fixed rate of 0%?  If so, then I would agree, but you are betting on that in 20 years that it will outperform I-Bonds and also counting on the Fed to unwind the monetary base as fast as interest rates are rising.  Has history given you an example to be optimistic that the Fed can pull that off?  As a reminder, for a mere small increase in current short term rates, the Fed will have to reduce the monetary base by a whopping 50% to avoid triggering higher inflation.  By design, EE-bonds do not compensate for inflation as well as I-Bonds.  They are more a play on extended deflation lke Japan than inflation, so should replace some of the LT bond portion not cash.

If however inflation over the next 20 years runs higher than 3.6%, then I-bonds would be better but Gold could potentially make up for the fact one might purchase more EE bonds than I bonds.

If the rate of inflation is, say, 15% and short term to long term interest rates are, say, 20%+, gold will not outperform.  Gold does not respond to inflation under a fiat exchange system, only negative real interest rates.

The EE bonds then could act as either a non-FDIC insured savings account of 0.6% a year as a liquid investment or as a 3.6% "20 year bond" as a illiquid investment. If desired, you could get a bunch of smaller EE bonds so if needed can only "cash-out" small portions for rebalancing. This then retains both the liquid 0.6% savings account rate and the 3.6% illiquid "20 year bond" rate.

I would compare the cash out penalties and minimum holding time vs I-Bonds.  I-Bonds can be sold and swapped for those with higher fixed rates when offered in the future if it is net profitable to do so.  You are not "locked" into a 0% fixed rate for 30-years if you do not want to be.

Just make sure you stagger your bonds purchase because the financial limits make it damn difficult to accumulate now.  I-Bonds were too good to be true and indeed, it didn't last.

[Greg]

As part of the cash portion though, if you assumed that inflation would be below 3.5-3.6% than you would be doing better with an EE bond over an I bond due to the implied doubling of the value of the EE bond over 20 years. As also pointed out in the thread I just linked to, the EE bond also pays a fixed 0.6% interest (regardless of the 20 year doubling) which still isn't too bad for a non-FDIC-insured product by the U.S. Government. My ING Direct Savings account pays 0.8% right now but that's at a risk for FDIC.

I assume you're comparing to the current I-Bond fixed rate of 0%?  If so, then I would agree, but you are betting on that in 20 years that it will outperform I-Bonds and also counting on the Fed to unwind the monetary base as fast as interest rates are rising.  Has history given you an example to be optimistic that the Fed can pull that off?  As a reminder, for a mere small increase in current short term rates, the Fed will have to reduce the monetary base by a whopping 50% to avoid triggering higher inflation.  By design, EE-bonds do not compensate for inflation as well as I-Bonds.  They are more a play on extended deflation lke Japan than inflation, so should replace some of the LT bond portion not cash.

I knew EE bonds would not compensate for if inflation went higher than 3.6%. I was thinking both for having protection in a deflationary environment (holding money in EE bonds) if nominal rates drop more, and holding some I Bonds for if an inflationary environment picks up. Both I believe could potentially happen and I'm allowed to get $10k of each so I might as well build my positions semi-equally in both of them.

If however inflation over the next 20 years runs higher than 3.6%, then I-bonds would be better but Gold could potentially make up for the fact one might purchase more EE bonds than I bonds.

If the rate of inflation is, say, 15% and short term to long term interest rates are, say, 20%+, gold will not outperform.  Gold does not respond to inflation under a fiat exchange system, only negative real interest rates.

I was wondering about that. So do we assume that since it is a fiat exchange system that there will be a correlation between gold and inflation but not a perfect correlation? So gold will sometimes outperform inflation (such as potentially over the past decade) but then might underperform at other times?

The EE bonds then could act as either a non-FDIC insured savings account of 0.6% a year as a liquid investment or as a 3.6% "20 year bond" as a illiquid investment. If desired, you could get a bunch of smaller EE bonds so if needed can only "cash-out" small portions for rebalancing. This then retains both the liquid 0.6% savings account rate and the 3.6% illiquid "20 year bond" rate.

I would compare the cash out penalties and minimum holding time vs I-Bonds.  I-Bonds can be sold and swapped for those with higher fixed rates when offered in the future if it is net profitable to do so.  You are not "locked" into a 0% fixed rate for 30-years if you do not want to be.

That's a good idea for using I-bonds as for cashing out. After the year mark you would would only be losing 3 months of interest if pulled out before 5 years. If I have a sort of savings "bond-ladder", presumably I'd be able to pull out I-bonds that are over 5 years old and leave the younger one still in tact to not disturb them from their inflation interest-bearing slumber.

[moda0306]

1NV3ST0R,

Another thing I've realized is that you don't actually have to buy the EE bonds... you KNOW you'll have the "option" to buy EE bonds at .6%/3.53% until whatever time the treasury might legitimately be able to pull the plug quickly (maybe near the next rate-change of EE bonds.

I simply can't see the treasury nixing the 3.53% EE bond doubling thing in one quick announcement.

So what you COULD do is simply sell some TLT or LTT's, put that cash in some STT action or (if you're comfortable) some kind of FDIC insured interest-bearing deal, and if we come to a point where EE rates are about to change, or you are about to miss out on your $10k limit for the year and LTT's are still at 2.8% at 30 years, buy up some EE's, if the LTT's have gone back up to 3.5% or so, maybe you can just take the cash and buy them back, and you've avoided a fat loss.

Notice, you don't actually have to lock your money up by buying the EE bonds until the last minute, because the "option" is always there until the year ends or the treasury gets a chance to pull these lovely things from us, which is likely to NOT be overnight... meanwhile, you can avoid the potential losses that a 2.8% 30-year treasury could hand you.  All you've lost is the 1.??% interest you may have received during the few months that you're sitting on cash, and EE's would have been paying their "phantom" return you wouldn't have seen until you were old and crusty.

[Greg]

Moda0306,

Thanks for the tips (not Inflation-Protected Treasuries mind you), I appreciate the help especially since I'm still quite new to the PP-lifestyle. A few days ago I purchased $1000 each of an I-Bond and an EE-Bond and am considering them as part of my 25% cash position I'm building into.

I also sometime soon am interested in buying direct from Fidelity a 30-year bond or two in a taxable account. I won't have a ROTH IRA until I start my job in July for the government. Essentially, I've got about 2 months until I'd be contributing to my Roth and I'd probably load it up in that first year with 30-year bonds to get my bond portion slowly closer to 25%. I've got about 65k in assets right now including stocks, bonds, gold ETF, and savings accounts/CDs so I won't be able to have my my bond portion all in tax sheltered for a whiles so most of my stuff will be in taxable as I'll also be building up my TSP/401k plan with my employer.

I'm also trying to understand what you are suggesting. I have no money at least of the moment in TLT or in LTT, I'm intending on building that portion of the portfolio up along with everything else. Are you suggesting that I don't purchase as many 30-year bonds as I might by the end of the year and wait it out to see if the rate goes up from 2.8% to 3.5-3.6%? If it does go up to that rate I would have saved myself a lot of capital loss then from having not purchased as many of the 30-year bonds initially and would have lost a bit more out on putting my money in a savings account at .8% interest instead of putting it into an EE bond instead.

The other potential would be that 2.8% as of now is not a floor but a ceiling and rates continue to drop and if I would have purchased 30-year bonds I'd be sitting on a reasonable capital gain and it would have made more sense to put the money into the 30-year bonds instead of in a savings account for potentially putting into an EE bond. Let's say if nominal 30 year bonds dropped to 2.0%, there'd be a reasonable capital gains on the 2.8% 30-year bonds I bought.

Wouldn't this be considered market timing though if I create my Long-Term Treasuries portion of my portfolio into LTTs and EE bonds and was waiting to see how things turn out? I could just prepare for both an increasing or decreasing in nominal rates and purchase a few Treasuries now and EE bonds and if the rate goes up then I have a capital loss but less of a loss than if I had just Treasuries and if rates go down, I'd still get the capital gain and would have been getting 3.6% (phantom) on my EE bond which doesn't sound too bad.

I'm just rambling by this point, I guess I'm just trying to determine if the EE bond fits more with the deep-cash portion of the portfolio or acts as part of the LTT portion.

[moda0306]

You don't need to have a job to start an IRA/Roth... you just need to have the amount of income that you contributed in the given year.  Since your job starts well into 2012, you should be ok... unless I'm missing something and you actually have to have a job to set one up, in which case that's new to me!!

I wasn't talking about anything specific regarding your finances and LTT's... maybe it's just best to start with a bread/butter PP and tinker later only after you feel comfortable.

I was simply saying that IF you wanted to toss EE's into your "Bond" portion, you don't actually have to buy them... you can just hold the cash and wait for LTT rates to rise before you decide whether to dive into EE's, and wait until the last minute before your purchase limits are almost about to expire (end of calendar year, I believe).

But it sounds like you're quite young, so EE's/I's at the expense of retirement accounts not being maxed might not be the amazing deal they are for those who've maxxed their other options out.  I still think using EE's as no more than 25% of your LTT portion could be a good bet, but to hedge your bets, you could contribute to Roths, keep some of it in cash waiting to pounce on EE's with LTT's at 2.8%... if rates stay low, either pull the money out of the Roth (or use new money) and buy EE's.  If rates go up on LTT's, buy LTT's then instead of EE's.

This is all fun tinkering, though for me... not really worth the time unless you almost enjoy it.  You seem like you're on the cusp of either enjoying it or thinking it's a burden.  Unless you enjoy the game, just use the bread/butter PP.

[Greg]

I've looked into Roth and regular IRA, you need earned income to be able to contribute to them. Currently I'm on a scholarship for the government (SMART scholarship) and that is not counted apparently as earned income so I haven't been able to contribute since that is my only income. I will start getting earned income in July.

And I'm 24 right now, just getting out of my masters in mechanical engineering to work for the man but I really enjoy investing and it's why I joined this forum in the first place because I really liked the premise of the PP. I'll have to look into whether or not I want to include EEs as part of my LTT or as cash.

Regardless, I guess I'm just trying to figure out if I have a finite amount of money in the first place, would EEs be beating LTTs in the short-term (i.e. a year). If not, I might weight more towards either parking in cash for the end of the year and purchasing EEs at the expense of purchasing more LTTs. I'd want to start the clock for EEs sooner than later and it just depends on whether it is believe the rates will go up or down for LTTs.

I suppose though if we knew that we wouldn't be on this forum 

[Greg]

If the rate of inflation is, say, 15% and short term to long term interest rates are, say, 20%+, gold will not outperform.  Gold does not respond to inflation under a fiat exchange system, only negative real interest rates.

I'm still confused a bit by this statement. Could you elaborate a bit more? Are you saying if real interest rates are positive that Gold is not going to track inflation? But it will roughly track it if we're in negative real interest rates?

[MachineGhost]

I'm still confused a bit by this statement. Could you elaborate a bit more? Are you saying if real interest rates are positive that Gold is not going to track inflation? But it will roughly track it if we're in negative real interest rates?

Better to say that if real interest rates are positive (or above 2%, actually) then there is no demand for hoarding real assets.  And if there is no demand for hoarding real assets, then such is unlikely to track inflation very well, at least in the short term (15-20 years).

After all, gold is a shiny, lumpy, barbaric relic that does absolutely nothing intrinsically.  For other people to want to hoard such, there has to be a demand for it.  Historically, there are not that many examples of gold being that useful in a crisis over other real assets (diamonds, cheap jewelry, soap, cigarettes, etc)..  It all depends on how far your personal financial system implodes....  it wasn't much good in China during the Japanese invasion, it was outlawed for Jews by the Nazi's wherever they occupied, but it certainly would have saved your bacon during the more recent Argentinean peso devaluation.  Gold has a narrow window in a crisis where it is still functionally useful and it is a bet that we won't revert to the extreme calamities of the previous century.

We have it extremely good in the USA in terms of "security and stability".  Unfettered freedom is on the way out.  There's just too many bad actors in the world now victimizing too many people and it is our mission to save them all!

[WildAboutHarry]

After all, gold is a shiny, lumpy, barbaric relic that does absolutely nothing intrinsically.

Gold helps me chew my food!

[gold] was outlawed for Jews by the Nazi's wherever they occupied

I recall hearing about some Nobel Prize winners in Germany (or German-occupied lands) who dissolved their gold medals in Aqua Regia, kept the dissolved gold on the shelf until after the war, then recast the medals.  Better living through chemistry.

[Greg]

After all, gold is a shiny, lumpy, barbaric relic that does absolutely nothing intrinsically.

Gold helps me chew my food!

So your mouth looks like this then if it helps you to chew your food?



Also on the more serious note:

So how intrinsically-linked is inflation to a rising interest rate? If gold is good when we're in a negative real interest rate (interest rate - inflation), then if the inflation spikes and is still above the interest rate (say you had 7% 30-year bonds but 9% inflation), we'd still be in negative so gold would still be going up?

If however we had rates go up to 7% for interest rates and inflation stayed at 3%, then we'd be in positive real interest rates and cash would be potentially better at this time (or I-bonds/EE bonds) over 30-year treasuries.

If you had however 15-20% inflation, it'd still be considered that gold would track inflation because with inflation that high, as long as we are in negative interest rates that the demand will spike for gold if my understanding is correct for people wanting hard assets.

[WildAboutHarry]

So your mouth looks like this then if it helps you to chew your food?

No, no.  Those are incisor (cutting) and canine (puncturing) teeth.  Not much chewing going on there. 

Just think how much better Jaws would have looked with gold:




Of all the explanations about things that influence the gold price, I like, in no particular order:

• the low-to-negative real interest rate argument.
• the sort of tracks inflation in the short term but does track inflation in the long term argument
• the hedge against uncertainty, calamity, government misbehavior, etc. argument

It really is just a supply and demand thing, after all.  And if you are going to be invested in gold ideally you want to be in gold prior to any of the above events.  Gold doesn't work right up to the point that it does.

[Reub]

That might be the optimal way of getting gold out of the country in a crisis! 

[Greg]

That might be the optimal way of getting gold out of the country in a crisis! 

Couldn't you just melt the gold into pellets/balls and then swallow them before going out of the country? just hope you have a filter/pan for when the california gold rush comes!

(of course this doesn't have anything to do with the OP, so I am sorry in advance for my humor)

[Greg]

Getting back to the OP, I was pondering as usual about things.

I was wondering since the PP is based around economic conditions (recession, inflation, etc.) and I Bonds provide to a certain degree inflation protection, should they be counted 100% as the cash portion? They are U.S. government backed and nonvolatile like cash should be and can be liquidated if needed for various expenses. If they have this inflation portion to them though, would you considered them as 50% cash and 50% gold portion or the portfolio?