I-Bond Question

Discussion of the Cash portion of the Permanent Portfolio

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stuper1
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I-Bond Question

Post by stuper1 » Wed Mar 13, 2013 10:46 am

I've been reading here about I-bonds, and they sound like a good place for some of my deep taxable cash.  I understand I can only buy $10k per year, have to hold for at least one year, and pay a 3-month penalty if redeem in less than 5 years.  Here's my question:  from an overall HBPP perspective, would I-bonds be expected to react to various economic conditions in a similar way as T-bills and provide the same protections?
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Re: I-Bond Question

Post by dualstow » Wed Mar 13, 2013 10:56 am

I would say that they are similar in that they cannot lose value. (Of course, T-bills are susceptible to inflation).  And, they are both backed by the U.S. government, unlike corporate bonds.
http://www.ibonds.info/About-I-Bonds/Wh ... Bonds.aspx

You mentioned that five-year waiting time for I-Bonds. One of the key advantages of T-Bills is their liquidity. You can sell them at will, anytime, and I-Bonds just don't share that liquidity, at least not without a penalty. In various economic conditions, that may be the advantage that counts- being able to put your cash into one or more of the other assets. For this reason, pp'ers talk about using I-Bonds for "deep cash" and never as a complete replacement for T-Bills or treasury funds. (Edited for typos).
Last edited by dualstow on Wed Mar 13, 2013 10:58 am, edited 1 time in total.
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Re: I-Bond Question

Post by melveyr » Wed Mar 13, 2013 11:56 am

I think you can think of them as cash (T-Bills) as long as you are willing to keep an eye on rates and be ready to sell them and roll them over into higher yielding I-Bonds or bills if rates rise. The huge benefit from T-Bills is that if you roll them over you benefit from rising rates. You want to make sure you do the same with your I-bonds and so that means redeeming them if it makes sense.
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Re: I-Bond Question

Post by stuper1 » Wed Mar 13, 2013 4:24 pm

Here's what I'm trying to understand.  If somewhere down the road, cash gets very valuable all of a sudden and I have a lot of I-Bonds instead of T-Bills, will I have missed a huge price jump that would likely have helped my cash portion pass the 35% rebalancing band that would have triggered buying lagging assets?  I'm not sure I'm asking this very well, and please forgive me for my great ignorance in this area.

Or is it not so much the price jump in cash, as it is just having cash on hand (whether T-Bills or I-Bonds older than 1-year) that can be used to buy the lagging assets when they collapse?
Last edited by stuper1 on Wed Mar 13, 2013 5:21 pm, edited 1 time in total.
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Re: I-Bond Question

Post by MachineGhost » Wed Mar 13, 2013 8:40 pm

stuper1 wrote: Here's what I'm trying to understand.  If somewhere down the road, cash gets very valuable all of a sudden and I have a lot of I-Bonds instead of T-Bills, will I have missed a huge price jump that would likely have helped my cash portion pass the 35% rebalancing band that would have triggered buying lagging assets?  I'm not sure I'm asking this very well, and please forgive me for my great ignorance in this area.
Cash simply does not have that volatility.  I've never heard of it ever reaching a 15% or 35% band.

Even with a 5-year Treasury ladder, it doesn't increase the leverage much.
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Re: I-Bond Question

Post by WildAboutHarry » Thu Mar 14, 2013 5:01 am

MachineGhost wrote:Cash simply does not have that volatility.  I've never heard of it ever reaching a 15% or 35% band.
Cash might not on its own, but if Stocks, Bonds, and Gold simultaneously crater, then Cash could hit the upper rebalancing band.  Of course that would take about a 40% hit on those three assets, but who knows? 

That is why I-bonds are better as a portion of ("deep" cash), rather than all of, the Cash portion.
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Re: I-Bond Question

Post by MachineGhost » Thu Mar 14, 2013 6:17 am

WildAboutHarry wrote: Cash might not on its own, but if Stocks, Bonds, and Gold simultaneously crater, then Cash could hit the upper rebalancing band.  Of course that would take about a 40% hit on those three assets, but who knows? 
Did cash hit the 35% during the triple witches of 1980 and 2008?
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Re: I-Bond Question

Post by dualstow » Thu Mar 14, 2013 8:06 am

stuper1 wrote: Or is it not so much the price jump in cash, as it is just having cash on hand (whether T-Bills or I-Bonds older than 1-year) that can be used to buy the lagging assets when they collapse?
Even if you end up not buying the other assets for a long time, it's nice to have a stabilizer, something that doesn't zig zag all over the place when the markets are going crazy.
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Re: I-Bond Question

Post by AgAuMoney » Thu Mar 14, 2013 10:40 pm

stuper1 wrote:from an overall HBPP perspective, would I-bonds be expected to react to various economic conditions in a similar way as T-bills and provide the same protections?
No.

Not if by "T-bills" you mean "long term treasuries" (LTTs).

IBonds have a 30year term, but since there is no secondary market, the interest rate does not readily leverage that maturity to create an immediate discount or premium the same way it does for LTTs.

IBonds are a cash equivalent.

If by "T-bills" you mean the ultra-short term stuff used for the 25% cash portion of the PP, then yes, IBonds will work for that.  Just make certain you don't run into problems with the 1st year lock up.
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Re: I-Bond Question

Post by dualstow » Fri Mar 15, 2013 9:15 am

AgAuMoney wrote: Not if by "T-bills" you mean "long term treasuries" (LTTs).
...
If by "T-bills" you mean the ultra-short term stuff used for the 25% cash portion of the PP, then yes, IBonds will work for that.
AgAu, I'm confused. ???
T-bills can only mean short-term treasuries.

Bills have maturities of 1 year or less.
Notes are 2 years to 10 years.
Bonds are greater-than-ten to 30 years.
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Re: I-Bond Question

Post by AgAuMoney » Fri Mar 15, 2013 11:46 pm

dualstow wrote: T-bills can only mean short-term treasuries.

Bills have maturities of 1 year or less.
Notes are 2 years to 10 years.
Bonds are greater-than-ten to 30 years.
Thanks for the succinct explanation of the difference.

The O.P. is a new investor.  Many times such people are confused about Treasury Bills/Notes/Bonds, which is what and why it matters, and it seems especially likely to be so when they are asking about the role of IBonds in the PP.  I didn't see any answer that I thought clearly and directly answered the O.P.'s question in plain English, so I posted.  Sorry to confuse.
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Re: I-Bond Question

Post by BearBones » Sat Mar 16, 2013 8:29 am

melveyr wrote: I think you can think of them as cash (T-Bills) as long as you are willing to keep an eye on rates and be ready to sell them and roll them over into higher yielding I-Bonds or bills if rates rise. The huge benefit from T-Bills is that if you roll them over you benefit from rising rates. You want to make sure you do the same with your I-bonds and so that means redeeming them if it makes sense.
1. How do you make this decision?

2. Say, nearing retirement, you have finally accumulated 200K in I-bonds. We then enter another 1970's style inflationary environment. You'd like to sell and buy new, but you are limited to purchasing only 10K. Back to square 1. What to do?
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Re: I-Bond Question

Post by WildAboutHarry » Sat Mar 16, 2013 12:40 pm

BearBones wrote:1. How do you make this decision?

2. Say, nearing retirement, you have finally accumulated 200K in I-bonds. We then enter another 1970's style inflationary environment. You'd like to sell and buy new, but you are limited to purchasing only 10K. Back to square 1. What to do?
I-Bonds are now, for all practical purposes, a one-decision investment (or money parking place) due to the purchase limit you mention.  It doesn't seem worth paying the taxes due and reinvesting, especially since you have the 1 and 5-year redemption issues. 

I plan on spending down whatever I-Bond balance I have in retirement, spending the 0s first and holding on to the 2s and 3s until the 2030s!
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Re: I-Bond Question

Post by sophie » Sat Mar 16, 2013 2:29 pm

I'm with Wild.

I see I Bonds not only as "deep cash" with a winning combination of safety and good returns, but also as a vehicle for tax deferral, if you're within 30 years of retirement.  They're sort of like a non-deductible IRA contribution, except with far more user control.  If you sell an I Bond, you have to pay taxes on the entire amount of interest you've earned, which is probably not worthwhile in order to up the fixed rate a few %.

I have the permanent portfolio & Bogleheads to thank for opening my eyes to I bonds.  Amazingly, you won't read about them anywhere else.
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Re: I-Bond Question

Post by WildAboutHarry » Sun Mar 17, 2013 8:51 am

Sophie wrote:They're sort of like a non-deductible IRA contribution, except with far more user control.
This is a really good point about I-Bonds that is often overlooked.

I have a July 2001 I-Bond (at 3%) that is on the verge of doubling ($1.00 is now worth about $1.90).  All that interest was immune from federal income taxes and will be until I cash it in in 2031.
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Re: I-Bond Question

Post by dualstow » Sun Mar 17, 2013 8:56 am

Yeah, soon after I moved to my current location and found myself suddenly unemployed for many months, my dad advised me to buy I Bonds in lieu of having a retirement account. This was long before I knew about bogleheads or the pp. I didn't realize just how wise he was/is. :-)
Last edited by dualstow on Mon Mar 18, 2013 8:22 am, edited 1 time in total.
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