Gumby wrote:
So, what are people thinking here? Buy our 2011 I-Bonds now, or wait until November to see if rates go up?
I went ahead with my paper bond purchases. Since I was also picking up some EE bonds (at the not-all-that-exciting 1.1% fixed rate) I decided to just go ahead. I'm not sure what your bank branch is like, but when I announce that I'm there to purchase U.S. savings bonds, a good amount of confusion usually ensues. To be precise, they usually look at me like I'm a tentacle-headed creature from Neptune that just asked to buy 10 kilograms of osmium. It winds up taking some time so I try to get it done in one shot.
I was thinking about holding off on my TreasuryDirect I-bonds until November, though.
I'm waiting until mid-October, at which point we will know the variable (CPI-based) rate for November onwards. If the variable rate is close to the current rate, I will wait to see if the fixed-rate component is non-zero. If the variable rate is significantly lower, then I will just buy my allocation for the year in October to get the nice high variable rate we currently have.
Be careful with I bonds. They are a great option, but may not be as responsive to sudden interest rate increases as T-bills.
HB reader made this point a few weeks ago:
"I wouldn't hold more than maybe 25-30% of my cash that way. They are probably okay (especially given the lack of alternatives to straight T-bill holdings), but they haven't really been tested in a "Fed-forced" high interest-rate environment like 1981."
In other words, the rate is low now, but if it suddenly started to rise, the new rate would be available quickly with a 30 day T-bill. An I-bond is going to lag by up to 6 months, which may eat up some of your performance.
"All men's miseries derive from not being able to sit in a quiet room alone."
Adam1226 wrote:
Be careful with I bonds. They are a great option, but may not be as responsive to sudden interest rate increases as T-bills.
HB reader made this point a few weeks ago:
"I wouldn't hold more than maybe 25-30% of my cash that way. They are probably okay (especially given the lack of alternatives to straight T-bill holdings), but they haven't really been tested in a "Fed-forced" high interest-rate environment like 1981."
In other words, the rate is low now, but if it suddenly started to rise, the new rate would be available quickly with a 30 day T-bill. An I-bond is going to lag by up to 6 months, which may eat up some of your performance.
You mean, 'interest rate risk?' Sure, that makes sense. But I don't see how a large I Bond holding would have that much of an impact. Any of the I-Bonds that were older than 12 months could be redeemed, for cash, instantly. The individual yearly limits on I Bonds would prevent most people from amassing too many unredeemable I Bonds all at once (i.e. I-Bond held for less than one year). So, I don't see that as a major risk at all — especially when you compare that to almost every other option for cash.
Last edited by Gumby on Mon May 16, 2011 6:40 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
A pre-1 year ibond could be looked at as pretty scary... I don't think you can redeem them no matter how much of a penalty you're willing to pay, which makes it scarier even than a 1-year treasury bond. But once you get past the 1 year hump (and especially after 5 years), you have yourself a pretty handy instrument, even at 0% fixed rates in a world of scarcity and volatile markets.
An average of 1% inflation could result in much higher ibond return, if the inflation rates go something like the following:
My math doesn't take into consideration compounding, but you get the idea... in a time of volatile inflation/deflation bumpiness, I-bonds are pretty sweet.
I also think it's apparent that in this day and age, cash-holders are willing to possibly lag inflation moreso than in the past, so a CPI based cash-instrument appears to me to be a real winner even without the fixed portion.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
Gumby wrote:
You mean, 'interest rate risk?' Sure, that makes sense. But I don't see how a large I Bond holding would have that much of an impact. Any of the I-Bonds that were older than 12 months could be redeemed, for cash, instantly.
I agree. Ironically, the biggest danger of the I-bond is that its attractive terms (tax deferral, inflation pacing, principal protection) might mean it is psychologically difficult to redeem the I-bond when you should do so.
HB Reader's example of 1981 is important because it was a time where short-term interest rates rose much higher than inflation. I-bonds would then lag other cash instruments. Gold, stocks, and bonds would likely all suffer. Cash needs to be there to cushion the blow, which means you need to be doing two things with your cash: getting those juicy new interest rates and buying up gold, stocks, and bonds as rebalance bands are crossed. Both of those things could require selling I-bonds and reinvesting either in real short term T-bills or whatever assets needed buying. I know that I'd have a hard time doing it but I also know that it's part of what made the PP able to stagger out of 1981 more or less intact.
It's for reasons like this that I don't think Browne would have necessarily recommended I-bonds. They can function marvelously as cash but you do have to keep your wits about you in "special circumstances" to get the most out of them.
moda0306 wrote:
My math doesn't take into consideration compounding, but you get the idea... in a time of volatile inflation/deflation bumpiness, I-bonds are pretty sweet.
Yes, this is a feature that I really love. It's important to note that the principal protection feature of TIPS isn't nearly as attractive as what the I-bond offers.
I think the decision to sell/buy i-bonds in 1981 would be a tough one... and probably depend on if the i-bond fixed rate offered in 1981 was as juiced as ST bond rates were (of course they didn't have ibonds back then, but it serves to help you think about such a situation should it arise).
Assuming the 1981 i bonds didn't rise in fixed rates from 1980, I think I'd have had trouble selling my hypothetical 1980 i-bonds. Especially when you think of the tax-considerations of selling, I think I'd have had to play the long-game and just use my MM fund cash to rebalance. Of course, if this left me too cash-strapped, selling some of the i-bonds would be an obvious option.
I see a situation where I'd want to sell my i-bonds as either 1) newly issued i-bonds are paying better fixed interest, or 2) I'm forced to use up enough cash where my i-bonds are making up too much of my cash portion (aka, not enough immediately available, immediately "refinancing" cash.
I'd be curious to see what the returns of Treasury MM funds were vs 1-3 year bonds during the 1970's and early 80's. The risk to st being very quickly rising rates, I'm definitely impressed with their performance during that time.
Yield curves interest the hell out of me in terms of their implications on the economy as a whole... plenty of learning left to do on that subject on my part.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
I think maybe if someone is long on cash (beyond their 12 month cushion), and can max out both the i-bond and EE bond limits, maybe it's a good idea to do both.
EE bonds (see more detailed thread for more info) pay a fixed rate (1.1% now) for 30 years, but like i-bonds are redeemable at face value after one year.
The nice thing is, they double in face value after 20 years, which represents a 3.5% ROI from year one... so they are paying greater than what the 3 year treasury is currently offering, tax deferred, and if you can avoid redeeming them they have a 3.5% (tax-deferred) built-in return after 20 years, while the 20-year bond is currently paying 3.99%, which is less-than 3% after 25% federal tax.
Even EE-bonds are a great option if you have plenty of immediate cash available.
For instance, instead of looking as i-bonds and ee-bonds as two separate instruments, think of them as the same (thought the ability to break them up is always a plus).
1) The EE bond pays 1.1% fixed, has a 3.5% phantom return if held for 20 years, and no inflation adjustment.
2) The I-bond pays 0% fixed, has no phantom return, but has a CPI adjustment, currently at 4.6%
The two, together, is like owning a bond with a .55% fixed return, a 1/2 CPI adjustment, and a 1.75% phantom return if held for 20 years (interestingly, about the amount of time Japan has been in a deflation)... not too bad, but you can break them up into their respective halves, which is a huge plus.
So basically, if you're concerned about the fixed rate (indicating a long-term deflationary fear), buy some EE bonds too... as a sustained 1.1% fixed rate still beats the market on 1-year bonds today, plus, if Japan-like deflation is what we see, could represent a great fixed rate for a long time, with that phantom gain waiting there for you (and growing from 3.5% as the "wait until doubling" decreases. (plus, remember, this is all tax-deferred). I bonds seem like the "better bond," but their lack of a fixed rate could leave them faltering if CPI falls, even slowly, year after year. Meanwhile, a 1.1% tax-deferred and fixed return on your "lesser bonds" is going to be a better play.
I think owning both I and EE bonds could be a great way to play, in a diversified way, both the short-term and long-term markets in arbitrage, if you will. Plus, it effectively doubles your allowed savings bond amount to $20,000 per person, or $40,000 per couple.
All in all, as great as I-bonds are, EE bonds have their place too. They offer better return than 3-year treasuries with no interest rate risk, enjoy tax-deferral, and have the phantom gain built in if held. I see no reason to ignore them.
Last edited by moda0306 on Tue May 17, 2011 1:15 pm, edited 1 time in total.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
My credit union savings accounts (Alliant, SFGI) where I keep part of my cash PP are only yielding 1.1% to 1.2%. Given they are taxable (my tax-efficient vehicles are all maxed out on higher-yielding LTT and cash instruments), it seems like an EE bond is indeed a no-brainer for additional cash since I have enough liquid cushion anyways.
moda0306 wrote:
I think the decision to sell/buy i-bonds in 1981 would be a tough one... and probably depend on if the i-bond fixed rate offered in 1981 was as juiced as ST bond rates were (of course they didn't have ibonds back then, but it serves to help you think about such a situation should it arise).
I think that buying I-bonds will usually be the correct move, regardless (unless they really screw you on the fixed rate, of course.) If interest rates really blew up a la 1981, I expect that simultaneous buying and selling would make the most sense for staying close to the true PP formulation of cash. In my mind, cash in the PP must carry no credit risk, be extremely liquid, and extremely reactive to interest rates. I-bonds can be all of these things so long as you are willing to sell them when necessary.
The hard part is judging when "necessary" comes, if at all!
If you follow HB Reader's suggestion of keeping I-bonds to no more than 25-30% of cash, it probably doesn't matter too much either way. But if savings bonds made up the vast majority of your cash holdings, you'd probably have to think on this very seriously.
moda0306 wrote:
I think maybe if someone is long on cash (beyond their 12 month cushion), and can max out both the i-bond and EE bond limits, maybe it's a good idea to do both.
...
All in all, as great as I-bonds are, EE bonds have their place too. They offer better return than 3-year treasuries with no interest rate risk, enjoy tax-deferral, and have the phantom gain built in if held. I see no reason to ignore them.
You're going to get sick of me agreeing with you, but that's how I view them as well. I-bonds are the superior all-around instrument, but EE's at the right rates are nice as well. You must, however, be willing to redeem them when (if) interest rates rise.
While I don't expect to see super-low interest rates forever, who knows? If they stay low, I'll have these EEs that will double in 20 years. If they don't, I can hold the EEs so long as the rate they offer me is better than short-term T-bills. So long as you are willing to manage your EE holdings in response to changing interest rates, it's a win. (Anyone who doesn't think they'd want to or remember to sell them should stick with pure T-bills or short Treasury Notes, on the other hand.)
No problem. This stuff intrigues me, especially since senior citizens left and right are paying 1% to money managers to put them into a muni bond fund reaping them some pathetic return. When here sits safer, tax-deferred, more lucrative return from a couple little-known bond instruments.
LW,
Keynes was right!! There... we've stopped agreeing with each other... haha. (JK, let's not get into that discussion on a cash thread).
But yes... many feel the need to tinker with the PP to accept it... and if their "out" for tinkering is "Savings Bond Maintenance" (I see this as a retirement pass-time that I'll love to do) then that's hardly a dangerous move. I think the 25-30% of i-bonds to be a bit conservative. I think the part you should focus on is "i/ee bonds of <1 yr old." If interest rates on my 2 year old ibond are 4.6+% right now, and all of a sudden we have a massive inflationary spike and Treasury MM rates are at 18% tomorrow, I sell my i-bond at face value and put it into treasury MM accounts.... easy as that. Maybe I'm missing something about what HB Reader was saying... I could see some risk in trying to buy i-bonds in such an environment where you have to hold them for 1 yr, but that's about it.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
As long as most Treasury Money Market Funds are closed to new investors, I-Bonds seem like a no-brainer — particularly since Fidelity and Vanguard are both telling me that I can't use their Treasury Money Market Funds.
Perhaps if more Treasury Money Market Funds ever start to open back up to investors we should take that as a sign to question the I-Bond strategy. And I imagine someone will then start a new discussion here titled, "Should I redeem my I-Bonds?"
Until then, they are very tempting.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
I predict, as rates rise, we'll probably have to have someone create an i/ee redemption decision tree. If rates don't rise, rest assured we'll all be on here just as much patting ourselves on our backs while we revel in our creativity.
The cash section of this forum will light up like a Chrismas tree. To me, though, thinking along these lines is as fun as it gets...
It will get really hairy if/when rates rise and people are 7-12 years into their EE bonds and are trying to decide whether to redeem them or not.
Could be fun.
Last edited by moda0306 on Tue May 17, 2011 3:14 pm, edited 1 time in total.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
Definitely. While I find this stuff fun and a great outlet for tinkering, "Savings bond management" might be a bit much for some.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
Gumby wrote:
As long as most Treasury Money Market Funds are closed to new investors, I-Bonds seem like a no-brainer — particularly since Fidelity and Vanguard are both telling me that I can't use their Treasury Money Market Funds.
If you're with Fidelity, you can buy and sell Treasury securities at no charge. This means that you can run your own virtual "Treasury Money Market Fund"-ish thing with no expenses. Considering that Treasury Money Market funds have such high expense ratios, I don't feel like I'm missing out on too much by not being allowed in.
I now use a 0-3 year Treasury ladder for most of my cash, savings bonds for a good chunk, and an HSA for most of the rest. (I also have an old CD ladder that I am in the process of winding down that I call PP "cash".)
Schwab also offers free Treasury trades. It's nice that there are so many good options out there.
MediumTex wrote:
One issue to consider in the redemption discussion is the accumulated and untaxed interest in your savings bonds.
Over time, this can be very significant.
Exactly right. Again, this sort of thing is why I feel that Browne probably would not have generally recommended savings bonds for the Permanent Portfolio, in spite of their advantages. If you're looking for a "fire and forget" type of instrument, something like an EE-series savings bond does not fit the bill the way that Treasury Bills do.
I-bonds are darn close to being "fire and forget", but probably not close enough to get the "fail-safe investing" seal of approval, if I had to guess. If you don't mind futzing around with such things, though, they are wonderful.
If the lack of "fire-and-forget" has to do with paying taxes that you would have had to pay in the past with lower-yielding treasury bonds or MM fund, I think it can be forgiven for the fact that people will think twice about selling them or do a quick tax-cost calc to see the actual cost of redemption.
Obviously, mental barriers (or freeing yourself from them) are a big part of the PP though, so I can see where you're coming from.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
Lone Wolf wrote:If you're with Fidelity, you can buy and sell Treasury securities at no charge. This means that you can run your own virtual "Treasury Money Market Fund"-ish thing with no expenses. Considering that Treasury Money Market funds have such high expense ratios, I don't feel like I'm missing out on too much by not being allowed in.
I now use a 0-3 year Treasury ladder for most of my cash, savings bonds for a good chunk, and an HSA for most of the rest. (I also have an old CD ladder that I am in the process of winding down that I call PP "cash".)
Lone Wolf, a 0-3 year Treasury ladder did occur to me. But, I'm not 100% sure about what the best approach is. How many "rungs" do you work with in a 0-3 year Treasury ladder? And if interest rates were to ever rise quickly, wouldn't that pose a problem depending on how many rungs you had? Harry Browne seemed to recommend 1-Year Treasuries if I remember correctly, but that was also during a time of higher interest rates. It seems like it could become a bit complex if I thought about it too much. Maybe you could give a little Fidelity Cash tutorial as a new Cash discussion? I'd really appreciate it and I think others would appreciate it as well.
Last edited by Gumby on Tue May 17, 2011 8:54 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
Sure, happy to. I placed some thoughts in your new thread.
As for Browne's original recommendations, I recall Fail-Safe Investing recommending a Treasury Money Market account. I no longer remember what he specifically said about owning individual Treasury Bills. Judging by the composition of most of these money markets, I think he was implicitly calling for Treasuries shorter than 1 year, leaning toward 6 months and shorter. I should dig up "How the Best-Laid Investment Plans Go Wrong", as it goes into a higher level of detail.
Anyone that has a good memory for the radio shows might also be able to remember whether Browne said much about alternatives to the Treasury Money Market.
According to Browne, T-bills were fine, perhaps even preferable...one less piece of paper between you and your money (as compared to a treasury only money market).
"All men's miseries derive from not being able to sit in a quiet room alone."
I think we should petition the treasury for bearer bonds... what an excellent "mattress" instrument.
Then, we can can sit in our rooms with the bonds strewn all over stewing, "Now I have a interest-bearing instrument I can hold in my hand.... HO... HO... HO..."
I'm surprised, after seeing how 1-3 year treasuries performed in the 1970's, (along with the fact that your portfolio is 25% gold) that one would feel like they have to be so short-term in their "cash" as to avoid going beyond 6-months.
Then again... I'm sure someday we'll have our "aha" moment on that as well.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
Adam1226 wrote:
According to Browne, T-bills were fine, perhaps even preferable...one less piece of paper between you and your money (as compared to a treasury only money market).
Completely makes sense. Do you happen to remember if he said this in print or was it only on the radio?
Also, in Fail-Safe Investing, Browne's PP chart has this notation: "Cash results are for Treasury bills, assuming a 1-year bill was bought at start of each year." This implies that he considered anything 0-1 years in duration to be fine.
moda0306 wrote:
Then, we can can sit in our rooms with the bonds strewn all over stewing, "Now I have a interest-bearing instrument I can hold in my hand.... HO... HO... HO..."
"No more of the $24.9 million remaining in unmatured definitive securities (5 CUSIPS) are callable. The next maturities will occur in 2015. The last definitive securities were issued in 1986 and are due to mature in 2016. Approximately 1% or less of the total matured securities are redeemed each month."
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
I want NEWLY issued bearer bonds. None of these crusty, yellowed 1985 bonds.
But instead of historical figures, I want movie villains like Hans Gruber and Robert DeNiro's character in Heat to be on them.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
