Gyroscopic Investing

As many on this forum know, I have long been a booster of buying US Series I bonds, especially for “Deep Cash” in the Cash quadrant of the Permanent Portfolio. I recently halted this practice (at least for now) and felt some obligation to explain why my thinking has evolved:

1. My I-bonds now constitute over 40% of my entire Cash holdings. I have plenty of them and diversification is an essential quality of a well-balanced portfolio to me.

2. I purchased a new house last year. Previously I paid cash for houses but this time I got a 30 year 3.9% mortgage before the Fed jacked up rates to over 7%. Since short term T-bills have recently been yielding about 5.4%, I decided to put cash previously going into I-bonds into constructing a T-bill ladder. If the T-bill yield should fall below my mortgage interest rate in the future, (which seems unlikely) I can pay off the mortgage in less than a year without selling off any of my other Permanent Portfolio assets.

3. In the meantime, inflation shows no sign of dropping below 4% any time soon. If it continues, the real cost of my monthly mortgage payment will decline month-by-month. Free money is a good thing.

jhogue wrote: ↑Sun Aug 06, 2023 4:42 pm
As many on this forum know, I have long been a booster of buying US Series I bonds, especially for “Deep Cash” in the Cash quadrant of the Permanent Portfolio. I recently halted this practice (at least for now) and felt some obligation to explain why my thinking has evolved:

1. My I-bonds now constitute over 40% of my entire Cash holdings. I have plenty of them and diversification is an essential quality of a well-balanced portfolio to me.

2. I purchased a new house last year. Previously I paid cash for houses but this time I got a 30 year 3.9% mortgage before the Fed jacked up rates to over 7%. Since short term T-bills have recently been yielding about 5.4%, I decided to put cash previously going into I-bonds into constructing a T-bill ladder. If the T-bill yield should fall below my mortgage interest rate in the future, (which seems unlikely) I can pay off the mortgage in less than a year without selling off any of my other Permanent Portfolio assets.

3. In the meantime, inflation shows no sign of dropping below 4% any time soon. If it continues, the real cost of my monthly mortgage payment will decline month-by-month. Free money is a good thing.

First unrelated response, then related responses.

As THE I-Bond devotee in this forum can you confirm the following through either direct knowledge or experience?

An your ago I read in a Larry Swedroe book on bond investing, which came out in 2006, that the annual iBonds purchasing limitations were $60,000 single and $120, 000 couple. I almost jumped out of my chair after I read that as it is considerably greater than the $15,000 / $30,000 we currently have.

And, related to that .... do you know of the history of these limitations or where it could be found?

Questions on your #2.

Would you have also been able to pay cash for this house?

What additional costs did you have from obtaining a mortgage over, again, paying cash?

When you say: "If the T-bill yield should fall below my mortgage interest rate in the future, (which seems unlikely) I can pay off the mortgage in less than a year without selling off any of my other Permanent Portfolio assets." Does this mean selling off any existing Treasuries that you own or not repurchasing when they come due? I guess if the yield falls below 3.9% you will be having a profit from selling those Treasuries as they would all be selling at a premium.

Also, your parenthetical phrase "(which seems unlikely)" seems to hold the belief that rates will stay up for quite a while.

I'm about to buy some Treasuries (well a lot of them) and I need to decide the breakdown between nominal Treasuries and TIPS and the varying terms for each.

I believe that there are three more Fed meetings by the end of this year.

At each of those meetings they can decide to cut, leave the same, or increase. I take cutting as not a probability. Currently we are at 5.25% to 5.50%?

My best guess is that on December 31, 2023 it will stand at either 5.50% to 5.75% or 5.75% to 6.00%. Then sometime during 2024 (no idea what quarter the cutting will begin).

We are just about 0% in January 2022 and in less than a year it went up about 5.0%.

Seems like it could go down just as quickly?

Therefore buying long-term Treasuries at their current rates may be one of those once in a generation or two opportunities (like all of us who wished we'd purchased long-term bonds in the early 80s before Paul Volker did all his work).

I posed this question to a former coworker who had also worked as a banker on Wall Street. His opinion was that now is NOT the time to buy long-term Treasuries as he believes the Fed rate is going to hit 7.0%.

jhogue wrote: ↑Sun Aug 06, 2023 4:42 pm inflation shows no sign of dropping below 4% any time soon.

jhogue, congratulations on the house deal, but is this a typo? CPI-U is currently at 3.0% and has been dropping precipitously. With inflation seemingly under control and unemployment at 3.5%, one wonders what motivation the Fed has for any further rate increases.

Vinnie, the purchase limit for I bonds was changed from $30,000 to $5000 in December 2007. See this press release. The justification was to help the small investor!

Pet Hog wrote: ↑Mon Aug 07, 2023 10:42 am

jhogue wrote: ↑Sun Aug 06, 2023 4:42 pm
inflation shows no sign of dropping below 4% any time soon.

jhogue, congratulations on the house deal, but is this a typo? CPI-U is currently at 3.0% and has been dropping precipitously. With inflation seemingly under control and unemployment at 3.5%, one wonders what motivation the Fed has for any further rate increases.

Vinnie, the purchase limit for I bonds was changed from $30,000 to $5000 in December 2007. See this press release. The justification was to help the small investor!

I second questioning the inflation assumption.

Thanks for that release. I think what it was saying that they did not want the larger investor to be able to take advantage of such a good deal.

> I posed this question to a former coworker who had also worked as a banker on Wall Street. His opinion was that now is NOT the time to buy long-term Treasuries as he believes the Fed rate is going to hit 7.0%.

doesnt necessitate 30 year going higher. yield curve's inverted. https://en.macromicro.me/collections/51 ... bonds-rate

Long bonds at 1% are dubious but at 4% PP theory is sound.

Pet Hog wrote: ↑Mon Aug 07, 2023 10:42 am jhogue, congratulations on the house deal, but is this a typo? CPI-U is currently at 3.0% and has been dropping precipitously. With inflation seemingly under control and unemployment at 3.5%, one wonders what motivation the Fed has for any further rate increases.

When I listen to Jerome Powell speak, it seems that the number he is really focussed on is core inflation which still stood at 4.83% through June. Here's my source:

https://ycharts.com/indicators/us_core_inflation_rate

The July numbers will be announced on Thursday morning (8/10) so both core and CPI-U (also called "headline inflation") will likely change. Powell has referred to the core number as "stubbornly high" and has said over and over that The Fed fears that the longer it stays high, the more difficult it will be to bring it down to their 2% target.

Anyway, I think The Fed is trying to get that core rate down sooner rather than later, so they may still raise the fed funds rate further. At least that is my reading of the tea leaves.

I suppose I should have left out any speculation on the future of interest rates in my last post. I don't know what they will do. What I am trying to do is guard against the possibility that inflation might be stubbornly persistent.

jhogue wrote: ↑Tue Aug 08, 2023 8:20 am
I suppose I should have left out any speculation on the future of interest rates in my last post. I don't know what they will do. What I am trying to do is guard against the possibility that inflation might be stubbornly persistent.

But don't we all have to make speculations on the future of interest rates so as to make our Treasury purchase decisions?

If we think inflation is going to persist then we purchase shorter term Treasuries so as to keep getting the rates close to inflation. But if we think inflation is going to come down at some point in the relative near future then we'd want to buy longer term Treasuries so as to lock in the higher rates of today.

barrett wrote: ↑Tue Aug 08, 2023 6:38 am When I listen to Jerome Powell speak, it seems that the number he is really focussed on is core inflation which still stood at 4.83% through June.

Too bad our I Bonds aren't priced based on core inflation -- or headline, whichever is the higher! Personally, I'd be delighted if the Fed keeps raising the funds rate, to 6 or 7%, so I can lock in some decent treasury yields for many years to come while inflation is low. Not sure how much higher LTTs could go, currently 4.2% on the 30-year, so I'm planning to rebalance into them some time before or in September. Let's see what this week's inflation numbers say.

Pet Hog wrote: ↑Tue Aug 08, 2023 10:18 am

barrett wrote: ↑Tue Aug 08, 2023 6:38 am
When I listen to Jerome Powell speak, it seems that the number he is really focussed on is core inflation which still stood at 4.83% through June.

Too bad our I Bonds aren't priced based on core inflation -- or headline, whichever is the higher! Personally, I'd be delighted if the Fed keeps raising the funds rate, to 6 or 7%, so I can lock in some decent treasury yields for many years to come while inflation is low. Not sure how much higher LTTs could go, currently 4.2% on the 30-year, so I'm planning to rebalance into them some time before or in September. Let's see what this week's inflation numbers say.

Aren't we all??!!!

Revenge of the Savers!

> don't we all have to make speculations on the future of interest rates

Bruh. What attracted you to a set-and-forget investing forum

boglerdude wrote: ↑Tue Aug 08, 2023 7:45 pm
> don't we all have to make speculations on the future of interest rates

Bruh. What attracted you to a set-and-forget investing forum

That it's a formula, mechanical system.

I will challenge anyone to beat me as a buy-and-hold investor. Made my equity investments in January 2003 and I've not since added or subtracted from them. All subsequent investments / savings have gone into cash.

That cash is now all in Vanguard's Treasury Money Market fund (VUSXX). I don't like it because it is only 70% Treasuries with the rest mainly being Repurchase agreements.

So I want to convert all I have in VUSXX to direct ownership of Treasuries. First step is to decide what portion should be nominal Treasuries and what should be TIPS. Then within each of those the time period for each of those bills / notes / bonds.

Now seems like it could be a good time to go longer term rather than constantly rolling over four week purchases, which are always reflecting current rates. Those current rates could be a lot lower than they are now if the Fed reverses rates as quickly as they have increased them over the last year and a half.

A one year T-bill yielded 5.34% this morning in Fidelity's secondary market.
A five year brokered CD yielded just 5.50%

1. Isn't it nice that Cash isn't trash any more?

2. Why fight the Fed?