Gyroscopic Investing

I see EE bonds and even I bonds as having unique advantages to individuals which is probably why they limit the purchase amount.

Currently EE bonds offer a guaranteed rate of 3.5% if held for 20 years. The 30 year treasury is at 3.21% if held for 30 years.

Obviously if you were in it for the buy and hold, the EE bond is a much better deal.

I understand that you hold the 30 year treasuries for only 10 years and they allow capturing of capital gains when interest rates fall.

However, as long as long term treasury rates are below 3.5%, it seems logical to think that you would have greater gains from the EE bonds. Even by having to hold them for 20 years.

nevermind

It looks like this has already been discussed here:

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

I will read that.

I have been thinking about this more as 30 year treasuries have been dropping.

If 30 year treasuries get to 3.00 % again, I am going to swap as much as I can to EE bonds.

I see it as a win win situation. If 30 year treasuries stay below 3.5 %, I earn the same if not better in the long run. If 30 year treasuries go back up above 4.00 %, there is no capital loss.


While rates are below 3.5 %, I will call my EE bonds long term bonds. If 30 year rates go back above 4.00 %, I will call them cash and re-balance as necessary.

whatchamacallit wrote: I have been thinking about this more as 30 year treasuries have been dropping.

If 30 year treasuries get to 3.00 % again, I am going to swap as much as I can to EE bonds.

I see it as a win win situation. If 30 year treasuries stay below 3.5 %, I earn the same if not better in the long run. If 30 year treasuries go back up above 4.00 %, there is no capital loss.


While rates are below 3.5 %, I will call my EE bonds long term bonds. If 30 year rates go back above 4.00 %, I will call them cash and re-balance as necessary.

What if rates drop to 2%?

Would you be comfortable watching stocks and gold drop in value holding 25% T-bills and 25% EE bonds?

Not saying it's a bad idea.  Just wondering if not having the deflation protection would bother you.

In some ways, a 50% cash portfolio (T-bills and EE bonds) seems like deflation protection, just not the same as T bonds.

I see what your saying. The volatility would be higher without the market price for the EE bonds changing with rates. The portfolio value could drop a lot quicker with the current value of the EE bonds until they hit 20 years and get a big payday.

If rates do drop that low though I think I would be thankful that I have EE bonds that are doubling in 20 years or less depending when they were bought.


Looking at the bonds individually outside of the permanent portfolio, it seems like a no brainer.

whatchamacallit, just thought a real-world experience with these EE bonds might be of value to you. I have some that I bought between 1997 and 1999 and the doubling time on those is 17 years (the rules change every few years on these bonds). Eight of my bonds will hit their double date on 11/1/14. Their current value ($1,000 bonds for which I paid $500 each) is $847.60 and the rate they will pay until that 'big' payday is 1.42%. Some others I have that just hit their doubling date in April are now paying 1.12%.

I guess just keep in mind that the rates on them can be painfully low and that life throws us curveballs that may mean we need the money before that magical doubling date. When I got these, there was a lot less easily available information on savings bonds than there is now. I don't regret having bought them but I certainly didn't understand them as well as I should have. For what it's worth, I'll use these EEs between 2016 and 2020 to help pay for our daughter's education. My understanding is that interest earned on the EE or I-Bonds is not subject to taxes if they are used to pay for higher education. See this link here:

http://www.treasurydirect.gov/forms/savpdp0051.pdf

And here is the IRS form that would help you figure out if you qualify for the exclusion based on your income:

http://www.irs.gov/pub/irs-pdf/f8815.pdf

Kind of a lot of damn info, I guess, but I thought it might be helpful. Who knows what the rules will be 20 years from now? Good luck!

Thanks for the info barrett. I learned something I didn't know reading your links. I learned I bonds can also be used for education tax free and I also didn't realize that you need to use principal plus interest to get the full benefit.


We are getting closer to that 3.00% mark for 30 year treasuries. I am still thinking of trading as much as I can from 30 year treasuries to EE bonds.

I still see it as a free lunch that the institutional investor doesn't have access to. If rates do go lower and stay lower I would bet the rules for EE bonds will end up changing.

I just traded in some of my treasury bonds that were trading at 2.95 %. I will buy some EE bonds to hold their place once I confirm the order went through.

Interesting, whatchamacallit. I assume that you are young (and accumulating for a while) and that you have read the whole moda/Ryan Melvey thread that you have cited above? I think that moda advocated looking at the EEs as part cash/part LTTs.

I think you're overlooking the concept of TOTAL RETURN?

The only way EE Bonds will help you is in an extended T-Bond bear market.  Otherwise, its a losing proposition and is no better than a cash equivalent just as I Bonds are.

I've hesitated to buy EE bonds because that guaranteed 3.5% rate over 20 years may actually prove to be a really bad deal compared to I bonds if inflation takes off.  You just don't know, and 20 years is way too long a time horizon to be making guesses.  When it comes to cash, I don't like making long term bets.  Cash is about simple and liquid, and also about adjusting quickly to the current interest rate environment.

Also, you are getting confused by the word "bond" here.  Bonds in the Permanent Portfolio are long-term Treasuries whose value fluctuates depending on the current interest rate environment.  Savings bonds don't have that fluctuation.  They are appropriate for the cash allocation of the PP, but not at all for the bond portion.  If you are cashing out your long bonds, you no longer have a PP.  Not a bad portfolio perhaps, but not a PP.

I think what I don't like about this EE idea is that it doesn't give you a favorable option to do an about face with that money. In 5, 10 or 15 years you may feel that you don't want to wait the full 20 years to get that magical doubling (remember that the interest rate can be really bad right up to that point), but you have the sunk-cost effect looming over you, as in "Damn! I have waited this long, so I might as well just keep waiting." You don't want to be closing off options with your investments any more than you have to.

And 20-years is a laughably long time.  Look at what happened in the last 20!

I am youngish with about 30 years until standard retirement age so I am only accumulating.

The way I understand the 30 year bonds is that you are locking whatever rate you buy them at. Their advantage is that you can sell this rate if rates go lower. If the rates go higher, you have still locked in that lower rate and lose principal.

I would rather lock in a higher rate for only 20 years vs 30 years. If rates continue to go lower I will be earning a much better rate. If rates go higher, I basically have the option to forfeit the 3.5 % rate payments by cashing in early without losing any principal. I may or may not even have to do that if I can find room for them in my cash portion.

whatchamacallit wrote: I am youngish with about 30 years until standard retirement age so I am only accumulating.

The way I understand the 30 year bonds is that you are locking whatever rate you buy them at. Their advantage is that you can sell this rate if rates go lower. If the rates go higher, you have still locked in that lower rate and lose principal.

I would rather lock in a higher rate for only 20 years vs 30 years. If rates continue to go lower I will be earning a much better rate. If rates go higher, I basically have the option to forfeit the 3.5 % rate payments by cashing in early without losing any principal. I may or may not even have to do that if I can find room for them in my cash portion.

In the context of the PP, the long term bonds are what protects the overall value of the portfolio in a deflationary environment.  In this kind of environment, both gold and stocks likely go down, but interest rates go down as well so the principal value of your bonds goes up.  In all likelihood you will sell some bonds because the bond portion of your portfolio will exceed your rebalance bands.  The interest you get from the bonds is nice, but that's really not the point.  By trading 30 year bonds for EE bonds, you're forgoing this protection since the principal value of EE bonds does not fluctuate with interest rates.

This is a very dangerous idea and basically breaks the PP.

Do you really not care if your overall portfolio loses 20% or more in a deflationary environment?

If you're absolutely convinced long term interest rates cannot go to 2% or even 1%, please see Browne's golden rule #4 - 'No one can predict the future". 

Likeise, don't go the other extreme and think zero coupon bonds are better because in an extended deflationary environment like Japan, the interest income off T-Bnds are critical in keeping the portfolio above water.

whatchamacallit wrote: The way I understand the 30 year bonds is that you are locking whatever rate you buy them at. Their advantage is that you can sell this rate if rates go lower. If the rates go higher, you have still locked in that lower rate and lose principal.

I would rather lock in a higher rate for only 20 years vs 30 years. If rates continue to go lower I will be earning a much better rate. If rates go higher, I basically have the option to forfeit the 3.5 % rate payments by cashing in early without losing any principal. I may or may not even have to do that if I can find room for them in my cash portion.

I detect a major bit of confusion here.  The purpose of 30 year bonds in the bond portion of the PP is not to earn interest, but to provide deflation protection.  EE bonds do not provide that protection precisely because the principle is not affected by the current interest rate environment.  A 30 year Treasury is not a cash instrument, while an EE bond is.  An EE bond is an odd sort of cash instrument that is essentially a 20 year bet that interest rates for cash instruments (NOT BONDS - that means savings accounts, CDs, T Bills) will not exceed 3.5%.

You might benefit from doing a bit of reading on the bond portion of the PP, from the many sources available to you:  Craig/MT's book, the stickied threads on this forum, Harry Browne's books and radio show.  The PP is simplicity itself at first glance, but these subtleties are endless.