I bonds, the sequel

[johnrichardson_us]

I clouded up my last question about ibonds with a lot of data. Here's
another try:

What do people think about holding ibonds as a "better cash"?

Since they are held outside retirement accounts, they can do triple
duty - for education (subject to income restrictions), as a retirement
fallback, and as part of an emergency fund. But are there better
alternatives?

 

[zxcvbob]

I clouded up my last question about ibonds with a lot of data. Here's
another try:

What do people think about holding ibonds as a "better cash"?

Since they are held outside retirement accounts, they can do triple
duty - for education (subject to income restrictions), as a retirement
fallback, and as part of an emergency fund. But are there better
alternatives?

I have some I-bonds that I bought in 2000, back when they were paying
decent interest. Their current rate is 6.76%, which is not bad. But I
bought a few I-bonds in 2003 and they are only earning 2.61% right now.
I don't know what the current rate is, but it's not very good. I
think it just went up from 1% over inflation to 1.5% over, but they
adjusted the inflation rate way down.

The inflation hedge *seems* like a good idea, but the government fudges
the inflation calculations to understate the actual rate of inflation.
(they "cook the books") So you are probably better off with EE bonds,
which I think pay 4%. (still not all that great) The one great thing
about I and EE bonds is they can be used for educational expenses and
the interest becomes tax free -- subject to restrictions of course. The
other good thing about I and EE bonds is the interest is exempt from
state taxes.

If you can handle the $1000 increments, T-bills are a better deal. The
maturities are much shorter, and the interest rates are much higher --
currently about 5%. And the interest is still exempt from state taxes.
You can buy them direct from the treasury and pay no commissions.

If you can't swing $1000 at a pop for T-bills, bank CD's are also paying
about 5% for 6 to 12 month notes. Money market rates should be
competitive also, but I don't know that for certain.

Best regards,
Bob

 

[jIM]

I have some I-bonds that I bought in 2000, back when they were paying
decent interest. Their current rate is 6.76%, which is not bad. But I
bought a few I-bonds in 2003 and they are only earning 2.61% right now.
I don't know what the current rate is, but it's not very good. I
think it just went up from 1% over inflation to 1.5% over, but they
adjusted the inflation rate way down.

The inflation hedge *seems* like a good idea, but the government fudges
the inflation calculations to understate the actual rate of inflation.
(they "cook the books") So you are probably better off with EE bonds,
which I think pay 4%. (still not all that great) The one great thing
about I and EE bonds is they can be used for educational expenses and
the interest becomes tax free -- subject to restrictions of course. The
other good thing about I and EE bonds is the interest is exempt from
state taxes.

If you can handle the $1000 increments, T-bills are a better deal. The
maturities are much shorter, and the interest rates are much higher --
currently about 5%. And the interest is still exempt from state taxes.
You can buy them direct from the treasury and pay no commissions.

If you can't swing $1000 at a pop for T-bills, bank CD's are also paying
about 5% for 6 to 12 month notes. Money market rates should be
competitive also, but I don't know that for certain.

Best regards,
Bob

Could someone explain what an EE bond is?

I-bonds are indexed to inflation (and issued by US government),
correct?
T-Bills are treasuries (issued by US government), correct?
EE I have seen in fund prospectus, but have not seen an explanation,
anyone which could comment, please feel free.

 

[kastnna]

The inflation hedge *seems* like a good idea, but the government fudges
the inflation calculations to understate the actual rate of inflation.
(they "cook the books") So you are probably better off with EE bonds,
which I think pay 4%. (still not all that great)

Why, or more importantly how, do they "cook the books"? Most reports I
have read imply that they actually overstate inflation by about 1%.
Technology, Quality, and substitution effects all drive the CPI
unrealistically upward. The topic was first broached in 1996 when the
famous "Boskin Report" was submitted to the Joint Economic Commitee.
It explored these flaws and recommended solutions. It also estimated
that CPI was overstated by 1.1% annually.

 

[joetaxpayer]

Could someone explain what an EE bond is?

I-bonds are indexed to inflation (and issued by US government),
correct?
T-Bills are treasuries (issued by US government), correct?
EE I have seen in fund prospectus, but have not seen an explanation,
anyone which could comment, please feel free.

see http://www.savingsbonds.gov

But I like to think of the EE bond as a way for the cheap relatives to
give a gift that says $100, but it only cost $50. The recipient then has
to not lose the physical piece of paper for the next nearly two decades,
at which point it will cost more in gas (to go cash it in) than half the
interest on the bond.

For the individual, the 'nice' thing is the minimum purchase is $50 face
value, so only $25 cost.
JOE

 

[P.Schuman]

see http://www.savingsbonds.gov

But I like to think of the EE bond as a way for the cheap relatives to
give a gift that says $100, but it only cost $50. The recipient then has
to not lose the physical piece of paper for the next nearly two decades,
at which point it will cost more in gas (to go cash it in) than half the
interest on the bond.

For the individual, the 'nice' thing is the minimum purchase is $50 face
value, so only $25 cost.
JOE

I still have some $5000 HH bonds that pay $200/yr direct deposit.

they also have a software app for tracking your bonds.
http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard_download.htm

 

[johnrichardson_us]

But I like to think of the EE bond as a way for the cheap relatives to

Heh.


I still have some $5000 HH bonds that pay $200/yr direct deposit.

This is more along the lines how I'd like to use I Bonds. I don't
expect them to outperform VISEX.

I'm looking to add some inflation protection to my bond portfolio.
I'd really like TIPS, but can't fit them in an IRA yet. I bonds seem
like a TIPS-lite. I can hold them in a taxable account and they
adjust for the CPI-U, similar to TIPS.

I do wish the base rate was above 2.8% though.

I didn't really think about individual treasuries though. I could
swing the $1000 minimum, but then I'd be getting taxable interest and
no inflation protection.

 

[zxcvbob]

Why, or more importantly how, do they "cook the books"? Most reports I
have read imply that they actually overstate inflation by about 1%.
Technology, Quality, and substitution effects all drive the CPI
unrealistically upward. The topic was first broached in 1996 when the
famous "Boskin Report" was submitted to the Joint Economic Commitee.
It explored these flaws and recommended solutions. It also estimated
that CPI was overstated by 1.1% annually.

A simplistic and perhaps inaccurate example: if beef prices go way up
they say, "people will just buy less beef and more chicken", and factor
that in as a /decrease/ in food prices (even if chicken was also up).

Best regards,
Bob

 

[Tad Borek]

I clouded up my last question about ibonds with a lot of data. Here's
another try:

What do people think about holding ibonds as a "better cash"?

I think savings bonds are a good alternative, keeping in mind that
one-year window before you can cash them in. Either EEs or I-bonds, or
perhaps a bit of both.

A big advantage of savings bonds (over T-bills or CDs) is that they are
one of the few tax-deferred ways of earning interest. You pay tax only
when you cash them in, unless you elect to pay it each year, which
nobody does. And like other government bonds they're exempt from state
income tax, so in a place like CA you may be avoiding 9.3% tax on your
interest income.

These two features can really add up to a benefit over the years,
especially considering that they typically pay rates comparable to
short-term CDs. I've seen more than one small fortune built largely on
savings bonds. The power of compound interest, and a lot of time!

-Tad