EE Series Savings Bonds

Discussion of the Cash portion of the Permanent Portfolio

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EE Series Savings Bonds

Post by Lone Wolf » Wed Feb 16, 2011 10:31 am

We've talked a good bit about I-bonds on here so I thought that I'd take a quick study of the "other" savings bond: the EE savings bond.  I wanted to just sort of do a quick little round-up for my own edification and see if anyone had some thoughts on how they fit into the Permanent Portfolio's "Cash" section (if at all.)

First, how they work.  EE bonds have a fixed rate of interest.  This rate is permanently established on the day that you buy the bond.  According to Treasury, this rate is determined by “adjusting the market yields of the 10-year Treasury Note by the value of components unique to savings bonds, including early redemption and tax deferral options.”?  I think this means that Tim Geithner makes it up on the spot (although I have been unable to verify this.)

These bonds grow in a tax-deferred fashion (like I-bonds.)  You owe taxes when you redeem the bonds or when the bond reaches full maturity (after 30 years.)  Once 30 years have elapsed, the bond stops earning any interest and it’s time to pay the tax man.  (They're also free of state and local taxation.)

Similar to I-bonds, EE-bonds must be held for one year.  If they are redeemed in their first five years, 3 months of interest is charged as a penalty.  For example, a bond redeemed after being held for 48 months would net the original principal, plus 45 (48-3) months of interest.  After five years, the bonds can be redeemed at any time without penalty.

There is a second way that EE bonds can pay off.  If they are held for 20 years, they immediately double in value (assuming that the rate of interest at which they were issued hasn’t made them more than double in value already.)  At current rates (0.6%), this is a very important mechanism as it yields an interest rate that’s equivalent to ~3.53%.

Basically, if these bonds match or nearly match the prevailing interest rate, they are a pretty good buy.  If they fall significantly below the prevailing interest rate, you always have the option to redeem them if you’ve held them for at least a year.  The potential penalty is only three months of interest, which is just not all that scary.

The current rate of 0.6% is roughly equivalent to about a two-year T-bill.  Additionally, if we go through a very long stretch of extremely low interest rates, the 20-year doubling is a nice way to achieve a “sudden”? >3.5% interest rate.

So do they fit into the Permanent Portfolio?  This is my interpretation of the requirements for a "Cash" instrument in the Permanent Portfolio:
  • Must be backed by the full faith and credit of the United States government.  Yes.
  • Must be highly liquid and available at a moment's notice.  Sort of -- they are liquid after one year.
  • The principal must be free of interest rate risk and the security must at minimum always retain its full value.  Yes.
On the whole, I don't see these as being nearly as attractive as I-series savings bonds but I could potentially see a place for them if you max out your annual I-bond purchases or if the spread between the I-bond fixed rate and the EE-bond fixed rate widens.  Since they have a fixed rate of interest, you must be willing to redeem them when rates begin to rise, something you don't have to worry about as much with I-bonds.  I bought a batch of EE bonds at 1.4% last year but I'm thus far passing on the current 0.6% offering.

Anyone else have any further thoughts \ corrections on EE bonds?  I'd be curious how you fit them in, if at all.
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Re: EE Series Savings Bonds

Post by moda0306 » Wed Feb 16, 2011 10:56 am

Nice writeup, Lone Wolf.

It doesn't meet the "full faith and credit" standard, but as far as online savings go, Ally offers 2.39% on 5 year CD's with (I believe) 2 or 3 month interest penalty.

Not too shabby.
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Re: EE Series Savings Bonds

Post by MediumTex » Wed Feb 16, 2011 11:03 am

EE bonds are great, though not as good as they used to be. 

In the past, the EE bond rate was set for the life of the bond.  Today, the rate fluctuates, so they are not as appealing to me.

When compared to 12 month treasurys I think EE bonds are great (you still have the complete tax deferral element), though I think I-bonds provide a lot more bang for the buck.

There is an interesting "back door" interest component to EE bonds that is not widely discussed.  IIRC, Series EE bonds are guaranteed to be worth their face value (which is double the purchase price) after 20 years.  In other words, you are guaranteed to double your money in 20 years, which translates into an annual return somewhere north of 2%.  Thus, Series EE bonds really have two rates--the annual rate that you will receive if you hold the bond less than 20 years, and the "face value rate" that guarantees that the bond will double in value (assuming the annual rate doesn't cause the bond to double in value in fewer than 20 years).

In a long term deflationary situation, this alternate rate on EE bonds would be sure to get more attention.
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Re: EE Series Savings Bonds

Post by AdamA » Wed Feb 16, 2011 11:07 am

I'm curious about this as well.  I'm simply uncertain as to what I should expect from Ibonds and EEbonds vs. short term treasuries (in spite of all the discussion).
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Re: EE Series Savings Bonds

Post by moda0306 » Wed Feb 16, 2011 11:12 am

Adam,

The nice thing about that uncertainty is that you're not really locked into anything beyond a year.  It's sort of like having your cake and eating it too.  I haven't tried my hand at buying these bonds yet, but I've looked at a few points in history and the I bonds seem to always beat 3 year treasuries, are tax deferred, and give pretty generous inflation portion payments.
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Re: EE Series Savings Bonds

Post by Lone Wolf » Wed Feb 16, 2011 11:29 am

MediumTex wrote: In the past, the EE bond rate was set for the life of the bond.  Today, the rate fluctuates, so they are not as appealing to me.
Are you sure it's still that way?  From what I read on TreasuryDirect, the rate is set for the life of the EE bond.  What you are describing sounds exactly like the pre-2005 rules.  (They change the rules on these things a lot.)

Here's what it says: "EE Bonds issue-dated May 2005 and after earn a fixed rate of interest. This fixed rate is determined by the issue date of the bond."
MediumTex wrote: There is an interesting "back door" interest component to EE bonds that is not widely discussed.  IIRC, Series EE bonds are guaranteed to be worth their face value (which is double the purchase price) after 20 years.  In other words, you are guaranteed to double your money in 20 years, which translates into an annual return somewhere north of 2%.  Thus, Series EE bonds really have two rates--the annual rate that you will receive if you hold the bond less than 20 years, and the "face value rate" that guarantees that the bond will double in value (assuming the annual rate doesn't cause the bond to double in value in fewer than 20 years).
Right, it's an interesting provision.  Like I mentioned above, I had that coming out to more like 3.53% per year... pretty good these days!  So if rates stay depressed for a super long time, this could be pretty nice.

However, if they don't stay low, you do have to be willing to give EE bonds with bad rates the heave-ho (whereas I see no reason to really get rid of any I-bonds.)  I am still not sure what the right formulation is for when you ought to do this.
MediumTex wrote: When compared to 12 month treasurys I think EE bonds are great (you still have the complete tax deferral element), though I think I-bonds provide a lot more bang for the buck.
This is how I saw it too.  Basically, I allow them to function as part of my "1-year" rung on the 1-3 year Treasury ladder that makes up the bulk of my cash portion.  If they start becoming worse than the 1-years, I have the option of just replacing them with real 1-year T-bills.
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Re: EE Series Savings Bonds

Post by MediumTex » Wed Feb 16, 2011 11:35 am

Lone Wolf wrote:
MediumTex wrote: In the past, the EE bond rate was set for the life of the bond.  Today, the rate fluctuates, so they are not as appealing to me.
Are you sure it's still that way?  From what I read on TreasuryDirect, the rate is set for the life of the EE bond.  What you are describing sounds exactly like the pre-2005 rules.  (They change the rules on these things a lot.)

Here's what it says: "EE Bonds issue-dated May 2005 and after earn a fixed rate of interest. This fixed rate is determined by the issue date of the bond."
You're right.

I was lamenting the low fixed rates.

I think, however, that the methodology changed in the 1990s as well.  I have some early 1990s EE bonds that seem to pay much more than later ones.
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Re: EE Series Savings Bonds

Post by Lone Wolf » Wed Feb 16, 2011 11:43 am

Adam1226 wrote: I'm curious about this as well.  I'm simply uncertain as to what I should expect from Ibonds and EEbonds vs. short term treasuries (in spite of all the discussion).
That's a good question.

EE bonds can sort of be compared to short-term Treasuries with a weird super power.  If they are held for 20 years they suddenly have a "jackpot" style payoff of >3.5%.  However, if short-term Treasury rates rise so that your old EE bonds start looking lame, they need to be liquidated.  A little maintenance involved there.

I-bonds are more like TIPS but much, much better (IMO.)  They usually have a moderately lower fixed rate than TIPS but much, much better tax treatment.  In addition, they weather deflation much better as they have principal protection for every 6 month period, not just for the lifetime of the security the way that TIPS do.

And moda is exactly right that after one year these things are quite liquid after a year.  That makes uncertainty about rates much easier to manage.  (I'd say that it's essential to be willing to do this for EE bonds.)
MediumTex wrote: I think, however, that the methodology changed in the 1990s as well.  I have some early 1990s EE bonds that seem to pay much more than later ones.
You are completely correct.  In fact, today's EE bond rules are the fourth set of rules that Treasury has used!  I can barely believe that even as I type it.
Last edited by Lone Wolf on Wed Feb 16, 2011 11:47 am, edited 1 time in total.
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Re: EE Series Savings Bonds

Post by walkerjks » Mon Apr 18, 2011 11:13 pm

Lone Wolf wrote: ight, it's an interesting provision.  Like I mentioned above, I had that coming out to more like 3.53% per year... pretty good these days!  So if rates stay depressed for a super long time, this could be pretty nice.

However, if they don't stay low, you do have to be willing to give EE bonds with bad rates the heave-ho (whereas I see no reason to really get rid of any I-bonds.)  I am still not sure what the right formulation is for when you ought to do this.
You just have to calculate yield to maturity.  That shouldn't be too hard, since you know, at any given time, what the current redemption value is, and you know what the 20-year redemption value is and you know what the time remaining to 20 years is.  Once you calculate the yield-to-maturity, simply compare that to the yield on the corresponding treasury is. 

Of course, you really should take into consideration that the EE savings bond is tax-deferred while the treasury isn't.  But it shouldn't be too hard to figure out when to sell the EE savings bond and buy a treasury of similar (or shorter, since this is the cash board) duration.
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Re: EE Series Savings Bonds

Post by Lone Wolf » Tue Apr 19, 2011 9:54 am

walkerjks wrote: You just have to calculate yield to maturity.  That shouldn't be too hard, since you know, at any given time, what the current redemption value is, and you know what the 20-year redemption value is and you know what the time remaining to 20 years is.  Once you calculate the yield-to-maturity, simply compare that to the yield on the corresponding treasury is. 

Of course, you really should take into consideration that the EE savings bond is tax-deferred while the treasury isn't.  But it shouldn't be too hard to figure out when to sell the EE savings bond and buy a treasury of similar (or shorter, since this is the cash board) duration.
I agree with the suggested method but it doesn't sound especially easy to me.  Perhaps you can tell me if I am overcomplicating something.  I think it breaks down like this:

Since we are treating EE bonds as cash, we would most fairly compare their fixed rate against that of very short-term Treasury bills.  Since they are at least partially liquid after one year, comparing them to a one-year T-bill might be fair.  So long as the rate on your EE bond is higher (taking into account your marginal tax rate) than the current one-year rate, you definitely keep them.  I think that's a pretty easy determination.

It gets trickier when short-term interest rates rise to the point that the fixed rate is no longer attractive.  Now your EE bond has turned into a bond of X years duration (depending on when you bought it.)  Let's say that you have 10 years left before your EE bond doubles.  You'd need to calculate the current value of the bond if you cashed it in today (taking into account that it has increased in value thanks to the fixed rate) to get your yield-to-maturity.  Furthermore, you'd need to compare the EE bond's YTM with the 10-year Treasury note's yield modified by your marginal tax rate (as it will be subject to income tax.)  This is the part that sounds like it would be a pain.
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 1:10 pm

At 1.1% return, and 3.5% phantom return, an EE-bond will offer 4.6% return for 20 years if held the full period... all tax-deferred, yet if rates rise and your old ee-bonds become obsolete, just sell 'em.

As great as i-bonds may seem, ee bonds have their place.  A sustained deflation with a slow, sustained falling of CPI will make EE bonds look spectacular in comparison with their 1.1% fixed rate + 3.5% phantom return.

Just reiterating what I said in another post.

Chances are, rates would rise and you'll just redeem them for something better, but the "insurance factor" of a guaranteed rate for 30 years and a doubling of value after 20 that represents a 3.5% return makes these an additional deflationary insurance policy to your long-term treasuries.

For those of you who've run out of tax-deferred space and are wealthy enough to have tons of "extra" cash (beyond 12 months in living expenses), you should DEFINITELY consider starting to load up on these things.
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Re: EE Series Savings Bonds

Post by Lone Wolf » Tue May 17, 2011 1:27 pm

Yep, good stuff moda.  I loaded up on the 1.1% rate.  If interest rates rise enough, I'll bring 'em to the bank and "refinance" back into real Treasury Bills.

I-bonds are still better, but EE's are a great addition as well so long as you don't mind tracking them and "actively managing" them a bit.  The PP works great without them but they give you some nice, risk-free "optional plays".
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 1:42 pm

The only way EE's would probably win out is such a deflationary force that CPI actually decreases, or doesn't increase.

Given our natural-resource situation (and growing world economies) I don't see this as the case.

But the term "deflationary spiral" didn't come about for no reason.  The way I see it is this:

I-bonds: insurance against stubbornly low st rates in the face of commodity inflation (what we have now)
EE-bonds: insurance against flat-out deflation (what appeared might be the case in 2008)

Funny thing is, the combination of the two that I mentioned in the other thread would provide an interesting bond instrument: .55% fixed return + 1.75% phantom 20 year return + 1/2 CPI adjustment.  Not. Too. Shabby.
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Re: EE Series Savings Bonds

Post by Lone Wolf » Tue May 17, 2011 2:06 pm

moda0306 wrote: EE-bonds: insurance against flat-out deflation (what appeared might be the case in 2008)
There's also the "insurance against annual I-bond purchase limit" angle.  This is especially relevant if someone has been accumulating cash for a while but has only more recently discovered savings bonds.
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 2:16 pm

The idea of a couple being able to pile $40,000 a year into these things (I & EE total) is pretty crazy.  That's $400,000 from age 40-50... often peak earning years.

Too bad you can't do it more easily through a Vanguard account or at least 100% through treasury-direct... though you wouldn't be able to high-five the Grandmas at the bank in the i/ee isle.

And most tax-deferral options having income limits, these things should be extremely attractive to relatively wealthy individuals, as they often are 1) concerned more with preserving wealth than growing it, 2) are in extremely high ordinary brackets (35%), and 3) would be able to max out every year and could afford to use their other investments as income while their savings bonds grow.

Can a financial advisor purchase savings bonds, either paper or through treasury direct, on behalf of their clients?
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 2:43 pm

I'm on a roll... why stop.

I think, if we step back and look at the implications of these, it's really something.  To simplify things a bit, most of us don't like the fact that our investments may pay less than our mortgage costs... let's assume 4% after the tax-benefit. LT bonds will beat that, so we're left with cash, for many reasons (for some people) being the tough pill to swallow with much more than their emergency-fund wealth.

Right now rates are being held unusually low on the short end of the duration curve, though they will probably rebound.  Imagining two scenarios here for the next 10 years:

1) short rates go up to 4%+
2) short rates stay around .5-1.5%

Obviously there's a hole there, but for illustrative purposes here you go.  

If rates rise to 4%+, you drop your ee bonds, and either buy new ones, or invest in cash in your tax-deferred accounts, and beat your mortgage rate.

If rates stay low, say for a decade, your EE bond will remain attractive as cash, and have earned the "phantom" 3.5% along the way (obviously), but lets say at that point rates rise... well you've now got a higher "phantom" rate since the maturity is so much closer. That is now like a 8.1% 10 year cd (right?... 7%+1.1%), and you really can't beat it at that point (probably, depending on how high rates actually go).

So at 20 years, the double face value starts to look pretty good after only 10 years of earning your fixed 1.1%.  At that point, it may be best to not look at your EE bond as cash at all, and move it to your VP, since redeeming the thing would be a real buzz-kill and be throwing out a lot of built-up benefit.  So here are your results:

1) Short-rates rose within a few years to 4%+ and you are quickly, again, beating your mortgage, with only a short period of lag.
2) At the end of 20 years, you will have realized a 4.6% return, tax-deferred, and beat your mortgage.

I know this is all intuitive on some levels, but I know it's tough for some people to borrow at 5% and invest at 1% (me, especially), so I thought I'd just connect the dots a bit so people can see how the future may play out and that cash doesn't necessarily have to be the loser some may think it will be.
Last edited by moda0306 on Tue May 17, 2011 2:47 pm, edited 1 time in total.
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 3:47 pm

LW,

I'm starting to question my theory that the I-bond is the "better bond"... or at least not as much as I'd once thought.  I'd say the i-bond, currently, is the "better short-term bet," at 4.6%... but the idea that we'll have greater than 1.1% CPI increase (1.1% being the interest rate on ee bonds (sans 20 yr doubling)) without having some fixed interest rate increase is unlikely.  Or more simply put, the CPI adjustment alone is nice for the short-term, but won't be the long-term panacea that EE bonds may be.  The best I-bonds will do (TODAY's I-bonds) is keep up with CPI... and while this is not a bad thing, short-term rates often mock inflation pretty closely, and it doesn't hold the potential "BOOM" factor that EE bonds do.

EE-bonds, while less appealing in the short-term (which, I'll admit, is the point of cash... it's not supposed to function as a LT bond), if deflation takes hold, would be the preferred holding at 4.6% if held for 20 years.  While a less-likely scenario, I think the ability for EE bonds to be EXTREMELY beneficial even in a falling CPI/interest environment would maybe make someone diversify into EE's before completely maxing out their yearly dose of I bonds.  A 4.6% return for 20 years when s-t rates are <1% and long-term rates are dropping has some amazing implications.

Both I and EE bonds let you "cheat" or "arbitrage" in certain ways... but the environments in which they will succeed most will differ, and I think holding some of EE is a really solid move, especially as a deflationist.  Don't get me wrong... the EE bond is a long play and is almost not even using cash as cash at some point... so maybe this debate is a bit moot.
Last edited by moda0306 on Tue May 17, 2011 3:51 pm, edited 1 time in total.
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Re: EE Series Savings Bonds

Post by Lone Wolf » Tue May 17, 2011 4:26 pm

moda0306 wrote: I'm starting to question my theory that the I-bond is the "better bond"... or at least not as much as I'd once thought.  I'd say the i-bond, currently, is the "better short-term bet," at 4.6%... but the idea that we'll have greater than 1.1% CPI increase (1.1% being the interest rate on ee bonds (sans 20 yr doubling)) without having some fixed interest rate increase is unlikely.  Or more simply put, the CPI adjustment alone is nice for the short-term, but won't be the long-term panacea that EE bonds may be.  The best I-bonds will do (TODAY's I-bonds) is keep up with CPI... and while this is not a bad thing, short-term rates often mock inflation pretty closely, and it doesn't hold the potential "BOOM" factor that EE bonds do.
I might not be following, but let me just make sure everything is clear.  The "fixed rate" of the EE bond is set on the day that you purchase it.  Thus, if interest rates rise in the future, only future purchases of EE bonds will benefit.  This means that when rates rise, you'd want to start consider selling your EE's.  (A decision that would involve multiple factors.)

I think you understand that bit, just calling it out again.  What you're excited about is the "what if rates fall or stay flat forever" scenario.  In this case, you keep those EE bonds and 20 years later they've doubled while everything else was languishing.

At heart I am an inflationist but I'm trying, trying not to pick sides.  Thus, I completely agree and hold the EEs as both a) an instrument that beats 3-year Treasury rates and b) will kick butt in a long-term deflationary scenario w/ low interest rates.  Deciding when to offload an EE will be hard because it involves some degree of guessing the future.
moda0306 wrote: EE-bonds, while less appealing in the short-term (which, I'll admit, is the point of cash... it's not supposed to function as a LT bond), if deflation takes hold, would be the preferred holding at 4.6% if held for 20 years.  While a less-likely scenario, I think the ability for EE bonds to be EXTREMELY beneficial even in a falling CPI/interest environment would maybe make someone diversify into EE's before completely maxing out their yearly dose of I bonds.  A 4.6% return for 20 years when s-t rates are <1% and long-term rates are dropping has some amazing implications.
Definitely less appealing than I-bonds for the short term but more appealing than short-term T-bills.  Once you've held them for 1 year they are liquid enough (with the 3-month interest penalty.)

I'm confused where the "4.6% for 20 years" you mentioned comes from, though.  I calculate a 20-year doubling as being equivalent to 3.53% or so per year.  Let me know if I am off, though.

Are you perhaps thinking that you get the fixed rate as well as the doubling?  Unfortunately, all that happens is at 20 years, if your bond has not reached face value (double your purchase price), your bond is worth face value.  Thus, at 20 years your bond will be worth either the principal + accrued interest or face value, whichever is greater.
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 4:33 pm

LW,

To your first point, yes I understand that as rates rise you'd want to offload your EE bonds... and yes, the deflationary scenario would be the ideal.

To your second point, dangit!  I didn't realize the bond mearly doubled in value, but lost all the other accrued interest.

That softens its appeal, but still I think you get the point.  In a sustained deflation, EE bonds will still provide a heckuva arbitrage.

Good catch.
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 4:41 pm

LW,

You killed my dreams of getting 1.1% AND the doubling to achieve a 4.6% rate... that killed me.

Nonetheless, a 20-year treasury bond (though you can redeem them for a gain or loss at any time), is at about 3.9% interest right now, which, when taxes are taken into consideration, especially in higher brackets, in the long-term will not beat the 3.5% tax-deferred of an EE bond.

Seems to be a pretty solid option for the VP at least, if you like the idea of having a lucrative cash-like investlment that doubles as a deflationary insurance policy.

It will be interesting to see how long the treasury offers these at current terms if we have lowering of interest rates.  The idea of buying these in 2008 when 30 year treasuries were offering 2.6% and deflation appeared imminent would have appealed to me, though in clear violation of PP tinkering rules.
Last edited by moda0306 on Tue May 17, 2011 4:50 pm, edited 1 time in total.
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Re: EE Series Savings Bonds

Post by fnord123 » Tue May 17, 2011 5:01 pm

moda0306 wrote:To your second point, dangit!  I didn't realize the bond mearly doubled in value, but lost all the other accrued interest.

That softens its appeal, but still I think you get the point.  In a sustained deflation, EE bonds will still provide a heckuva arbitrage.
I was wondering about your stacking of the doubling with the incremental interest rate, as that didn't match my understanding of EE bonds either.

Actually, upon thinking on EE bonds more, I think they may have a drawback, specifically around the fact that they do not compound.  Savings accounts are taxed every year, but they compound in value.  EE bonds do not compound as far as I understand it (one gets a fixed interest payment every year), but are taxed at the end.  Below is a table that compares the two. The first dollar amount in each row is the savings account balance, based on the given interest rate. It includes a 20% tax payment on interest earned that year.  The second dollar amount is the value the EE-bond could be cashed out that year, with a 20% tax payment on the interest of the EE bond. 

Code: Select all

Tax Rate:	20.00%	
Interest Rate:	1.10%	
	Savings Acct Balance	EE-Bond Cash-Out Value
Year	$10,000	$10,000
1	$10,088	$10,088
2	$10,177	$10,176
3	$10,266	$10,264
4	$10,357	$10,352
5	$10,448	$10,440
6	$10,540	$10,528
7	$10,633	$10,616
8	$10,726	$10,704
9	$10,820	$10,792
10	$10,916	$10,880
11	$11,012	$10,968
12	$11,109	$11,056
13	$11,206	$11,144
14	$11,305	$11,232
15	$11,404	$11,320
16	$11,505	$11,408
17	$11,606	$11,496
18	$11,708	$11,584
19	$11,811	$11,672
20	$11,915	$18,000
As it turns out, if we assume an identical interest rate for the EE-bond and the savings account, the benefit of compounding makes the savings account a better choice unless one holds the EE-bond until maturity.    This holds true for any combination of interest rates and tax rates.

This doesn't mean EE-bonds are bad per se, it just means that if one can get an interest rate in a savings account that is comparable, and is comfortable with the additional risk, that the savings account may be the better choice.

P.S. Note that this ignores default risk for the FDIC/NCUA. However, if one holds a treasury ladder and gets an equal interest rate (1.1%) the same compounding benefit applies.
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 5:07 pm

fnord,

http://www.treasurydirect.gov/indiv/res ... dterms.htm

Interest is compounded within EE bonds, it would appear.  The 1.1% appears, given the terms, to be compounded, and the 3.53%, I'm quite sure, is a compounded calculation of what it would take to double your money in 20 years.
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 5:12 pm

So LW,

Basically, the 20 year doubling becomes less and less relavent as the fixed rate becomes closer and closer to 3.5%, correct.... since there will really be little-to-no 20-year step-up?

I guess the implication of this are that the treasury's keeping the 20-year rule is more and more worth considering as long-term rates drop.

http://www.treasurydirect.gov/indiv/res ... tbonds.htm
http://www.treasurydirect.gov/indiv/res ... dterms.htm

Further, comparing fixed i-bond rates and fixed ee bond rates is also somewhat interesting (see above links).  EE's historically offer much more lucrative fixed rates, but the thing is, when those rates are fixed at or near 3.5%, the doubling is almost a moot point.  Only as rates lower does that feature tend to stand out.  

So basically, folks, keep an eye on long-term rates as well as short-term.  If they get low enough, the 3.5% 20-year return could be a nice return to grab with some money that you don't want to take too much principal risk with in a VP... maybe an offset to some miners or something if you're an inflationist.
Last edited by moda0306 on Tue May 17, 2011 5:13 pm, edited 1 time in total.
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Re: EE Series Savings Bonds

Post by MediumTex » Tue May 17, 2011 5:19 pm

I view each of the PP asset classes as potentially having some "deep storage" items.

What I mean by deep storage is assets that you are unlikely EVER to sell, since no rebalancing event is going to completely clean out any of the PP assets.

For the cash piece, I view savings bonds as deep storage items.  I would try to configure a PP with savings bonds so that you will never have to sell any of your bonds to rebalance.  This probably results in a savings bond target of 20-30% of your cash PP holdings.

Just a thought.
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Re: EE Series Savings Bonds

Post by moda0306 » Tue May 17, 2011 5:21 pm

MT,

Totally agree... I think of cash and gold especially as having those traits.  Gold because you want some physical, but it can eventually become a hassle, and cash because there are some near-perfect-cash items out there that really are a lot of bang-for-your-buck risk/reward wise.
Last edited by moda0306 on Tue May 17, 2011 5:23 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."

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