ee bonds

Discussion of the Cash portion of the Permanent Portfolio

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grapesofwrath
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ee bonds

Post by grapesofwrath » Fri Jun 23, 2017 7:11 am

Would it make sense to consider ee bonds for the "cash" component of a PP ? I know they only give 0.1% but there is the provision that they are guaranteed to double in 20 years if one can handle that time frame. I assume one could liquidate them in emergency. Also if interest rates do rise significantly then I assume one could liquidate and reinvest them elsewhere. However, if cash rates stay <3.5% then one wins if one sticks it out ?
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AdamA
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Re: ee bonds

Post by AdamA » Sat Jun 24, 2017 9:34 am

I am a big fan of EE bonds for the reasons you mention.

Just remember that you can only buy $10K a year.

Also a good idea to have some T-bills prior to using EE bonds so that you can rebalance or use for emergencies.

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Re: ee bonds

Post by barrett » Sat Jun 24, 2017 1:22 pm

There was a fairly in-depth thread about this a few years ago with a good discussion between moda and melveyr. I just can't locate it at the moment. I don't personally like the whole idea of waiting through that doubling period because your bonds are not anywhere close to doubling until the actual doubling date. To get an idea of what it might feel like to wait, go to Treasury Direct and build yourself a little phony inventory of EE bonds. To do this just make up numbers with this format: M12345678EE (M means it's a $1,000 bond, then just put in eight random digits and tag an EE on the end). You can play around with different dates but try a bond with, say, an issue date of 01/2001. That is about six months short of 17 years. You'll see that that bond is only worth about $756.

To me this would feel like a classic sunk-cost issue as in, "I've already waited ten years, I might as well wait another ten." And the closer you get to the doubling date, the higher your yield to maturity is. In the example I gave in the previous paragraph, you'd get about a 33% return on your money in those last six months (almost the same as you would get the very last day).

But this may just come down to personal preference and the age of the investor. If anyone can find that previous thread, please post a link. That discussion was way more thorough that what I have laid out here.
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Re: ee bonds

Post by sophie » Sat Jun 24, 2017 4:04 pm

I remember that discussion too.

Nothing wrong with EE bonds, but there's a lot of what-if's over a very long time horizon that have to work out in order to make them worthwhile. That is, you have to not need to cash them for 20 years, and the current low interest environment needs to last that long. I think most of us opted for I Bonds instead, but I'd like to wait for the fixed rates to be nonzero.
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Re: ee bonds

Post by whatchamacallit » Sat Jun 24, 2017 8:18 pm

I just recently decided to start practicing a bit heresy in the bond/cash portion of my permanent portfolio.


I have built more of a bullet instead of a barbell using a combination of

EE Bonds
I Bonds
Rewards Checking accounts
FDIC Insured Marketable CDs

I am getting a higher yield than the barbell with what I feel is lower interest rate change risk.

Keeping on topic of EE Bonds. Another perk is the no tax on gains if you use the whole bond for qualified college expenses.
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Re: ee bonds

Post by Desert » Sat Jun 24, 2017 10:19 pm

whatchamacallit wrote:I just recently decided to start practicing a bit heresy in the bond/cash portion of my permanent portfolio.


I have built more of a bullet instead of a barbell using a combination of

EE Bonds
I Bonds
Rewards Checking accounts
FDIC Insured Marketable CDs

I am getting a higher yield than the barbell with what I feel is lower interest rate change risk.

Keeping on topic of EE Bonds. Another perk is the no tax on gains if you use the whole bond for qualified college expenses.
I agree with the general idea, and practice something similar. Just keep in mind that the interest rate "risk" cuts both ways. In a falling rates environment, we won't get as much upside volatility as those holding all treasuries (barbell or bullet).
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sophie
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Re: ee bonds

Post by sophie » Sun Jun 25, 2017 8:27 am

whatchamacallit wrote: I have built more of a bullet instead of a barbell using a combination of

EE Bonds
I Bonds
Rewards Checking accounts
FDIC Insured Marketable CDs

I am getting a higher yield than the barbell with what I feel is lower interest rate change risk.
No issue with what you did, but it has nothing whatsoever to do with bullet vs barbell. Barbell is holding a combination of cash and long treasury bonds, and bullet is replacing both with intermediate (e.g. 10 year) Treasuries. The longer duration (non-cash) bonds change in value with interest rates, so they also provide you with capital gains or losses. Cash doesn't do this.

As far as your choices go - perfectly reasonable. US Savings Bonds are the closest thing there is to a free lunch: better interest rates than T bills under the right circumstances, with equivalent risk.

The checking accounts and CDs give you higher interest rates, true, but there IS greater risk with them. See many prior threads on what FDIC insurance really means. Short version, if it's just your bank that fails you'll eventually get your money back. Most of it anyway. But, the FDIC system isn't designed to handle a systemic crash, such as 2008, and won't prevent government actions negating the FDIC guarantee, such as what happened in Cyprus.

I keep money in savings accounts too, but more for convenience (and sheer laziness).
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Re: ee bonds

Post by jhogue » Wed Jun 28, 2017 10:50 pm

Dear fellow PP’ers,

Long term lurker (since 2013) here. I have learned a great deal about investment and how to implement Harry Browne’s Permanent Portfolio by reading the posts of so many on this forum. Thank you all. Recently, I have been studying past threads on the role of US savings bonds in the cash portion of my PP.

The 2010 thread I think barrett and Sophie recalled, in which Lone Wolf and moda discussed the merits of EE bonds can be found at:
https://gyroscopicinvesting.com/forum/v ... moda#p5720

The 2011 thread in which Lone Wolf, moda, and Medium Tex discussed the roles of I bonds and EE bonds for PP Cash (142 posts!), can be found at:
https://gyroscopicinvesting.com/forum/v ... 807d5da8fd

Points to consider:

1. Medium Tex proposed that I bonds be used as “deep cash” within the PP. I bonds have no interest or principal risk, making them as safe as a US Treasury money market fund. They are completely liquid after a one year holding period, can be tax deferred for 30 years, and are exempt from state and local taxes— “free lunch” for those of us who live in high tax localities like Sophie’s People’s Republic of New York!

2. If I bonds are “deep cash” in the PP then EE bonds are “deeper cash.” Lone Wolf and Moda agreed that EE bonds, with a doubling feature at 20 years (3.53% p.a.), have the same protective features of I bonds, but with a great long-term guaranteed rate. There are, however, some important cautions for PP users. First, only buy EE bonds after you have bought your annual limit of I bonds. I bonds are more flexible than EE bonds and provide inflation as well as some deflation protection. Second, only buy EE bonds if you intend to keep them for the entire 20 year doubling period. The current annual rate (0.1%) is now so low that there are better options than redeeming them early. Third, holding EE bonds requires more active management than Harry Browne’s “fire-and-forget” design of the original PP. If we get another bout of 1970s-style inflation, you have to be prepared to sell your EE bonds and buy higher yielding Treasurys. Moda prepared a chart showing the interest rate and years to maturity at which you should make this shift (see the links above).

3. I second Sophie’s caution to whatchamacallit (and everyone else on this forum) to think twice about using FDIC-insured CDs and bank accounts for your PP cash. The same goes for municipal bonds. In the present low interest rate environment it is tempting—but mistaken—to chase higher yields. Harry Browne’s principal goal for the PP was always capital preservation. In a bank run in which the FDIC is swamped with withdrawals, the U.S. Treasury would become the safe haven of choice for investors seeking dollar liquidity. As a latecomer to the PP myself, I am still in the process of “unwinding” my old FDIC CDs and bank accounts and buying Treasury-backed securities.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: ee bonds

Post by grapesofwrath » Fri Jun 30, 2017 3:59 am

jhogue - thanks for the reply and taking the time to dig up those links to previous discussion on I and EE bonds. It would be interesting to know if the participants in that discussion are still around and if their views and enthusiasm have changed given the real rates for these products have sunk while nominal bill returns are inching up.
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Re: ee bonds

Post by sophie » Fri Jun 30, 2017 6:45 am

grapesofwrath wrote:jhogue - thanks for the reply and taking the time to dig up those links to previous discussion on I and EE bonds. It would be interesting to know if the participants in that discussion are still around and if their views and enthusiasm have changed given the real rates for these products have sunk while nominal bill returns are inching up.
jhogue - thank you for that great summary and the research!

IMHO, Treasury bills are the way to go right now, especially with the Fed still planning to bump up interest rates. They provide about the same yield as 1-2 year CDs but can be sold without penalty (apart from slight reduction in value if interest rates go up). I'm still hoping the I Bond fixed rate will go up in November so I'm waiting until then before buying this year's aliquot.
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Re: ee bonds

Post by dualstow » Fri Jun 30, 2017 2:36 pm

Thanks for the refresher/reminder, jhogue!

For some reason I thought the doubling occurred at 17 years ??? EDIT: It may be because they're pre-2005.

I bought my first EE bonds (and I bonds) around the year 2000 at my dad's suggestion. I was out of work for a while and the purchase was a substitute for contributing to a retirement account. Ended up buying some more over several years, just because. I think I have a bunch due to ripen in the next few years if not this year. Time to get on that clunky TreasuryDirect website and see what's going on with those.
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jhogue
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Re: ee bonds

Post by jhogue » Fri Jun 30, 2017 6:48 pm

grapesofwrath wrote:jhogue - thanks for the reply and taking the time to dig up those links to previous discussion on I and EE bonds. It would be interesting to know if the participants in that discussion are still around and if their views and enthusiasm have changed given the real rates for these products have sunk while nominal bill returns are inching up.
@grapesofwrath:
I would also like to know what Medium Tex, moda, and Lone Wolfe think about savings bonds today. To paraphrase John Maynard Keynes, it seems that the Federal Reserve intends to remain irrational longer than individual savers can remain solvent. Watching short term rates over the past several years gives me a case of the fidgets whenever I think about the pile of low-earning cash sitting in my PP. Here is a chart I put together to help me put things back into perspective:

Maturity Rate Date Source
13 week Treasury 1.03% 6/30/2017 Fidelity
Money Market Account 1.05% 5/31/2017 Ally Bank
26 week Treasury 1.14% 6/30/2017 Fidelity
1 year Treasury 1.27% 6/30/2017 Fidelity
1 year CD: 1.40% 6/30/2017 synchrony
2 year Treasury: 1.38% 6/30/2017 Fidelity
2 year CD: 1.65% 6/30/2017 synchrony
3 year Treasury: 1.56% 6/30/2017 Fidelity
3 year CD: 1.90% 6/30/2017 Goldman
5 year Treasury: 1.87% 6/30/2017 Fidelity
Current I-bond rate: 1.96% 5/01/2017 Buy I-bonds ^
5 year CD: 2.35% 6/30/2017 synchrony
10 year Treasury Bond 2.28% 6/30/2017 Fidelity
10 year CD: 2.85% 6/30/2017 Fidelity
20 year Treasury: 2.57% 6/01/2017 Fidelity
Previous I-bond rate: 2.76% 4/30/2017 Usually Buy I-bonds ^
20 year CD: 3.15% 6/30/2017 Fidelity
30 year Treasury Bond 2.84% 6/30/2017 Fidelity
30 year CD: -.--% 6/30/2017 unavailable
Current EE-bond rate: 3.53% 06/30/2017 Buy EE-bonds + Hold 20 years ^

-The current I bond rate (1.96%) actually beats current 5 year Treasury and 3 year CD rates. The previous I bond rate (2.76%, Nov. 2016 – April 2017) beat current 20 year Treasury and 10 year CD rates. Of course, the I bond rate will be adjusted every 6 months, but I find it reassuring that Medium Tex’s original justification for treating I bonds as an acceptable substitute for Harry Browne’s Treasury money market fund has held up so well.

-This matrix also reinforces my conviction that buying FDIC-insured CDs for the PP is a mistake. The best available 5 year CD rate today yields just 0.39% over an I bond. To get that “great CD rate,” you have to surrender five years worth of liquidity versus one year for an I bond plus the “full faith and credit of the U.S. Treasury “ plus 30 years of tax deferral plus state and local tax exemption. Not worth it, in my book.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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