Whoops, you are right - thanks for the correction! Given the tax deferred nature of EE-bond interest, then they definitely provide a better rate of return at identical interest rates.moda0306 wrote: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.
EE Series Savings Bonds
Moderator: Global Moderator
Re: EE Series Savings Bonds
Re: EE Series Savings Bonds
I feel awful about killing your dreams but the good news is that your analysis still holds up. If interest rates stay really low, you are getting a "free roll" option at 20-year 3.5% rates. If they go up, you can just redeem the EE's and throw the cash you raise into new savings bonds, T-bills, or your Treasury ladder.moda0306 wrote: You killed my dreams of getting 1.1% AND the doubling to achieve a 4.6% rate... that killed me.
Yes! The "doubling" feature was only added in May 2005, and the fixed rate wasn't substantially below 3.5% until May 2008. This shows that a) the doubling feature has only become relevant in the past couple of years and b) they change the rules on newly-issued savings bonds all the time.moda0306 wrote: 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.
I very nearly 100% agree with everything you've said, as it is excellent general advice about the PP. I do believe that EE bonds could be an exception, though. EE bonds at 1.1% enjoy a superior rate of interest to even a 3-year Treasury. You must hold them for one year. After that, though, they can be redeemed at any time, with the only risk being 3 months of interest. With rates low, you want to hang on to them. If rates rise substantially, though, I think you must be willing to pull them out of the freezer and redeem them.MediumTex wrote: 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.
Re: EE Series Savings Bonds
I think what MT was saying that as long as the rates stay competetive, "redeem" MM and other cash first before sinking down to some preferable-termed I or EE bonds.
I don't think he was suggesting you sit on your 0% fixed i bond if there are 2% fixed being issued.
Basically, if rates make already-owned i-bond or ee-bond particularly attractive, they should sit "deep" in your cash holdings... maybe "redeemed cash of last resort," if you will.
I'm sure we're in agreement on all this, just wanted to clarify.
One question maybe should be... How much time do we get before they start changing terms on these bonds. Do they announce it 6-12 months in advance, or is it a "November 1st" announcement that they're changing the bonds that are offered to the public? This could play into planning a bit. I'm surprised EE bonds still exist as they did in 2005, to be honest.
I don't think he was suggesting you sit on your 0% fixed i bond if there are 2% fixed being issued.
Basically, if rates make already-owned i-bond or ee-bond particularly attractive, they should sit "deep" in your cash holdings... maybe "redeemed cash of last resort," if you will.
I'm sure we're in agreement on all this, just wanted to clarify.
One question maybe should be... How much time do we get before they start changing terms on these bonds. Do they announce it 6-12 months in advance, or is it a "November 1st" announcement that they're changing the bonds that are offered to the public? This could play into planning a bit. I'm surprised EE bonds still exist as they did in 2005, to be honest.
"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."
- Thomas Paine
- Thomas Paine
Re: EE Series Savings Bonds
One quick point I've already made about these, but is worth repeating for tinkerers, is that you gain nothing by purchasing these bonds before the last day of the month by redeeming them beyond the first day of the month.
The interest is calculated as if you owned the bond the whole month.
The interest is calculated as if you owned the bond the whole month.
"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."
- Thomas Paine
- Thomas Paine
Re: EE Series Savings Bonds
I've been thinking of EE bonds as always lying within your cash portion, but here's a bit of an EE bond "trick" you may want to consider if rates tumble back to their 2008 levels:
Normally, one my not be inclined to buy EE bonds, but near the end of 2008, a PP holder would have been sitting on 20-30 year bonds yielding 3%-2.6% (rates were actually higher on 20's than 30's). At this point, if one had deep enough funds in their LTT holdings to purchase some EE bonds without risk of skewing the liquidity of their portfolio too much, it may have been a GREAT time to do that. The EE bond has the phantom, tax-deferred unredeemable 3.53% interest for holding it for 20 years, which handily beat the 2.6-3% taxable return of the 20-30 year bonds at the time.
Treasuries dropped 21% in 2009, but if one would have sold an extra $20,000 of treasuries at the end of 2008 and another $20,000 at the beginning of 2009, to buy $40,000 of EE bonds when rates were obviously very favorable to that decision (3.53% phantom gain on EE bonds held for 20 years), one would have been able to avoid $8,400 in losses.
I know this is all in hindsight, but as long as your funds are deep enough and liquid enough, the advantages of diving into unredeemable 20-year treasury at a tax-deferred 3.53% at that time, at least to some degree, even if less than $40,000, would have been huge, even if rates would have continued to fall.
I realize that a huge part of the reason for investing in LTT's is the price moves, not just the interest payment, but as MT has said, much like physical gold lies deep within your gold reserves and will most likely not be sold, EE bonds within cash or LT bonds (or a mix of both as st & lt rates make different portions of the EE bonds more/less attractive) can sit deep within those accounts as well.
The EE bonds as a LT bond definitely does have some drawbacks, just as a gold etf doesn't have all the traits you want in an inflation hedge, but one can avoid a lot of interest rate risk if they bury these suckers deep in their LTT holdings at the right time. Let's just hope if rates drop again they don't weaken the EE bond from its current form.
One more consideration is that usually you are selling bonds at 20 years in duration... so if rates go low, and continue to stay low so that you're holding your EE's for the 20 year doubling, you might want to start to view those bonds as somewhat split between cash and bonds... as realistically that's more what will be comparable to... no big deal. Lastly, you probably will have tax considerations with all of this, often not favorable to selling a bunch of bonds at a gain to invest in a similar instrument. Just keep all of this in mind.
Normally, one my not be inclined to buy EE bonds, but near the end of 2008, a PP holder would have been sitting on 20-30 year bonds yielding 3%-2.6% (rates were actually higher on 20's than 30's). At this point, if one had deep enough funds in their LTT holdings to purchase some EE bonds without risk of skewing the liquidity of their portfolio too much, it may have been a GREAT time to do that. The EE bond has the phantom, tax-deferred unredeemable 3.53% interest for holding it for 20 years, which handily beat the 2.6-3% taxable return of the 20-30 year bonds at the time.
Treasuries dropped 21% in 2009, but if one would have sold an extra $20,000 of treasuries at the end of 2008 and another $20,000 at the beginning of 2009, to buy $40,000 of EE bonds when rates were obviously very favorable to that decision (3.53% phantom gain on EE bonds held for 20 years), one would have been able to avoid $8,400 in losses.
I know this is all in hindsight, but as long as your funds are deep enough and liquid enough, the advantages of diving into unredeemable 20-year treasury at a tax-deferred 3.53% at that time, at least to some degree, even if less than $40,000, would have been huge, even if rates would have continued to fall.
I realize that a huge part of the reason for investing in LTT's is the price moves, not just the interest payment, but as MT has said, much like physical gold lies deep within your gold reserves and will most likely not be sold, EE bonds within cash or LT bonds (or a mix of both as st & lt rates make different portions of the EE bonds more/less attractive) can sit deep within those accounts as well.
The EE bonds as a LT bond definitely does have some drawbacks, just as a gold etf doesn't have all the traits you want in an inflation hedge, but one can avoid a lot of interest rate risk if they bury these suckers deep in their LTT holdings at the right time. Let's just hope if rates drop again they don't weaken the EE bond from its current form.
One more consideration is that usually you are selling bonds at 20 years in duration... so if rates go low, and continue to stay low so that you're holding your EE's for the 20 year doubling, you might want to start to view those bonds as somewhat split between cash and bonds... as realistically that's more what will be comparable to... no big deal. Lastly, you probably will have tax considerations with all of this, often not favorable to selling a bunch of bonds at a gain to invest in a similar instrument. Just keep all of this in mind.
Last edited by moda0306 on Thu May 19, 2011 6:03 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."
- Thomas Paine
- Thomas Paine
Re: EE Series Savings Bonds
One way out of selling LT bonds just to buy EE bonds as part of your LTT portion is to sell your LT bonds to cash (hopefully in a tax-deferred account), and simply "convert" your EE bonds to LTT's... basically, take whatever your balance is of EE bonds, and instead of considering it cash, consider it LTT's, and the funds from selling your LTT's will stay in your account as cash.
Of course, you can always try to buy additional EE bonds as you see fit and as liquidity allows.
Of course, you can always try to buy additional EE bonds as you see fit and as liquidity allows.
"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."
- Thomas Paine
- Thomas Paine