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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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 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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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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Re: ee bonds

Post by jhogue » Fri Jun 30, 2017 6:53 pm

sophie wrote:
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.
@Sophie:

1. It is possible that the liquidity of plain vanilla short term Treasury bills might win out over the next year if the Fed jacks up short term rates. Who knows what they will do? However, the I bond/ 1 year Treasury rate spread now stands at + 0.69% (see my chart above). Over the 30 year life of $15,000 (one year’s purchase limit of I bonds), that would amount to $3,105 in additional tax differed earnings, compared to 30 consecutive 1 year Treasury bills at the same spread. And don’t forget that taxes on T bill earnings will be due each year. Unfortunately, T bills do not have tax deferral and annual I bond purchases are a “use it or lose it” proposition.

I too am hoping that the I bond fixed rate goes up in November. Regardless, if you are thinking about buying I bonds in November, be sure to see the blog, tipswatch.com, for an excellent forecast of the fixed and variable rates for new I bonds.


2. Are you still employing the STT strategy you outlined in your post “Tax trickery with short term treasuries” in 2012?
https://gyroscopicinvesting.com/forum/v ... t=trickery

I tried it last year because we sold our house and had to park a big slug of cash in our Fidelity brokerage account. Buying high coupon, maturing T bonds was easy to do and I found it to be an ingenious use of the differential tax policy on federal vs. state/local taxes that also captured the tax loss. Yet another “free lunch”! (or at least, “free desert”).


I also loved WildAboutHarry’s embedded Groucho Marx story:

“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!"
“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 jhogue » Fri Jun 30, 2017 7:20 pm

dualstow wrote: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.
@dualstow:

My wife’s parents were big fans of EE bonds as gifts for their grandchildren. I think there have been something like 5 iterations of them, including those issued after 1989 that were completely tax exempt for education.

Twenty years ago I bought a variable annuity because I was in graduate school and did not have access to a tax deferred account other than an IRA. I wish we had bought savings bonds instead.

Five years ago we started purchasing I bonds, after maxing out ORP, 403b, 457b, and Roth IRAs. Like Medium Tex, I enjoy watching our stash of I bonds grow bigger every year.
“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 barrett » Sat Jul 01, 2017 12:53 pm

dualstow wrote: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.
Dualstow, The only drag about the Treasury Direct savings bond tool here https://www.treasurydirect.gov/BC/SBCPrice is inputting the dates and serial numbers of your bonds. Once you have everything input and saved, it's a piece of cake to check their value whenever you want to.
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Re: ee bonds

Post by dualstow » Sat Jul 01, 2017 12:56 pm

Yup, I have a link saved someplace. I just haven't used it for a while.
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Re: ee bonds

Post by barrett » Sat Jul 01, 2017 2:33 pm

dualstow wrote:Yup, I have a link saved someplace. I just haven't used it for a while.
Just to be clear, I am talking about saving your entire savings bond inventory. Once you've input everything, all you have to do is change the date and everything updates.
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Re: ee bonds

Post by dualstow » Sat Jul 01, 2017 2:52 pm

Yes. I had a link on my computer called BondMap. It may have been an internal link to an Excel file that pulled data. That was back when I used Windows. Or, it may have been a weblink to TreasDirect that showed something worthwhile after password entry.

Last I checked I would log in and see half the bonds saved, either the paper or the digital, and I had to input the other half manually.

Why didn't I save everything after doing that? It's a mystery, even to me. O0
I *really* don't like their website, and don't visit often.
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Re: ee bonds

Post by sophie » Sat Jul 01, 2017 5:50 pm

I tried the savings bond value wizard, as it really is a pain to log into TD to do it. It's great, and incidentally you don't actually need the serial numbers, just issue month/year. Thanks for the pointer!

Caveat: the app is Windows specific, and doing it online on a mac requires Safari. Annoying that it doesn't work on Chrome.
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Re: ee bonds

Post by dualstow » Sat Jul 01, 2017 8:28 pm

Ah, yes, that must be why I gave up on it. Mac & Chrome here.
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Re: ee bonds

Post by sophie » Sun Jul 02, 2017 7:54 am

jhogue wrote:
sophie wrote: 2. Are you still employing the STT strategy you outlined in your post “Tax trickery with short term treasuries” in 2012?
https://gyroscopicinvesting.com/forum/v ... t=trickery

I tried it last year because we sold our house and had to park a big slug of cash in our Fidelity brokerage account. Buying high coupon, maturing T bonds was easy to do and I found it to be an ingenious use of the differential tax policy on federal vs. state/local taxes that also captured the tax loss. Yet another “free lunch”! (or at least, “free desert”).
Ha, I haven't used that in a while! I thought with T bills rising in yield, it wouldn't be worth the effort unless you could find a very high interest rate bond, which takes some persistent hunting through the secondary market. Sounds like you didn't find that to be a problem. It is indeed a "free lunch", yes, and glad you found a good use for it with your big wad of cash. My main goal with it was to erase the difference between Treasuries and CDs, at the expense of a little extra diddling online.
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Re: ee bonds

Post by barrett » Sun Jul 02, 2017 12:09 pm

I'm going to beat the Treasury Direct savings bond horse one more time as I really don't get the antipathy towards their calculator.

I haven't "logged on" to their website in years (well maybe if I want to delve into a discussion about length of time for certain EE bonds to double or some other minutiae). I just have my bond inventory (both EE and I) saved on my desktop. When I want to see what the bonds are worth (or will be worth a few months down the line), I just open that TD file.

It's also a great tool for someone my age (almost 59) for tax planning as I'll have a bunch of the EEs hitting the 30-year mark from 2021 to 2023 when I am also planning to be doing Roth conversions and will be trying to stay in a lowish tax bracket.

I just always figure that I am the most tech-averse person on here. If the TD savings bond tool were tough to use, I would be the one struggling with it.

Sorry, I get worked up talking about savings bonds! Years ago I used to be paid frequently in cash and my trick for not blowing it was to go straight to the bank and buy savings bonds with the intent of holding them until maturity. Self-employed people can be well served by these little mental gymnastics.
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Re: ee bonds

Post by jhogue » Mon Jul 03, 2017 12:10 am

barrett, I share your enthusiasm for savings bonds!

1. Paper savings bonds have a special attraction for me, even though it is pretty clear the US Treasury would simply like to get rid of them. They don’t sell paper EE bonds any more, but you can still get $5,000 in paper I bonds as part of your annual tax refund. I have found that filing the necessary extension and refund forms to get them is pretty simple with Turbotax software. While I have tried to make a rational financial case for buying I bonds as part of “deep cash” in the PP, being able to hold paper bonds in your hands has what some here have described as a “fondle factor” as well. As long as Treasury is selling paper savings bonds, I will be buying them.

2. The Treasury used to sell forty year series E bonds, but reduced that to 30 years, pretty much in tandem with their standardized auctions of 30 year Treasury bonds. Note too that Treasury has, in effect, made new issue EE bonds less attractive by reducing the interest paid on EE bonds that are past the 20 year doubling mark. President Trump’s Secretary of the Treasury, Steve Mnuchin, has recently come out in favor of creating 50, and possibly 100 year ultra long Treasury bonds to help refinance the national debt and pay for Trump’s infrastructure initiative. I am kind of surprised that this has not triggered more commentary and response from this forum and elsewhere. So far, Wall Street has shown little interest in ultra long bonds, but if that initiative should come to pass, it could present some interesting new wrinkles to both ends of the PP barbell.
“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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