Two I-Bond Questions

[barrett]

I posted this yesterday but on an old thread, and I am interested in feedback from you all out there...

I have a couple of questions on I-Bonds...

Does anyone besides me get the willies that one can't hold paper bonds anymore? I really don't like just having them all set up electronically. My thinking is that owning bonds that are not super easy to access is a bit like owning gold through an ETF. As Craigr might put it, it feels like there are too many pieces of paper between me and the asset.

The other question goes back to the issue of whether or not holding I-Bonds as cash in the PP is imprudent. I know US Treasuries are considered the safest for the "cash" position because the government can either raise taxes or print money to make payments. Does the same hold true for I-Bonds?

Thanks in advance for your input. And now for a bit of a tangent (but only after you have answered my first two questions!) ... In the late 1990s the government came up with TIPS and I-Bonds as new instruments for getting us to lend them money. Anyone care to guess what they might come up with next?

[Gosso]

In the late 1990s the government came up with TIPS and I-Bonds as new instruments for getting us to lend them money. Anyone care to guess what they might come up with next?

[img width=300]http://lwgsummerland.files.wordpress.co ... %26h%3D273[/img]

On a more seriously note, TIPS and I-Bonds did not make us give the government anymore of our money, they are just a different vehicle for holding the money.  In other words they are an alternative to standard treasuries.

[barrett]

Correct, but isn't offering more bond-type products a bit like what any retailer does? People are more likely to like one of them if there is a lot of selection. But please answer my first two question and then we can devolve into Yoda speak!

[barrett]

Thanks for your input, TennPaGa. I hadn't heard about floating rate notes yet. It seems that a lot of roads now lead back to the Treasury Direct website... which gets me back to my question about paper bonds. I had purchased a few of the paperless bonds when they first became available, and then turned around and sold them after a year or so because I felt like I didn't really own anything without physical bonds that I could see and touch. Not sure why I am fine owning stocks when I don't hold any actual certificates. Could it be that I am not a completely rational being?

[ns3]

Does anyone besides me get the willies that one can't hold paper bonds anymore? I really don't like just having them all set up electronically. My thinking is that owning bonds that are not super easy to access is a bit like owning gold through an ETF. As Craigr might put it, it feels like there are too many pieces of paper between me and the asset.

I bought my first I-bonds last year and I get your point. With LTT's I've always gotten my interest paid into my Fidelity account but now they are just going to be numbers showing up on a screen at Treasury Direct. So they aren't really making interest payments, are they?

Still, there is something funny about your reasoning. You want a paper bond so there won't be a piece of paper between you and your asset?

[barrett]

Good point! But it's only one piece of paper that I can take to a bank and get paper money in return (hmm...). Do the paperless bonds even have serial numbers that you can plug into the Treasury Direct calculator? Silly question, I guess, but one worry I had about the few that I held was that I wouldn't actually be able to prove that I owned anything. The second worry was that I might not be organized enough when I am really old to even remember that my computer can link me to my wealth in some way (not likely to happen until close to the end of my life with a safe deposit box!).

[barrett]

To your first point, ns3, no they are not actually making interest payments on the I-Bonds but that has always been the case with savings bonds. They grow tax-deferred for as long as 30 years but the government doesn't have to show you the money until you redeem them... which makes them like a lot of assets, I guess. So you are a bit uncomfortable but don't actually "get the willies" like I do? 

[WildAboutHarry]

The drawback about I-bonds is that they are not as liquid as USTs or UST money market accounts, and so not as handy when rebalancing.

They are pretty darn liquid, though, once you pass the 1-year blackout period.  I did a redemption from Treasury Direct last year, and while I don't recall how fast the money hit my bank account it was pretty fast.  Given that one can purchase a limited amount of I-Bonds per year, the liquidity factor is almost a non-issue.  You cannot rebalance out of and then back in to I-Bonds unless you stay within the $10K limits.

One thing that gives me pause about Treasury Direct is the lengthy disclaimer about account security.  Basically (as I recall) you are on your own if your account is hacked.

[barrett]

Yeah, I just went back and read the Treasury Direct disclaimer again and it makes my head hurt with all the legalese. I figure with my old paper bonds that at least they can't be taken electronically. It would take a direct strike on the safe deposit area of my bank to wrest them from my grasp (either that or a bank employee with two copies of my key!). Not impossible, I guess, but much less likely than a hacker getting access to information online.

But I am glad to hear that your redemption went smoothly. These were great a few years back when they were paying better interest. Now they are a bit less attractive, but I'm guessing there will be periods again in the future when they pay better interest if they are not monkeyed with. It's a nice boring place for cash to sit and get a decent return provided you don't need it within that first year (or five if you don't want to incur the loss of three-months of interest).

And here's a question that I am going to put to a college financial planner but I'll throw it out here as well in case anyone knows all the minutiae on these bonds... I have some series EE bonds from the late 1990s that are returning a paltry 1% or so. I have read that one doesn't have to pay taxes on the interest if they are used to pay higher education expenses. My question is does this apply if I am putting them towards the education of a non relative?

Thanks everyone for your input.