Gyroscopic Investing

Okay, cool. I am excited to hop on the bandwagon.

Am I correct to assume that I-Bonds are a screaming deal compared to the EE bonds? I don't see why I would want an EE bond over an I-bond unless I ran out of i-bond space...

Thoughts?

melveyr,

I think in general i-bonds are the better deal, but a few weeks ago when 20 year bond rates were 2.5% or so a 3.53% implied return by doubling principle over 20 years appeared to me to be an amazing deal with no principle risk along the way. 

I tend to think ee bonds will prove to be better than i-bonds if we go through a prolonged japan-style deflation.

moda,

I was thinking about the EE bond being used as a 30 year, but I personally don't know what I would do with it. With the HBPP I would sell a 30 year once it became a 20 year.

With the savings bond, it only really functions as a 30 year if you hold it all the way to maturity. So it wouldn't really work in the PP unless your cash/long bonds were lumped into a 0-30 year ladder or something. Even then, you can't really rebalance with the savings bonds because there is no price volatility.

So, would you use an EE bond as a 30 year and just think of it as a VP bet?

melveyr wrote: moda,

I was thinking about the EE bond being used as a 30 year, but I personally don't know what I would do with it. With the HBPP I would sell a 30 year once it became a 20 year.

With the savings bond, it only really functions as a 30 year if you hold it all the way to maturity. So it wouldn't really work in the PP unless your cash/long bonds were lumped into a 0-30 year ladder or something. Even then, you can't really rebalance with the savings bonds because there is no price volatility.

So, would you use an EE bond as a 30 year and just think of it as a VP bet?

Why not just consider it a part of your cash allocation? It's like an advantaged savings account.

Gumby,

That is likely what I will do. I just don't plan on using it as 30 year because it doesn't work for my situation.

melveyr wrote: I was thinking about the EE bond being used as a 30 year, but I personally don't know what I would do with it. With the HBPP I would sell a 30 year once it became a 20 year.

So, would you use an EE bond as a 30 year and just think of it as a VP bet?

Savings bonds (which earn interest up to 30 years) do not work the same way as 30 year Treasury bonds, and are not a substitution for them in the HBPP.

Treasury bonds are marketable securities that trade on exchanges, and as such the price of the bond itself (NOT the interest rate) can go up and down with economic conditions, just like stocks, options, and other securities traded on exchanges. 

This up and down price volatility of T-Bonds is why they are important to the HBPP, not any interest they earn.  The interest is just icing on the cake.  (But it is tasty icing; if you hold your Long Term Treasuries in TLT or another ETF/Mutual Fund where you can have automatic dividend reinvestment, the magic of compound interest can occur.)

If you look at TLT, which holds 20-Year+  Treasury bonds, it has fluctuated in price since January 2011 almost 40% between the year-to-date high and low, with average interest rates (yields) ranging between  lower 3.XX% and upper 4.XX%.  The last few years have been great years for the T-Bonds in the PP, as typically T-Bonds don't fluctuate to such heights in such a short period of time.

A Series EE Savings Bond, however, is closer to a 30 year Certificate of Deposit (which can't be liquidated before 12 months, has a 3 month penalty if liquidated before 5 years, and a guaranteed interest rate that may be higher than the original rate if held for the full 30 years) except it has the full faith and credit of the US government.  A Series I Savings Bond is like a similar CD with an overall interest rate that changes in some "loose" relationship to the CPI.  I had to specify "loose" because while the variable rate component of the interest is related to the CPI, the fixed rate component is whatever the Treasury Secretary decides it should be--fat chance on the Secretary assigning a fixed-rate of 10% if whatever CPI they use is 15%.  IMHO.  Anyway, you can't sell them on exchanges, so they are stable in value--which is exactly what you want for the cash portion of the PP.

So a Series I or EE Savings Bond is useful for the Permanent Portfolio's deep cash--the part that is not likely to be used this year for rebalancing.  Even though a Savings Bond is good to 30 years, it's not the same animal as the 30-Year Treasury Bond. 

If Series I and EE Savings Bonds are birds, 30-Year Treasury Bonds are crocodiles (maybe its vice-versa, or some analogy like that).

Interesting stuff... One of the Bogleheads made this little I Bond tracker...

http://web.me.com/rlhinkley/ibonds/index.html

New rates announced...

https://www.treasurydirect.gov/news/pre ... di1111.htm

No surprise there.... 0% fixed on i-bonds and EE down quite a bit from 1.1% to .6%.

I still like EE bonds as a interest-rate play over the 20-year period.

Gumby,

Did we ever figure if electronic EE bonds do the 3.53% doubling?

Gumby wrote: New rates announced...

https://www.treasurydirect.gov/news/pre ... di1111.htm

"Public Debt Announces New Savings Bonds Rates, Series I to Earn 3.06%, Series EE to Earn 0.60%."

Six months ago the I-Bond rate was 4.60%.  I'm glad I got my October order in before the deadline.  Still, 3.06% shows that there is some inflation still out there, as the fixed rate on I-Bonds is 0.00%.

smurff,

What's weird to me is that commodities have dropped 21% (PCRAX) in the past 6 months.  It was my typical observation that most of our inflation, currently, was in the form of commodities.  I think I need to take another look at the CPI-U chart.

Moda, commodities may have dropped over the past six months, but Peter Pan Peanut Butter is going up 30%.   
Okay, that's the near future, but food prices have gone up.  Still, it's hard to keep track of all the different CPIs produced by the BLS (what component is deducted from which one) and which one applies to alter the interest rate of programs linked to it. 

A rate like 3.06 is still good in an environment where 6 month Treasury Bills pay 0.065%.

I have to keep reminding myself, however,  that the interest rate of the I-Bond or EE-Bond  is not the main reason savings bonds are good for the PP; it's to keep cash in a vehicle that is as low-risk as a T-bill and as liquid as possible.  An extra $44.60 or $33.06 on a $1000 I-bond per year is icing on the cake (or candy sprinkles on the ice cream).

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

Looks like a -.3% adjustment to CPI over the last two reported months, and December has seen some pretty fast-falling commodity prices (PCRAX down over -5%), so I'd guess the trend will continue up through the first 3 months of the interest reporting period.

We might have a negative CPI period, folks!

But don't worry... I bonds can never lose principal.

smurff wrote:

Gumby wrote: New rates announced...

https://www.treasurydirect.gov/news/pre ... di1111.htm

"Public Debt Announces New Savings Bonds Rates, Series I to Earn 3.06%, Series EE to Earn 0.60%."

Six months ago the I-Bond rate was 4.60%.  I'm glad I got my October order in before the deadline.  Still, 3.06% shows that there is some inflation still out there, as the fixed rate on I-Bonds is 0.00%.

Please correct me if I am wrong, but doesn't the iBond rate fluctuate every 6 months, so if you purchased your bonds last year, the 6 month rate of 4.6% would apply, then the next 6 months you'll get a 3.06% rate, etc?  I'm not following the benefit, other than getting a few months of 4.6% interest before the rate drops down with everyone else's iBonds.

Yes, the annual rate is average of the two six month periods.  I-Bonds are awesome because you'll get at least the rate of inflation or 0%, whever is higher.  Nothing else can make that guarantee, except maybe annuities.

MG

Storm wrote:

smurff wrote:

Gumby wrote: New rates announced...

https://www.treasurydirect.gov/news/pre ... di1111.htm

"Public Debt Announces New Savings Bonds Rates, Series I to Earn 3.06%, Series EE to Earn 0.60%."

Six months ago the I-Bond rate was 4.60%.  I'm glad I got my October order in before the deadline.  Still, 3.06% shows that there is some inflation still out there, as the fixed rate on I-Bonds is 0.00%.

Please correct me if I am wrong, but doesn't the iBond rate fluctuate every 6 months, so if you purchased your bonds last year, the 6 month rate of 4.6% would apply, then the next 6 months you'll get a 3.06% rate, etc?  I'm not following the benefit, other than getting a few months of 4.6% interest before the rate drops down with everyone else's iBonds.

CPI-U is down again about -.2% from last month.... so far we're 3-of-6 months thru the inflation index period, and down about -.5%.

Don't worry, you can't lose principle on I-bonds.

MediumTex wrote:

moda0306 wrote: MT,

Imagine holding one still today from 2000 yielding about 3.5% fixed... I think if I had yr 2000 issued i-bonds I'd sleep with them in my bed.

I would put them in plastic sleeves and weave them together into a suit.  I would wear it all the time.  People would call me "the crazy Ibond guy", but I wouldn't care.

"Crazy I-Bond Guy and his crazy suit".

I made this because of that comment.



Hilarious.