xram wrote:So what are the odds of IBONDS paying out 3.56% average over twenty years? ...
Let's start with what we know. Savings bonds are US Treasury obligations, like other Treasuries. We can work out break even inflation for non-Savings bond treasuries based on the present 20-year nominal rate minus the 20-year TIPS real rate.
According to the Treasury, at the end of trading yesterday, 20-year nominals yielded 2.78%, and the same term TIPS, 0.20% real.http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
2.78 - 0.20 = 2.58%. That number, break even inflation, is a reasonable estimate of what bond market participants, in aggregate, think inflation is likely to average over the next 20 years.
My calculator says doubling in 20 years is equivalent to 3.53%, so that's what I'll use.
I Bonds bought today have a fixed rate of 0%, which is added to the inflation component as updated every six months. Over the long term today's I Bonds are expected to track inflation, nothing more or less, so I'll show the expected 20-year I Bond rate to be the same as break even inflation.
3.53% > 2.78% = 2.78% > 2.58% = 2.58% > 1.76% > 0.20%Which is to say:
EE bond doubling > nominal = TIPS (adjusted to expected nominal yield) > break even inflation = expected I Bond yield > present I Bond yield > EE bond yield if not held all the way to 20 years.
It seems market expectations are that at break even inflation, EE bonds will outperform nominals, TIPS, and I Bonds bought today for 20 years, without being exposed to market fluctuations like the TIPS and nominals.
We'll know in two decades whether the market's expectations were accurate.
Let me ask you a question back:What are the odds of you personally being able to hold EE bonds for exactly twenty years, despite the likelihood of unforeseen and unforeseeable events?
If the odds are high, EEs may be a good choice for you.