Should I sell I-bonds to get 6.75% [in Pakistan bonds?]

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get_g0ing
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Should I sell I-bonds to get 6.75% [in Pakistan bonds?]

Post by get_g0ing » Tue Feb 26, 2019 11:51 pm

Hi,

I have $35,000 of I-bonds, bought between 2014 - 2018.

Pakistan government has launched a special bond/certificate for Pakistan origin people living overseas. It's 6.75% bi-annual for 5-year term. I live in the US and am eligible for this.

I'm thinking of selling the I-bonds and buying these certificates.

Is this is a good idea?

Image

chessknt
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Re: Should I sell I-bonds to get 6.75%

Post by chessknt » Wed Feb 27, 2019 12:07 am

get_g0ing wrote:
Tue Feb 26, 2019 11:51 pm
Hi,

I have $35,000 of I-bonds, bought between 2014 - 2018.

Pakistan government has launched a special bond/certificate for Pakistan origin people living overseas. It's 6.75% bi-annual for 5-year term. I live in the US and am eligible for this.

I'm thinking of selling the I-bonds and buying these certificates.

Is this is a good idea?

Image
No. Not sure if you are using I bonds as a cash or bond allocation part of your portfolio but whichever it is the greatly increased default risk (Google Pakistan credit rating and compare to USA) you would be taking on should recategorize those funds as equities at least if not play money.

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emlowe
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Re: Should I sell I-bonds to get 6.75%

Post by emlowe » Wed Feb 27, 2019 12:13 am

Pakistan is B- rated. I believe this is considered not investment grade (aka junk bond)

So you are trading a great deal of credit quality for yield, along with single-issuer risk. You are also sacrificing liquidity. I read this as saying you can liquidate early but only in PKR.

As a comparison, I might look at iShares Emerging Markets Bond Index EMB. The 30-day yield is 5.25% but has mostly BB and up credit quality (it does have about 30% B or lower)

I'm not sure the risk is worth it, but the interest rate does seem in line with a B- rated bond instrument.

Elena
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Re: Should I sell I-bonds to get 6.75%

Post by Elena » Wed Feb 27, 2019 7:30 am

Could you take a stretch and do it with "new" money? (and leave the I-bonds alone). You would be losing the pre-tax space that you have been building for a number of years. I know that the bond rates are enticing (the advertisement makes them very attractive), but I would find another way of satisfying your investment needs. Maybe get a short-term loan, then pay it fast and keep the bonds until maturity? Or just dip into your savings acct.? I would not sell the I-bonds for lower-grade "play" money.

bhough
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Re: Should I sell I-bonds to get 6.75%

Post by bhough » Wed Feb 27, 2019 7:46 am

You are comparing apples and oranges.

If you want a higher return with more risk (and a small tax hit now), do it.

If your I-bond purchases were primarily for safety, liquidity, deferred taxation, inflation/deflation protection, keep the I-bonds.

I'd keep the I-bonds.
b

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Re: Should I sell I-bonds to get 6.75%

Post by riverguy » Wed Feb 27, 2019 8:12 am

Investing in Pakistan at the beginning of an escalation with India sounds like a not so good idea...

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Re: Should I sell I-bonds to get 6.75%

Post by Grt2bOutdoors » Wed Feb 27, 2019 9:08 am

Here is a tip: when comparing two different instruments, understand that there is no free lunch. The Pakistani government is offering a much higher yield to compensate and entice (relative term) you for the great risk you will be taking. Let's say you are looking at the 3 year bond and saying to your greedy (joke) self, hmmm....6.25% with no currency risk (paid in US dollars) for 3 years, I can only get 2.44% as of yesterday (reported on US Treasury daily average yield curve report) why is that? You are being offered a 375 basis point premium - that should send off warning signals to you. Remember, there is no free lunch, you are contemplating selling a AAA rated bond for a B- bond, in terms of repayment ability, the difference is night and day. The US Government has people banging on their doors throwing money at them to buy their bonds, do you think that is the same case for Pakistani offered bonds? You may want to consider the Vanguard High Yield Corporate Bond fund - similar yield as the Pakistani offering, the main difference, is one is very liquid, can be sold and bought on a daily basis. The Pakistani offering, you buy it and now you are illiquid for the next 3-5 years. Which sounds better to you?

IMO, I would not buy the Pakistani offering, if I wanted to take some risk, I'd buy the Vanguard High Yield Corporate fund. I would pass on the emerging market bond.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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get_g0ing
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Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Wed Feb 27, 2019 10:39 am

chessknt wrote:
Wed Feb 27, 2019 12:07 am
No. Not sure if you are using I bonds as a cash or bond allocation part of your portfolio but whichever it is the greatly increased default risk (Google Pakistan credit rating and compare to USA) you would be taking on should recategorize those funds as equities at least if not play money.
Elena wrote:
Wed Feb 27, 2019 7:30 am
Could you take a stretch and do it with "new" money? (and leave the I-bonds alone). You would be losing the pre-tax space that you have been building for a number of years. I know that the bond rates are enticing (the advertisement makes them very attractive), but I would find another way of satisfying your investment needs. Maybe get a short-term loan, then pay it fast and keep the bonds until maturity? Or just dip into your savings acct.? I would not sell the I-bonds for lower-grade "play" money.
emlowe wrote:
Wed Feb 27, 2019 12:13 am
Pakistan is B- rated. I believe this is considered not investment grade (aka junk bond)

So you are trading a great deal of credit quality for yield, along with single-issuer risk. You are also sacrificing liquidity. I read this as saying you can liquidate early but only in PKR.

As a comparison, I might look at iShares Emerging Markets Bond Index EMB. The 30-day yield is 5.25% but has mostly BB and up credit quality (it does have about 30% B or lower)

I'm not sure the risk is worth it, but the interest rate does seem in line with a B- rated bond instrument.
So when we say B-rated, can you tell me briefly what it means?
Does it mean that after 5 years there is a higher chance of not getting the money back?

If *that* is the risk then I don't think 5 year is a long enough time frame to worry, so I don't think the country would go away in that time.

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Re: Should I sell I-bonds to get 6.75%

Post by drk » Wed Feb 27, 2019 10:48 am

get_g0ing wrote:
Wed Feb 27, 2019 10:39 am
So when we say B-rated, can you tell me briefly what it means?
Does it mean that after 5 years there is a higher chance of not getting the money back?

If *that* is the risk then I don't think 5 year is a long enough time frame to worry, so I don't think the country would go away in that time.
That rating (B-) indicates that Pakistan currently has the capacity to service it's debt but is "vulnerable to adverse business, financial and economic conditions" (e.g., a slowdown in growth, a bear market in emerging market debt, a more expensive US dollar). It's not about whether Pakistan will *exist* but whether it will *default*, and that's the difference between getting paid the 6.75% interest that you expect and getting paid nothing.

As indicated above, you could instead buy the Emerging Markets Bond fund, earn a slightly lower yield, and at least diversify the default risk.

Last thing: do you know the tax treatment of these in the US? That's worth investigating.

aristotelian
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Re: Should I sell I-bonds to get 6.75%

Post by aristotelian » Wed Feb 27, 2019 10:55 am

Pakistan has to pay about 3X as much as the U.S. government to borrow money. Think about why that might be the case.

You would be paying the market rate, so to that extent it could be a "good idea" to increase return but in no way would the risk be equivalent to U.S. Treasury I Bonds.

chessknt
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Re: Should I sell I-bonds to get 6.75%

Post by chessknt » Wed Feb 27, 2019 11:03 am

get_g0ing wrote:
Wed Feb 27, 2019 10:39 am
chessknt wrote:
Wed Feb 27, 2019 12:07 am
No. Not sure if you are using I bonds as a cash or bond allocation part of your portfolio but whichever it is the greatly increased default risk (Google Pakistan credit rating and compare to USA) you would be taking on should recategorize those funds as equities at least if not play money.
Elena wrote:
Wed Feb 27, 2019 7:30 am
Could you take a stretch and do it with "new" money? (and leave the I-bonds alone). You would be losing the pre-tax space that you have been building for a number of years. I know that the bond rates are enticing (the advertisement makes them very attractive), but I would find another way of satisfying your investment needs. Maybe get a short-term loan, then pay it fast and keep the bonds until maturity? Or just dip into your savings acct.? I would not sell the I-bonds for lower-grade "play" money.
emlowe wrote:
Wed Feb 27, 2019 12:13 am
Pakistan is B- rated. I believe this is considered not investment grade (aka junk bond)

So you are trading a great deal of credit quality for yield, along with single-issuer risk. You are also sacrificing liquidity. I read this as saying you can liquidate early but only in PKR.

As a comparison, I might look at iShares Emerging Markets Bond Index EMB. The 30-day yield is 5.25% but has mostly BB and up credit quality (it does have about 30% B or lower)

I'm not sure the risk is worth it, but the interest rate does seem in line with a B- rated bond instrument.
So when we say B-rated, can you tell me briefly what it means?
Does it mean that after 5 years there is a higher chance of not getting the money back?

If *that* is the risk then I don't think 5 year is a long enough time frame to worry, so I don't think the country would go away in that time.
If you don't understand how bonds work, credit ratings, or how default works I would learn all of these things before making a decision so that you actually understand what you are buying.

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Re: Should I sell I-bonds to get 6.75%

Post by mhadden1 » Wed Feb 27, 2019 11:04 am

I-bonds pay the rate of inflation plus a small premium, so you are protected against unexpected inflation. It's the US government and US dollars, so, risk free. Treasuries for 3-5 years pay around 2.5% maybe, risk free. You have to decide how much extra risk you want to take to get the 6.75%. On the face of it, if Pakistan thinks it must pay 6.75% to sell the bonds, the market sees a substantial amount of risk.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

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get_g0ing
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Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Wed Feb 27, 2019 11:07 am

drk wrote:
Wed Feb 27, 2019 10:48 am
get_g0ing wrote:
Wed Feb 27, 2019 10:39 am
So when we say B-rated, can you tell me briefly what it means?
Does it mean that after 5 years there is a higher chance of not getting the money back?

If *that* is the risk then I don't think 5 year is a long enough time frame to worry, so I don't think the country would go away in that time.
That rating (B-) indicates that Pakistan currently has the capacity to service it's debt but is "vulnerable to adverse business, financial and economic conditions" (e.g., a slowdown in growth, a bear market in emerging market debt, a more expensive US dollar). It's not about whether Pakistan will *exist* but whether it will *default*, and that's the difference between getting paid the 6.75% interest that you expect and getting paid nothing.

As indicated above, you could instead buy the Emerging Markets Bond fund, earn a slightly lower yield, and at least diversify the default risk.

Last thing: do you know the tax treatment of these in the US? That's worth investigating.
I see. Thanks for explaining. This is a new concept for me, so thanks for helping me.

Do we have recent examples of something like this happening, i.e. a B-rated country defaulting on it's debt.

I'd like to understand how common this is.

And when you say:
"that's the difference between getting paid the 6.75% interest that you expect and getting paid nothing."
Is the principal at risk also? Meaning, you don't get your money back.

Thanks.

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get_g0ing
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Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Wed Feb 27, 2019 11:09 am

chessknt wrote:
Wed Feb 27, 2019 11:03 am
get_g0ing wrote:
Wed Feb 27, 2019 10:39 am
chessknt wrote:
Wed Feb 27, 2019 12:07 am
No. Not sure if you are using I bonds as a cash or bond allocation part of your portfolio but whichever it is the greatly increased default risk (Google Pakistan credit rating and compare to USA) you would be taking on should recategorize those funds as equities at least if not play money.
Elena wrote:
Wed Feb 27, 2019 7:30 am
Could you take a stretch and do it with "new" money? (and leave the I-bonds alone). You would be losing the pre-tax space that you have been building for a number of years. I know that the bond rates are enticing (the advertisement makes them very attractive), but I would find another way of satisfying your investment needs. Maybe get a short-term loan, then pay it fast and keep the bonds until maturity? Or just dip into your savings acct.? I would not sell the I-bonds for lower-grade "play" money.
emlowe wrote:
Wed Feb 27, 2019 12:13 am
Pakistan is B- rated. I believe this is considered not investment grade (aka junk bond)

So you are trading a great deal of credit quality for yield, along with single-issuer risk. You are also sacrificing liquidity. I read this as saying you can liquidate early but only in PKR.

As a comparison, I might look at iShares Emerging Markets Bond Index EMB. The 30-day yield is 5.25% but has mostly BB and up credit quality (it does have about 30% B or lower)

I'm not sure the risk is worth it, but the interest rate does seem in line with a B- rated bond instrument.
So when we say B-rated, can you tell me briefly what it means?
Does it mean that after 5 years there is a higher chance of not getting the money back?

If *that* is the risk then I don't think 5 year is a long enough time frame to worry, so I don't think the country would go away in that time.
If you don't understand how bonds work, credit ratings, or how default works I would learn all of these things before making a decision so that you actually understand what you are buying.
Any recommended reading or Youtube video as a brief 101 type intro.
Something basic and simple to understand.

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Re: Should I sell I-bonds to get 6.75%

Post by Dottie57 » Wed Feb 27, 2019 11:16 am

On BH, I’ve read to take risk in stocks and buy bonds fore safety. Don’t chase returns in fixed income. It make sense to me. I would not sell I-Bonds.

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Re: Should I sell I-bonds to get 6.75%

Post by samsoes » Wed Feb 27, 2019 11:22 am

chessknt wrote:
Wed Feb 27, 2019 11:03 am
If you don't understand how bonds work, credit ratings, or how default works I would learn all of these things before making a decision so that you actually understand what you are buying.
This. ^^
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Re: Should I sell I-bonds to get 6.75%

Post by jminv » Wed Feb 27, 2019 11:27 am

Those are very low interest rates for bonds from a country that needs And is actively negotiating an IMF bailout.

It seems like quite a bit of credit risk for the yield on offer.

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get_g0ing
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Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Wed Feb 27, 2019 11:58 am

samsoes wrote:
Wed Feb 27, 2019 11:22 am
chessknt wrote:
Wed Feb 27, 2019 11:03 am
If you don't understand how bonds work, credit ratings, or how default works I would learn all of these things before making a decision so that you actually understand what you are buying.
This. ^^
Can't be stressed enough.
Any recommended reading or Youtube video as a brief 101 type intro.
Something basic and simple to understand.

Topic Author
get_g0ing
Posts: 546
Joined: Sat Dec 09, 2017 11:09 am

Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Wed Feb 27, 2019 12:00 pm

jminv wrote:
Wed Feb 27, 2019 11:27 am
Those are very low interest rates for bonds from a country that needs And is actively negotiating an IMF bailout.

It seems like quite a bit of credit risk for the yield on offer.
Can you elaborate on what exactly is the risk please?

Also, any recent examples of this type of risk actually happening? (like for some other country)

Thanks.

Rupert
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Re: Should I sell I-bonds to get 6.75%

Post by Rupert » Wed Feb 27, 2019 12:14 pm

get_g0ing wrote:
Wed Feb 27, 2019 12:00 pm
jminv wrote:
Wed Feb 27, 2019 11:27 am
Those are very low interest rates for bonds from a country that needs And is actively negotiating an IMF bailout.

It seems like quite a bit of credit risk for the yield on offer.
Can you elaborate on what exactly is the risk please?

Also, any recent examples of this type of risk actually happening? (like for some other country)

Thanks.
Pakistan itself has defaulted in the last two decades. See https://www.investopedia.com/articles/i ... efault.asp . Other countries that have done it include Russia, Argentina, Greece.

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get_g0ing
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Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Wed Feb 27, 2019 1:02 pm

Rupert wrote:
Wed Feb 27, 2019 12:14 pm
get_g0ing wrote:
Wed Feb 27, 2019 12:00 pm
jminv wrote:
Wed Feb 27, 2019 11:27 am
Those are very low interest rates for bonds from a country that needs And is actively negotiating an IMF bailout.

It seems like quite a bit of credit risk for the yield on offer.
Can you elaborate on what exactly is the risk please?

Also, any recent examples of this type of risk actually happening? (like for some other country)

Thanks.
Pakistan itself has defaulted in the last two decades. See https://www.investopedia.com/articles/i ... efault.asp . Other countries that have done it include Russia, Argentina, Greece.
When you say "default", does that mean not paying the interest or not paying back the original principal itself?

Thanks.

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Re: Should I sell I-bonds to get 6.75%

Post by mhadden1 » Wed Feb 27, 2019 1:17 pm

get_g0ing wrote:
Wed Feb 27, 2019 1:02 pm
Rupert wrote:
Wed Feb 27, 2019 12:14 pm

Pakistan itself has defaulted in the last two decades. See https://www.investopedia.com/articles/i ... efault.asp . Other countries that have done it include Russia, Argentina, Greece.
When you say "default", does that mean not paying the interest or not paying back the original principal itself?

Thanks.
The whole range of possibilities exists, from one minute late on an interest payment, to no interest and no principal repayment. And not all the outcomes are equally likely.

In general, my advice is not to try to chase fixed income returns. Overall, I would say that is a Bogleheads tenet. Others may disagree about that. I understand why people chase the higher returns though - means more cash, which is just as good as money. :happy
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

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Wiggums
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Re: Should I sell I-bonds to get 6.75%

Post by Wiggums » Wed Feb 27, 2019 1:24 pm

This investment is not something that I would choose, nor do I see it as a replacement for I-bonds. The return is very low considering the risk to interest payments and even principle.

Moody’s recently published this statement.

The country does not have enough foreign exchange reserves to pay its public and private external debt due over this year, the Moody’s report revealed. “Foreign exchange reserves are low, and gross borrowing requirements are large in Pakistan and Sri Lanka, threatening the ability of these governments to refinance debt and fund deficits affordably,” Moody’s Investors Service said.
Last edited by Wiggums on Wed Feb 27, 2019 1:30 pm, edited 1 time in total.

Rupert
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Re: Should I sell I-bonds to get 6.75%

Post by Rupert » Wed Feb 27, 2019 1:25 pm

mhadden1 wrote:
Wed Feb 27, 2019 1:17 pm
get_g0ing wrote:
Wed Feb 27, 2019 1:02 pm
Rupert wrote:
Wed Feb 27, 2019 12:14 pm

Pakistan itself has defaulted in the last two decades. See https://www.investopedia.com/articles/i ... efault.asp . Other countries that have done it include Russia, Argentina, Greece.
When you say "default", does that mean not paying the interest or not paying back the original principal itself?

Thanks.
The whole range of possibilities exists, from one minute late on an interest payment, to no interest and no principal repayment. And not all the outcomes are equally likely.

In general, my advice is not to try to chase fixed income returns. Overall, I would say that is a Bogleheads tenet. Others may disagree about that. I understand why people chase the higher returns though - means more cash, which is just as good as money. :happy
Yes, "default" includes all of those things. They may not pay interest. They may not pay back the original principal. You can't know in advance what they might do. That's why many people say, "Only take risk on the equity side." That means, don't play around with risky bonds and fixed-income investments. The potential return is not great enough to justify the risk you are taking. Edited to note: This is why the poster above suggested mentally re-characterizing this investment, if you choose to make it, as an equity investment, i.e., one more akin to investing in stocks. You cannot fairly consider this investment as a replacement for IBonds in your portfolio.

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get_g0ing
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Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Thu Feb 28, 2019 7:11 am

Grt2bOutdoors wrote:
Wed Feb 27, 2019 9:08 am
Here is a tip: when comparing two different instruments, understand that there is no free lunch. The Pakistani government is offering a much higher yield to compensate and entice (relative term) you for the great risk you will be taking. Let's say you are looking at the 3 year bond and saying to your greedy (joke) self, hmmm....6.25% with no currency risk (paid in US dollars) for 3 years, I can only get 2.44% as of yesterday (reported on US Treasury daily average yield curve report) why is that? You are being offered a 375 basis point premium - that should send off warning signals to you. Remember, there is no free lunch, you are contemplating selling a AAA rated bond for a B- bond, in terms of repayment ability, the difference is night and day. The US Government has people banging on their doors throwing money at them to buy their bonds, do you think that is the same case for Pakistani offered bonds? You may want to consider the Vanguard High Yield Corporate Bond fund - similar yield as the Pakistani offering, the main difference, is one is very liquid, can be sold and bought on a daily basis. The Pakistani offering, you buy it and now you are illiquid for the next 3-5 years. Which sounds better to you?

IMO, I would not buy the Pakistani offering, if I wanted to take some risk, I'd buy the Vanguard High Yield Corporate fund. I would pass on the emerging market bond.
emlowe wrote:
Wed Feb 27, 2019 12:13 am
Pakistan is B- rated. I believe this is considered not investment grade (aka junk bond)

So you are trading a great deal of credit quality for yield, along with single-issuer risk. You are also sacrificing liquidity. I read this as saying you can liquidate early but only in PKR.

As a comparison, I might look at iShares Emerging Markets Bond Index EMB. The 30-day yield is 5.25% but has mostly BB and up credit quality (it does have about 30% B or lower)

I'm not sure the risk is worth it, but the interest rate does seem in line with a B- rated bond instrument.
drk wrote:
Wed Feb 27, 2019 10:48 am
get_g0ing wrote:
Wed Feb 27, 2019 10:39 am
So when we say B-rated, can you tell me briefly what it means?
Does it mean that after 5 years there is a higher chance of not getting the money back?

If *that* is the risk then I don't think 5 year is a long enough time frame to worry, so I don't think the country would go away in that time.
That rating (B-) indicates that Pakistan currently has the capacity to service it's debt but is "vulnerable to adverse business, financial and economic conditions" (e.g., a slowdown in growth, a bear market in emerging market debt, a more expensive US dollar). It's not about whether Pakistan will *exist* but whether it will *default*, and that's the difference between getting paid the 6.75% interest that you expect and getting paid nothing.

As indicated above, you could instead buy the Emerging Markets Bond fund, earn a slightly lower yield, and at least diversify the default risk.

Last thing: do you know the tax treatment of these in the US? That's worth investigating.
There were two different recommendations that came up:

iShares Emerging Markets Bond Index EMB
Vanguard High Yield Corporate

How should I compare and look at these two?

Thanks.

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Wiggums
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Re: Should I sell I-bonds to get 6.75%

Post by Wiggums » Thu Feb 28, 2019 7:41 am

What does your IPS say regarding international exposure? Are you looking to added higher risk bonds to your portfolio?

The J.P. Morgan EMBI (Emerging Market Bond Index), EMBI+ (Emerging Market Bonds Index Plus) and EMBIG (Emerging Market Bond Index Global) indexes are designed to help individual and institutional investors benchmark bond performance in emerging markets around the world, with each index covering different types of emerging market economies.

The Vanguard High-Yield Corporate Fund falls within Morningstar's high-yield bond category. Funds in this category tend to focus on lower-quality bonds, which are generally riskier than bonds from higher-quality issuers. High-yield bonds are often referred to as junk bonds.

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JMacDonald
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Re: Should I sell I-bonds to get 6.75%

Post by JMacDonald » Thu Feb 28, 2019 8:34 am

India and Pakistan are at rusk of going to war and have nuclear weapons. What could go wrong with that investment.

https://www.bloomberg.com/news/articles ... wned-pilot
Best Wishes, | Joe

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Re: Should I sell I-bonds to get 6.75%

Post by David Jay » Thu Feb 28, 2019 8:39 am

get_g0ing wrote:
Thu Feb 28, 2019 7:11 am
There were two different recommendations that came up:

iShares Emerging Markets Bond Index EMB
Vanguard High Yield Corporate

How should I compare and look at these two?

Thanks.
Dottie had a great response to this question above:
Dottie57 wrote:
Wed Feb 27, 2019 11:16 am
On BH, I’ve read to take risk in stocks and buy bonds for safety. Don’t chase returns in fixed income.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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emlowe
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Re: Should I sell I-bonds to get 6.75%

Post by emlowe » Thu Feb 28, 2019 3:58 pm

To be clear, I wasn't recommending EMB, I was suggesting you could use it as a reference point to compare the Pakistani Bond with "similar" bonds.

Investing from I-Bonds (a safe, fixed-income component) to a High Yield or Emerging Bond fund is moving to a completely different category of risk. As said very well, "Don't chase returns in fixed income"

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get_g0ing
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Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Thu Feb 28, 2019 10:52 pm

David Jay wrote:
Thu Feb 28, 2019 8:39 am
get_g0ing wrote:
Thu Feb 28, 2019 7:11 am
There were two different recommendations that came up:

iShares Emerging Markets Bond Index EMB
Vanguard High Yield Corporate

How should I compare and look at these two?

Thanks.
Dottie had a great response to this question above:
Dottie57 wrote:
Wed Feb 27, 2019 11:16 am
On BH, I’ve read to take risk in stocks and buy bonds for safety. Don’t chase returns in fixed income.
emlowe wrote:
Thu Feb 28, 2019 3:58 pm
To be clear, I wasn't recommending EMB, I was suggesting you could use it as a reference point to compare the Pakistani Bond with "similar" bonds.

Investing from I-Bonds (a safe, fixed-income component) to a High Yield or Emerging Bond fund is moving to a completely different category of risk. As said very well, "Don't chase returns in fixed income"
What should I keep in mind as the main reason(s) for "Don't chase returns in fixed income"?

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David Jay
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Re: Should I sell I-bonds to get 6.75%

Post by David Jay » Thu Feb 28, 2019 10:56 pm

get_g0ing wrote:
Thu Feb 28, 2019 10:52 pm
David Jay wrote:
Thu Feb 28, 2019 8:39 am
get_g0ing wrote:
Thu Feb 28, 2019 7:11 am
There were two different recommendations that came up:

iShares Emerging Markets Bond Index EMB
Vanguard High Yield Corporate

How should I compare and look at these two?

Thanks.
Dottie had a great response to this question above:
Dottie57 wrote:
Wed Feb 27, 2019 11:16 am
On BH, I’ve read to take risk in stocks and buy bonds for safety. Don’t chase returns in fixed income.
emlowe wrote:
Thu Feb 28, 2019 3:58 pm
To be clear, I wasn't recommending EMB, I was suggesting you could use it as a reference point to compare the Pakistani Bond with "similar" bonds.

Investing from I-Bonds (a safe, fixed-income component) to a High Yield or Emerging Bond fund is moving to a completely different category of risk. As said very well, "Don't chase returns in fixed income"
What should I keep in mind as the main reason(s) for "Don't chase returns in fixed income"?
Nothing less than investment grade.
Nothing longer than intermediate term.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Wiggums
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Re: Should I sell I-bonds to get 6.75%

Post by Wiggums » Thu Feb 28, 2019 11:01 pm

David Jay wrote:
Thu Feb 28, 2019 10:56 pm
Nothing less than investment grade.
Nothing longer than intermediate term.
Well said

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munemaker
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Re: Should I sell I-bonds to get 6.75% [in Pakistan bonds?]

Post by munemaker » Thu Feb 28, 2019 11:06 pm

get_g0ing wrote:
Tue Feb 26, 2019 11:51 pm

Pakistan government has launched a special bond/certificate for Pakistan origin people living overseas. It's 6.75% bi-annual for 5-year term. I live in the US and am eligible for this.

I'm thinking of selling the I-bonds and buying these certificates.

Is this is a good idea?
What could possibly go wrong?

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whodidntante
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Re: Should I sell I-bonds to get 6.75% [in Pakistan bonds?]

Post by whodidntante » Thu Feb 28, 2019 11:13 pm

OP, if this investment were available to me I would not buy it. I do think that holding EM debt is reasonable, but I would do it with a low cost bond fund if I wanted exposure to that asset class.

drk
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Re: Should I sell I-bonds to get 6.75%

Post by drk » Thu Feb 28, 2019 11:32 pm

emlowe wrote:
Thu Feb 28, 2019 3:58 pm
To be clear, I wasn't recommending EMB, I was suggesting you could use it as a reference point to compare the Pakistani Bond with "similar" bonds.

Investing from I-Bonds (a safe, fixed-income component) to a High Yield or Emerging Bond fund is moving to a completely different category of risk. As said very well, "Don't chase returns in fixed income"
Co-sign. Neither EM bonds nor this product are comparable to Series I Bonds, at all.

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get_g0ing
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Re: Should I sell I-bonds to get 6.75%

Post by get_g0ing » Thu Feb 28, 2019 11:44 pm

David Jay wrote:
Thu Feb 28, 2019 10:56 pm
Nothing longer than intermediate term.
Reason for this please?

Topic Author
get_g0ing
Posts: 546
Joined: Sat Dec 09, 2017 11:09 am

Re: Should I sell I-bonds to get 6.75% [in Pakistan bonds?]

Post by get_g0ing » Thu Feb 28, 2019 11:46 pm

whodidntante wrote:
Thu Feb 28, 2019 11:13 pm
OP, if this investment were available to me I would not buy it. I do think that holding EM debt is reasonable, but I would do it with a low cost bond fund if I wanted exposure to that asset class.
Thanks. Can you give some names of the bond funds you had in mind please?
I would like to review and compare them.

Thanks.

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David Jay
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Re: Should I sell I-bonds to get 6.75%

Post by David Jay » Fri Mar 01, 2019 8:38 am

get_g0ing wrote:
Thu Feb 28, 2019 11:44 pm
David Jay wrote:
Thu Feb 28, 2019 10:56 pm
Nothing longer than intermediate term.
Reason for this please?
Duration risk. There is a high cost (or lost opportunity if you choose not to sell) to get out of long duration bonds.

I sense that you are young, but I remember when inflation went to 21% in 1979-1980. How would you feel if you were holding a long term bond paying 7% and you were effectively losing 14% per year in purchasing power.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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SlowMovingInvestor
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Re: Should I sell I-bonds to get 6.75% [in Pakistan bonds?]

Post by SlowMovingInvestor » Fri Mar 01, 2019 8:56 am

1) You will have to pay taxes in the US on these bonds.

2) There may be FBAR reporting requirements depending on whether an 'account' is created to hold these bonds.

if someone intends to return to Pakistan, then they have a backup because the bonds can be encashed in Pakistani currency, and it's reasonably safe to assume that Pakistan will not default in that. But if not, it's a different story altogether.

Question for any other boglehead: are diferent credit ratings assigned to sovereign bonds issued in a foreign currency (such as $) versus those in local currency ?

Also, would be a formula for the difference in rates for a CD be

rates in US = rates in local currency + cost of currency hedge over CD lifetime ?
Last edited by SlowMovingInvestor on Fri Mar 01, 2019 9:16 am, edited 1 time in total.

msk
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Re: Should I sell I-bonds to get 6.75% [in Pakistan bonds?]

Post by msk » Fri Mar 01, 2019 9:11 am

These bonds are being offered to a narrow set of investors. Consequently these investors are weak as a group and invest based on "patriotism". So the first thing I would do, if I were tempted, is to see if Pakistan has any bonds currently in the market that are in US$, similar maturity to those on offer, and verify what the effective yield is. E.g. it would not surprise me that such existing, marketable bonds pay even higher interest than 6.5%. Some EM countries have to pay 8.5%! Pakistan? No clue but I won't be surprised if the international investors demand >6.5%. Dispassionate international investors do invest in junk, corporate or EM. And they do expect to come out ahead. There is always a yield that is high enough that will make the borrower look attractive enough.

msk
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Re: Should I sell I-bonds to get 6.75% [in Pakistan bonds?]

Post by msk » Fri Mar 01, 2019 9:20 am

SlowMovingInvestor wrote:
Fri Mar 01, 2019 8:56 am

Question for any other boglehead: are different credit ratings assigned to sovereign bonds issued in a foreign currency (such as $) versus those in local currency ?
Interest rates for bonds in Local Currency are always different compared to those in similar maturity bonds in USD or Euros. Obviously all countries prefer to issue LC bonds since they can always just print more to redeem them. But at the moment only the USA can do that, and as long as the US$ is seen as a reserve currency the USA can continue to issue an endless amount of US$ bonds. Delicate balancing act between issuing too many $ and retaining overseas confidence. So far, so good.

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