Revisiting EE Bonds given 20 year treasury bond at ~1.9%

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BlueCable
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Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by BlueCable » Sat Aug 17, 2019 8:20 am

If the market is efficient, then 20 year treasury bonds are currently priced at a fair risk-adjusted return of about 1.9%.

EE bonds are not marketable securities and are not subject to market pricing. Even though bond prices have climbed, EE Bonds are still yielding 3.5% if held for 20 years.

To obtain the 160bp higher return in EE Bonds, am I accepting any additional risk over the 20 year bond, which is fairly priced? I guess if interested rates rise, I could reinvest the 20-year bond coupon at a higher rate then the EE's 3.5%. Also, if rates fall further, you could sell the 20-year Bond for capital gains.

The tax deferred nature of EE Bonds is also attractive for me, since I hope to be a few years into early retirement in 20 years.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by HEDGEFUNDIE » Sat Aug 17, 2019 10:18 am

I am only 33 and I am strongly considering setting up an EE savings bond ladder now for withdrawal starting when I am 53 and (hopefully) early retired.

If interest rates rise the EE bond rate should rise with it. It will still be lower than the 20 year Treasury but you will get some future upside on top of the guaranteed upside you get now.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by whodidntante » Sat Aug 17, 2019 10:32 am

Hard pass. If my alternative is to lockup money for 20 years with an option to remove for most of my interest, I'm putting it in equities. But then, my fixed income is really a "I lost my job and it took longer than I thought to find a new one and equities are down 50% and I needed expensive medical treatments for flesh-eating bacteria and a new roof" fund.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by HEDGEFUNDIE » Sat Aug 17, 2019 10:42 am

I should add that outside of the EE bonds I am over 100% equities.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by MotoTrojan » Sat Aug 17, 2019 10:46 am

HEDGEFUNDIE wrote:
Sat Aug 17, 2019 10:42 am
I should add that outside of the EE bonds I am over 100% equities.
Outside of the excellent adventure are you further leveraged? If you don’t mind me asking, what is your overall allocation (equity/bonds)?

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by Beehave » Sat Aug 17, 2019 10:51 am

Just to be clear:
- The interest rate on the EE bond is fixed and remains constant for the 1st 20 years you hold it.
- At 20 years time the bond is guaranteed to double in value. Also, I believe that the gov't can also change the interest rate at that time.
- You can cash in the bond after 1 year but you lose some of the interest. If there are "capital gains" (because interest rates have decreased) it will not benefit you because you cannot sell the bond on the open market. You can only cash it in for its base value (what you paid) plus any interest minus any penalty (interest fordeiture) depending on how long you've held the bond

Some implications:
- If you plan to buy and hold for 20 years it's probably reasonable to put some money in.
- You can put $10,000 a year in per person, so it can be a nice portion of a plan, but realistically a ladder of these bonds should be considered a portion of a retirement plan, because $20,000 dollars per year starting 20 years from now may not buy as much as you would hope.
- Specifically, if there is significant inflation, the doubling over 20 years may not be sufficient to prevent significant erosion.
- Apart from risk of erosion from inflation, EE bonds should provide security, a high degree of certainty, and diversification as a long-term investment.
- Adding Series I bonds added to EE bonds may provide a more complete umbrella of secure, long-term investment that provides diversification from corporate stocks and bonds and a degree of security against both inflation and deflation - - and if neither inflation nor deflation prevails over that time, you still come out just fine.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by HEDGEFUNDIE » Sat Aug 17, 2019 11:08 am

MotoTrojan wrote:
Sat Aug 17, 2019 10:46 am
HEDGEFUNDIE wrote:
Sat Aug 17, 2019 10:42 am
I should add that outside of the EE bonds I am over 100% equities.
Outside of the excellent adventure are you further leveraged? If you don’t mind me asking, what is your overall allocation (equity/bonds)?
I am 80/20 but the 20 is all EDV so in terms of volatility I’m basically 100% equity. Plus the Excellent Adventure.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by illumination » Sat Aug 17, 2019 11:25 am

whodidntante wrote:
Sat Aug 17, 2019 10:32 am
Hard pass. If my alternative is to lockup money for 20 years with an option to remove for most of my interest, I'm putting it in equities.
I feel the same way.

If after 20 years your equities didn't return 3.5% per year, I can see plausible scenarios where those EE bonds are worthless anyway. It really is a gamble because of how you have to hold the EE bonds to maturity.

I guess you could make a case that we become Japan and its zero interest rates basically forever and growth is almost non-existent. But I would argue Japan has a lot of issues causing this the US doesn't have.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by HEDGEFUNDIE » Sat Aug 17, 2019 11:51 am

illumination wrote:
Sat Aug 17, 2019 11:25 am
whodidntante wrote:
Sat Aug 17, 2019 10:32 am
Hard pass. If my alternative is to lockup money for 20 years with an option to remove for most of my interest, I'm putting it in equities.
I feel the same way.

If after 20 years your equities didn't return 3.5% per year, I can see plausible scenarios where those EE bonds are worthless anyway. It really is a gamble because of how you have to hold the EE bonds to maturity.

I guess you could make a case that we become Japan and its zero interest rates basically forever and growth is almost non-existent. But I would argue Japan has a lot of issues causing this the US doesn't have.
The 20 year return on the S&P 500 from July 1999 through July 2019 was 5.8% CAGR. $10k would have grown to $31k.

EE bonds would have paid a guaranteed 3.5% CAGR. $10k growing to $20k.

Looks like a perfectly appropriate risk-adjusted return to me.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by dcw213 » Sat Aug 17, 2019 1:15 pm

I am considering buying again as well. I bought the last time in 2016 but since then they have not been worth it to me. I am already at my max equity exposure so always looking for new fixed income possibilities. I keep a bunch of my fixed income allocation in very liquid investments (bond funds, savings accounts, no penalty CDs) and then try to maximize yield on the rest in longer term investments. The last year it has been retail CDs (I bought a bunch of 5 year 3.5%-4.0% CDs). Those offers are pretty much gone now, considering going back to EE in the event I need to direct more money late this year if the rates still make sense. I dont love the idea of 3.5% over 20 years but we are in an environment where there is no yield available.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by MotoTrojan » Sat Aug 17, 2019 2:30 pm

HEDGEFUNDIE wrote:
Sat Aug 17, 2019 11:08 am
MotoTrojan wrote:
Sat Aug 17, 2019 10:46 am
HEDGEFUNDIE wrote:
Sat Aug 17, 2019 10:42 am
I should add that outside of the EE bonds I am over 100% equities.
Outside of the excellent adventure are you further leveraged? If you don’t mind me asking, what is your overall allocation (equity/bonds)?
I am 80/20 but the 20 is all EDV so in terms of volatility I’m basically 100% equity. Plus the Excellent Adventure.
Do you hold your EDV in taxable as well?

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by HEDGEFUNDIE » Sat Aug 17, 2019 3:51 pm

MotoTrojan wrote:
Sat Aug 17, 2019 2:30 pm
HEDGEFUNDIE wrote:
Sat Aug 17, 2019 11:08 am
MotoTrojan wrote:
Sat Aug 17, 2019 10:46 am
HEDGEFUNDIE wrote:
Sat Aug 17, 2019 10:42 am
I should add that outside of the EE bonds I am over 100% equities.
Outside of the excellent adventure are you further leveraged? If you don’t mind me asking, what is your overall allocation (equity/bonds)?
I am 80/20 but the 20 is all EDV so in terms of volatility I’m basically 100% equity. Plus the Excellent Adventure.
Do you hold your EDV in taxable as well?
Of course not.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by Grt2bOutdoors » Sat Aug 17, 2019 4:19 pm

HEDGEFUNDIE wrote:
Sat Aug 17, 2019 10:18 am
I am only 33 and I am strongly considering setting up an EE savings bond ladder now for withdrawal starting when I am 53 and (hopefully) early retired.

If interest rates rise the EE bond rate should rise with it. It will still be lower than the 20 year Treasury but you will get some future upside on top of the guaranteed upside you get now.
I've been posting about EE bonds now for years, even before the Forbes article. Take a look at Treasurydirect, you'll see that EE bond rates have not risen, even when interest rates were markedly higher than they are now. In May of 2006. the EE paid a rate of 3.5%, at that time, the US Treasuries were paying 4.99% for 5 Year Treasuries, 5.14% for the 10 Year and 5.48% for the 20 Year. The bond matured exactly 20 years after date of issuance with a guaranteed double if the rate of interest earned annually was not sufficient to make this occur. Any day after the 20th anniversary, the bond continued to earn 3.50% until final maturity at year 30. I would not count on the EE bond rate rising if interest rates rise, you can see that EE's have paid below market interest rates in this example, if you look at the various terms and rates chart you'll see the rates started sliding after May 2006 and have been in the low 0.10% annual interest rate since November 2013, with the exception of two periods; May 2014 - 0.50% and May 2015 - 0.30%.
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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by HEDGEFUNDIE » Sat Aug 17, 2019 4:33 pm

Grt2bOutdoors wrote:
Sat Aug 17, 2019 4:19 pm
HEDGEFUNDIE wrote:
Sat Aug 17, 2019 10:18 am
I am only 33 and I am strongly considering setting up an EE savings bond ladder now for withdrawal starting when I am 53 and (hopefully) early retired.

If interest rates rise the EE bond rate should rise with it. It will still be lower than the 20 year Treasury but you will get some future upside on top of the guaranteed upside you get now.
I've been posting about EE bonds now for years, even before the Forbes article. Take a look at Treasurydirect, you'll see that EE bond rates have not risen, even when interest rates were markedly higher than they are now. In May of 2006. the EE paid a rate of 3.5%, at that time, the US Treasuries were paying 4.99% for 5 Year Treasuries, 5.14% for the 10 Year and 5.48% for the 20 Year. The bond matured exactly 20 years after date of issuance with a guaranteed double if the rate of interest earned annually was not sufficient to make this occur. Any day after the 20th anniversary, the bond continued to earn 3.50% until final maturity at year 30. I would not count on the EE bond rate rising if interest rates rise, you can see that EE's have paid below market interest rates in this example, if you look at the various terms and rates chart you'll see the rates started sliding after May 2006 and have been in the low 0.10% annual interest rate since November 2013, with the exception of two periods; May 2014 - 0.50% and May 2015 - 0.30%.
Ok then if that happens again I’ll just buy the 20 year Treasury directly.

Don’t know why a Treasury / EE bond ladder isn’t the standard recommendation around here.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by willthrill81 » Sat Aug 17, 2019 4:54 pm

whodidntante wrote:
Sat Aug 17, 2019 10:32 am
Hard pass. If my alternative is to lockup money for 20 years with an option to remove for most of my interest, I'm putting it in equities. But then, my fixed income is really a "I lost my job and it took longer than I thought to find a new one and equities are down 50% and I needed expensive medical treatments for flesh-eating bacteria and a new roof" fund.
In my view, those buying EE bonds are betting that over the next 20 years, inflation will remain very low, interest rates won't rise significantly, and the Treasury won't change the terms of EE bonds. I believe that they are also betting, to some extent, against stocks. And in return, they hope to get an additional ~1.5% yield over Treasuries and maybe almost nothing over CDs, along with a small tax-advantage.

I for one am not willing to take that bet.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by Grt2bOutdoors » Sat Aug 17, 2019 5:07 pm

HEDGEFUNDIE wrote:
Sat Aug 17, 2019 4:33 pm
Grt2bOutdoors wrote:
Sat Aug 17, 2019 4:19 pm
HEDGEFUNDIE wrote:
Sat Aug 17, 2019 10:18 am
I am only 33 and I am strongly considering setting up an EE savings bond ladder now for withdrawal starting when I am 53 and (hopefully) early retired.

If interest rates rise the EE bond rate should rise with it. It will still be lower than the 20 year Treasury but you will get some future upside on top of the guaranteed upside you get now.
I've been posting about EE bonds now for years, even before the Forbes article. Take a look at Treasurydirect, you'll see that EE bond rates have not risen, even when interest rates were markedly higher than they are now. In May of 2006. the EE paid a rate of 3.5%, at that time, the US Treasuries were paying 4.99% for 5 Year Treasuries, 5.14% for the 10 Year and 5.48% for the 20 Year. The bond matured exactly 20 years after date of issuance with a guaranteed double if the rate of interest earned annually was not sufficient to make this occur. Any day after the 20th anniversary, the bond continued to earn 3.50% until final maturity at year 30. I would not count on the EE bond rate rising if interest rates rise, you can see that EE's have paid below market interest rates in this example, if you look at the various terms and rates chart you'll see the rates started sliding after May 2006 and have been in the low 0.10% annual interest rate since November 2013, with the exception of two periods; May 2014 - 0.50% and May 2015 - 0.30%.
Ok then if that happens again I’ll just buy the 20 year Treasury directly.

Don’t know why a Treasury / EE bond ladder isn’t the standard recommendation around here.
I have recommended them. Most people can not hold an investment for 5 years, let alone 20 years.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by bernoulli » Sat Aug 17, 2019 5:37 pm

I see EE bonds as part of my bond allocation. My principle is guaranteed and the return of doubling in 20 years is also guaranteed, that is better than all CDs at least in recent history. If interest rate does go up in the 20 years, I have allocation in other types of bond funds to balance it out. I think EE is a great tool for diversification, especially for risk averse investors like me.

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BlueCable
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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by BlueCable » Sat Aug 17, 2019 7:07 pm

willthrill81 wrote:
In my view, those buying EE bonds are betting that over the next 20 years, inflation will remain very low, interest rates won't rise significantly, and the Treasury won't change the terms of EE bonds. I believe that they are also betting, to some extent, against stocks. And in return, they hope to get an additional ~1.5% yield over Treasuries and maybe almost nothing over CDs, along with a small tax-advantage.

I for one am not willing to take that bet.
Maybe my question should have been: if I was going to purchase a new 20 year bond, is the EE clearly a better choice?

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by MoneyMarathon » Sat Aug 17, 2019 7:13 pm

BlueCable wrote:
Sat Aug 17, 2019 7:07 pm
Maybe my question should have been: if I was going to purchase a new 20 year bond, is the EE clearly a better choice?
If you want the money in 20 years, without taking on much/any credit risk, then yes, it's basically a mispricing in your favor that exists because of government rules on who can buy them. You would be bending over and picking up free money.

As an individual, you would have to greatly prefer the ability to speculate on movements in yield to want the marketable 20 year bonds (which have a much lower coupon) more.

I don't see why you wouldn't want to buy EE, along with your other investments (stocks, inflation-linked bonds, etc.), if you're thinking about buying nominal bonds and holding on to them for 20 years.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by willthrill81 » Sat Aug 17, 2019 7:14 pm

BlueCable wrote:
Sat Aug 17, 2019 7:07 pm
willthrill81 wrote:
In my view, those buying EE bonds are betting that over the next 20 years, inflation will remain very low, interest rates won't rise significantly, and the Treasury won't change the terms of EE bonds. I believe that they are also betting, to some extent, against stocks. And in return, they hope to get an additional ~1.5% yield over Treasuries and maybe almost nothing over CDs, along with a small tax-advantage.

I for one am not willing to take that bet.
Maybe my question should have been: if I was going to purchase a new 20 year bond, is the EE clearly a better choice?
Some may, but I certainly don't for the reasons I described above. I'd strongly prefer long-term TIPS since they at least address inflation risk, although those are 30 year bonds.

Now if you were also buying at least an equivalent amount of I-bonds, buying EE bonds might make more sense to me, because you would have both sides of the 'inflation bet' (i.e. if inflation remains very low, EE bonds win; otherwise, I bonds win).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by HockeyFan99 » Sat Aug 17, 2019 8:44 pm

I am increasingly favoring the idea of buying $20K per year of both I bonds (which we have been doing for the last few years, to create an emergency fund that will eventually replace cash held in short term CDs and MMAs) and EE bonds.

I continue to struggle with the “why not just buy more equities?” argument, but I think there is a case, for us, for the I/EE ladder to build an income floor that will bridge the period from a hoped for early retirement (in 20 years when kids leave home, we hope) until full social security (which will not have been gutted, we hope).

We are still heavily invested in equities (about 80% overall), so this is not ditching equities for EE bonds, but rather diverting some of the money that could otherwise go to equities into EE bonds.

Tax deferral is a nice bonus, but not the primary purpose.

But there are so many people who are more sophisticated lurking here that I’m still in watch and learn and listen mode, as I assume I have until end of year to decide whether to kick this plan off for 2019 and purchase the $20K allocation for this year. (Somebody please tell me if that is not true!)
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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by HEDGEFUNDIE » Sat Aug 17, 2019 8:46 pm

I don't think this is that complicated.

We have here a 20 year Treasury bond that pays a guaranteed 3.5%. If some part of your bond allocation is meant for "safety" why wouldn't you buy as much as you can? If and when interest rates rise just stop buying EEs that year and buy CDs / straight Treasuries instead.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by MotoTrojan » Sat Aug 17, 2019 8:58 pm

HEDGEFUNDIE wrote:
Sat Aug 17, 2019 3:51 pm
MotoTrojan wrote:
Sat Aug 17, 2019 2:30 pm
HEDGEFUNDIE wrote:
Sat Aug 17, 2019 11:08 am
MotoTrojan wrote:
Sat Aug 17, 2019 10:46 am
HEDGEFUNDIE wrote:
Sat Aug 17, 2019 10:42 am
I should add that outside of the EE bonds I am over 100% equities.
Outside of the excellent adventure are you further leveraged? If you don’t mind me asking, what is your overall allocation (equity/bonds)?
I am 80/20 but the 20 is all EDV so in terms of volatility I’m basically 100% equity. Plus the Excellent Adventure.
Do you hold your EDV in taxable as well?
Of course not.
With the state tax exemption it’s not that much of a surefire move IMHO but I’d likely do the same.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by MoneyMarathon » Sat Aug 17, 2019 9:35 pm

HockeyFan99 wrote:
Sat Aug 17, 2019 8:44 pm
I think there is a case, for us, for the I/EE ladder to build an income floor that will bridge the period from a hoped for early retirement (in 20 years when kids leave home, we hope) until full social security (which will not have been gutted, we hope).
All abstract arguments aside, I really like this part. It's like putting a message in a bottle to my future self to avoid the "one more year" syndrome and just retire already. The ladder is there.
HockeyFan99 wrote:
Sat Aug 17, 2019 8:44 pm
We are still heavily invested in equities (about 80% overall), so this is not ditching equities for EE bonds, but rather diverting some of the money that could otherwise go to equities into EE bonds.

Tax deferral is a nice bonus, but not the primary purpose.

But there are so many people who are more sophisticated lurking here that I’m still in watch and learn and listen mode, as I assume I have until end of year to decide whether to kick this plan off for 2019 and purchase the $20K allocation for this year. (Somebody please tell me if that is not true!)
I think it makes a lot of sense to have 80%+ in equities and a mix of nominal & inflation linked bonds. Once you've decided to have any, it makes sense to buy the best available at any moment. Right now that's EE bonds and I bonds. If, in a future year, you're getting a better deal buying the marketable 20 year treasury nominal bonds, or by buying 20 year TIPS, you could switch over (or, in the case of TIPS and I bonds, buy a bit of both) for a while.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by willthrill81 » Sat Aug 17, 2019 9:41 pm

MoneyMarathon wrote:
Sat Aug 17, 2019 9:35 pm
I think it makes a lot of sense to have 80%+ in equities and a mix of nominal & inflation linked bonds. Once you've decided to have any, it makes sense to buy the best available at any moment. Right now that's EE bonds and I bonds. If, in a future year, you're getting a better deal buying the marketable 20 year treasury nominal bonds, or by buying 20 year TIPS, you could switch over (or, in the case of TIPS and I bonds, buy a bit of both) for a while.
By 'best', I believe you mean 'highest yield'. That may or may not be true, since there is a lot more to fixed income than yield. There is value in liquidity, and that's something that EE bonds effectively lose the longer you get into that 20 year period. And due to this, EE bonds are not at all attractive for rebalancing purposes.

That alone does not make them a poor investment, but it shouldn't be ignored either by focusing exclusively on yield.
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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by leftcoaster » Sat Aug 17, 2019 9:52 pm

I am laddering EE and I bonds. $65k/year, since you can buy an additional 10 of each in a trust and get 5 I bonds in tax refunds.

Doing this has given me tax deferred space without which I’d be buying munis in taxable.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by Call_Me_Op » Sun Aug 18, 2019 6:37 am

I max out in EE bonds each year not because I am planning on any kind of laddering strategy but because it is a different type of investment that has interesting characteristics and is tax deferred. One area where it is appealing is if we have a protracted period of very low interest rates. It complements the IBond nicely - and I purchase those too.
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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by smectym » Sun Aug 18, 2019 9:58 am

As to the conundrum of whether to hold EE bonds vs. I bonds, the correct answer is “plenty of both.” As to the conundrum of whether to hold EE/I bonds vs. equities: same answer.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by welderwannabe » Sun Aug 18, 2019 5:23 pm

willthrill81 wrote:
Sat Aug 17, 2019 4:54 pm
In my view, those buying EE bonds are betting that over the next 20 years, inflation will remain very low, interest rates won't rise significantly, and the Treasury won't change the terms of EE bonds.
Except for the last statement, that is the bet anyone buying a regular nominal treasury (20+ yrs) is making too.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by willthrill81 » Sun Aug 18, 2019 5:40 pm

welderwannabe wrote:
Sun Aug 18, 2019 5:23 pm
willthrill81 wrote:
Sat Aug 17, 2019 4:54 pm
In my view, those buying EE bonds are betting that over the next 20 years, inflation will remain very low, interest rates won't rise significantly, and the Treasury won't change the terms of EE bonds.
Except for the last statement, that is the bet anyone buying a regular nominal treasury (20+ yrs) is making too.
To an extent, yes, but the complication of EE bonds is that their liquidity effectively drops the longer you hold them right up until the 20 year period is up. As such, there is an increasing cost from switching from them to anything else.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by welderwannabe » Sun Aug 18, 2019 8:08 pm

willthrill81 wrote:
Sun Aug 18, 2019 5:40 pm
To an extent, yes, but the complication of EE bonds is that their liquidity effectively drops the longer you hold them right up until the 20 year period is up. As such, there is an increasing cost from switching from them to anything else.
In a rising rate environment, you may have a significant principal loss selling a treasury on the market. Redeeming an EE bond will never give you less than what you put in.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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willthrill81
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Re: Revisiting EE Bonds given 20 year treasury bond at ~1.9%

Post by willthrill81 » Sun Aug 18, 2019 8:35 pm

welderwannabe wrote:
Sun Aug 18, 2019 8:08 pm
willthrill81 wrote:
Sun Aug 18, 2019 5:40 pm
To an extent, yes, but the complication of EE bonds is that their liquidity effectively drops the longer you hold them right up until the 20 year period is up. As such, there is an increasing cost from switching from them to anything else.
In a rising rate environment, you may have a significant principal loss selling a treasury on the market. Redeeming an EE bond will never give you less than what you put in.
Rising rates lead to reduced bond value but higher yields. For 10 year bonds, these counter-balance each other fairly well such that a 10 year bond fund's yield is a very good estimate of its 10 year forward return.

I'm not saying that EE bonds' 3.53% nominal yield doesn't have a degree of appeal to it. But it comes with some unique and significant caveats not found with other bonds. Some find the yield to be worth the caveats. That's perfectly fine. I do not for the reasons I've already specified.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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