I don't understand the case for EE bonds

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willthrill81
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

Grt2bOutdoors wrote:
willthrill81 wrote:
Grt2bOutdoors wrote:I use equities for risk, the purpose of fixed income is to protect the savings face value I can not afford to lose, ever. TIPS can expose you to deflationary losses, nominal bonds have a place in a portfolio.
So you view a twenty year holding for equities as being more risky than holding a 3.5% nominal bond for the same period? I can point to many more historical periods where you would have lost more buying power with the bonds than with the stocks over twenty years.
For retirement money, I have a serious issue with holding a 100% or even 80% equity portfolio. I'm gliding down as I reach either age or asset targets. I only take risk when willing, able or needing to. The last thing I want to experience is a bad sequence of returns when I'm 5 years away from retiring. It could take longer than that to recover.
I totally understand that and agree with you. But EE bonds do not help you as much as other bonds with sequence of returns risk because their nominal return (currently) is essentially zero unless you hold them for twenty years. If stocks take a nosedive and you need to get most/all of your income from your bonds, you'll be sacrificing that 3.5% nominal return for a guaranteed real loss if you cash them out early. And if you just refuse to sell them, you would almost certainly have been far better off with putting that money in equities instead. Being almost forced to hold EE bonds for twenty years really handcuffs you.

If we're talking about a portfolio in or near the withdrawal phase, I think that a much stronger case can be made for other bonds where you aren't sacrificing liquidity for returns.
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Re: I don't understand the case for EE bonds

Post by mhop »

No one can make a case for or against an EE purchase until we're 20 years down the road. Perfect is the enemy of good, and a lot of these CD/bond analyses delve into the realm of perfecting and optimizing a portfolio missing many variables that we won't know until they happen (yield increases, inflation, etc). If you can stomach the term, chase the yield. Wash, rinse, repeat until real factors (yield, inflation) deem a re-analysis is necessary. I plan on doing some of everything: a base level of inflation protected instruments, a fund or 5 yr CDs, then something longer term like EEs.
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Re: I don't understand the case for EE bonds

Post by Kevin M »

Grt2bOutdoors wrote:
willthrill81 wrote: I would definitely purchase TIPS long before EE bonds.
I see no upside to holding TIPS in a taxable account. There is nothing worse than paying tax on phantom income for the inflation adjustment, the only way you realize the income is to completely liquidate the TIPS holding which sort of defeats the purpose doesn't it?
I just don't understand this argument. I can think of lots of things that are worse than paying tax on phantom income. If you have enough liquidity in your taxable account, then it's not that big of a deal, but it certainly is something to factor in.

You realize the income when the TIPS matures, and tax deferral is something we can quantify.

Assuming a constant tax rate of 25% and inflation of 2%, you'd need a real TIPS return of slightly more than 1.75% in at taxable account to break even with the EE bond after 20 years at 3.53% nominal (1.50% real).

With the current 20-year TIPS yield of 0.79%, inflation would have to average a little less than 3% for TIPS in taxable to break even with an EE bond after 20 years. So the upside of TIPS in taxable would be if inflation averaged 3% or more over the next 20 years. You may not want to bet on it, but it's not "no upside".

Conversely, if your only choices are TIPS in taxable or EE bonds, I can see a case for EE bonds as a bet on inflation averaging less than 3% over the next 20 years, which certainly is a bet the bond market is making, with 20-year breakeven inflation at 1.82%.

Kevin
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Re: I don't understand the case for EE bonds

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Re: I don't understand the case for EE bonds

Post by willthrill81 »

letsgobobby wrote:Where else can you get a guaranteed 3.5% nominal return over the next 20 years?

I would not put all my money in EE bonds, not even all my fixed income. But for money I definitely won't need for 20 years, I do not see another comparable return, comparabe risk asset class. We buy the max every year.
Considering the twenty year holding period required, stocks are so much more likely to come out so much further ahead that it's not even a contest unless you are far more bearish about the future than the last ninety years of market returns.

Guarantees come with price tags. And even then, there are still risks.
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Re: I don't understand the case for EE bonds

Post by sreynard »

Kevin M wrote:
sreynard wrote:I always looked at EE bonds as a saving vehicle not as in investment. Young people could allocate a percentage of their pay to EE bonds and a few years later cash them in to buy a car, the down payment on a house, or to help pay for college.
This makes no sense with EE bonds being issued currently. You earn 0.1% if you redeem before 20 years, so it makes no sense to buy an EE bond for anything less than a 20-year time period. You can earn 1% in a savings account, so 10X more, and no amount of tax-deferral or state-income tax exemption is going to compensate for that difference.
There were probably times when they turned out to be reasonably good investments, but I see no way you would know this twenty (or seventeen) years in advance.
We know in advance that an EE bond bought today is a bad investment for a 17-year period. You will earn 0.1% annualized, while you can earn about 2.5% on a 17-year Treasury (with 10-year yield at 2.24% and 20-year at 2.61%).

We know in advance that you'll earn 3.53% annualized for a 20-year period. What we don't know is whether or not this will end up being good relative to the alternatives. We know in advance it will be better than buying a 20-year Treasury at a yield of 2.6% and holding to maturity.

Kevin
As a young private in the army it made a lot of sense to buy EE bonds to save. Savings accounts could be raided for beer money and you don't miss what you don't see. The rate wasn't really a factor. As a 50 year old its a much different story. Maybe I break even with inflation when I'm 70? Sure savings accounts are worse, but then it would be pretty silly to keep very much sitting in a savings account for 20 years. Of course people do all kinds of silly things, but that doesn't make them good investments. :)

Sure we know exactly what we will get in 20 years, we just don't know what inflation will be, so we don't know if that yield is a good or bad one. If its bad, it's bad for 20 years. Unless you cut and run early, running could be every bit as bad as that savings account.

Every few years I've looked at EE rates and have just never seen a compelling reason to buy them over alternatives. I bonds? Sure, can see good reasons for those, though I don't have any myself. TIPS? Ditto, perfectly reasonable. Maybe short/intermediate treasury yields will remain this low for the next 20 years, but I'm not going to take that bet. Certainly not if it's a bet I would be locked into for 20 years if I'm wrong. So I have to agree with the OP, I just don't see the case for EE bonds.
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Re: I don't understand the case for EE bonds

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Re: I don't understand the case for EE bonds

Post by willthrill81 »

letsgobobby wrote:
willthrill81 wrote:
letsgobobby wrote:Where else can you get a guaranteed 3.5% nominal return over the next 20 years?

I would not put all my money in EE bonds, not even all my fixed income. But for money I definitely won't need for 20 years, I do not see another comparable return, comparabe risk asset class. We buy the max every year.
Considering the twenty year holding period required, stocks are so much more likely to come out so much further ahead that it's not even a contest unless you are far more bearish about the future than the last ninety years of market returns.

Guarantees come with price tags. And even then, there are still risks.
what you have stated is completely irrelevant to the reason I hold EE bonds.

If you want to invest 100% in stocks, go ahead. I do not.
May I then ask why you hold EE bonds? People talk about risk, but how much risk is there in holding equities for twenty years? Is it because you want a guarantee, irrespective of inflation risk?
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Re: I don't understand the case for EE bonds

Post by sreynard »

letsgobobby wrote:
willthrill81 wrote:
letsgobobby wrote:Where else can you get a guaranteed 3.5% nominal return over the next 20 years?

I would not put all my money in EE bonds, not even all my fixed income. But for money I definitely won't need for 20 years, I do not see another comparable return, comparabe risk asset class. We buy the max every year.
Considering the twenty year holding period required, stocks are so much more likely to come out so much further ahead that it's not even a contest unless you are far more bearish about the future than the last ninety years of market returns.

Guarantees come with price tags. And even then, there are still risks.
what you have stated is completely irrelevant to the reason I hold EE bonds.

If you want to invest 100% in stocks, go ahead. I do not.
Which is why I consider them a good long term savings vehicle. If I needed a good safe place to park money for 20 years that I knew I wasn't going to need to touch, EE bonds are a pretty good choice. As long as inflation doesn't go above historic averages, I would be fairly confident of getting my money back real. Certainly better than 20 year treasuries now, if that were my only other choice.

The other choice would be to sacrifice the guarantee and buy short/immediate treasures now in the hope I could roll them over to better yielding ones when they come due.
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Re: I don't understand the case for EE bonds

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Re: I don't understand the case for EE bonds

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letsgobobby wrote:
willthrill81 wrote: May I then ask why you hold EE bonds? People talk about risk, but how much risk is there in holding equities for twenty years? Is it because you want a guarantee, irrespective of inflation risk?
Are you 100% stocks?
I'm really not trying to be rude, but that's irrelevant to my question. I would like to know, specifically, why you are attracted to EE bonds.
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Re: I don't understand the case for EE bonds

Post by mhop »

Kevin M wrote:I recently bought a 7-year CD at 3%. I'd much rather take this bet than have to hold for 20 years to get 3.5%. If I can earn 4% for the remaining 13 years after the CD matures, I end up making 3.65%. Or maybe a CD will come along in less than 7 years with a rate high enough to justify paying the 1.5% penalty to do an early withdrawal, and I'll earn even more than 3% over 7 years.
Kevin
Curious. This money is not new money though is it? It was pooled from other IRAs with CDs paying what % over what terms? The analysis doesn't necessarily start today unless it's new money. So we know you're comfortable at 3% for the next 7 years, but you may have made a decision 3-5 years ago as well that could add more detail.
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Re: I don't understand the case for EE bonds

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willthrill81 wrote:
letsgobobby wrote:
willthrill81 wrote: May I then ask why you hold EE bonds? People talk about risk, but how much risk is there in holding equities for twenty years? Is it because you want a guarantee, irrespective of inflation risk?
Are you 100% stocks?
I'm really not trying to be rude, but that's irrelevant to my question. I would like to know, specifically, why you are attracted to EE bonds.
Didn't he state it above? : "get a guaranteed 3.5% nominal return over the next 20 years"
Stock market doesn't do this.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

DaftInvestor wrote:
willthrill81 wrote:
letsgobobby wrote:
willthrill81 wrote: May I then ask why you hold EE bonds? People talk about risk, but how much risk is there in holding equities for twenty years? Is it because you want a guarantee, irrespective of inflation risk?
Are you 100% stocks?
I'm really not trying to be rude, but that's irrelevant to my question. I would like to know, specifically, why you are attracted to EE bonds.
Didn't he state it above? : "get a guaranteed 3.5% nominal return over the next 20 years"
Stock market doesn't do this.
When I addressed that issue, he merely replied "what you have stated is completely irrelevant to the reason I hold EE bonds."

The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
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Re: I don't understand the case for EE bonds

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willthrill81 wrote:
letsgobobby wrote:
willthrill81 wrote: May I then ask why you hold EE bonds? People talk about risk, but how much risk is there in holding equities for twenty years? Is it because you want a guarantee, irrespective of inflation risk?
Are you 100% stocks?
I'm really not trying to be rude, but that's irrelevant to my question. I would like to know, specifically, why you are attracted to EE bonds.
I must say, I'm a little confused as well. I can see a good case for fixed income for money that I do need in the next twenty years. For money that I sure I don't need for at least 20 years, stocks would seem to me to be the obvious choice.

But then I've never understood the percent of portfolio in fixed income idea. To me it always made more sense to think in terms of years of expenses in fixed income. It may come out to close to the same in dollar amount so maybe it doesn't really matter, but I'm always worried my percentage would be wrong and I either didn't have enough for bad times, or ran out of money because I limited my growth too much. Guarantees would be a lot more appealing if I already had enough to retire. :)

Since the limit is only $10K per person, maybe maxing out EE bonds every year doesn't really matter to high income folks. They would already have all the other bases covered. It's probably better than buying gold anyway. :twisted:
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Re: I don't understand the case for EE bonds

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sreynard wrote:I must say, I'm a little confused as well. I can see a good case for fixed income for money that I do need in the next twenty years. For money that I sure I don't need for at least 20 years, stocks would seem to me to be the obvious choice.

But then I've never understood the percent of portfolio in fixed income idea. To me it always made more sense to think in terms of years of expenses in fixed income. It may come out to close to the same in dollar amount so maybe it doesn't really matter, but I'm always worried my percentage would be wrong and I either didn't have enough for bad times, or ran out of money because I limited my growth too much. Guarantees would be a lot more appealing if I already had enough to retire.
I'm with you. All my possible reasons for wanting to hold bonds are related to the possibility of actually using those funds sometime in the short-to-medium future.
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Re: I don't understand the case for EE bonds

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Good point about the risk of inflation and holding EE bonds. If inflation is a concern, then I-bonds would be better. But there's no way of knowing which type of bond will come out ahead. I guess EE bonds give you a known guaranteed return, which may or may not be better than the rate of inflation.
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Re: I don't understand the case for EE bonds

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hollowcave2 wrote:Good point about the risk of inflation and holding EE bonds. If inflation is a concern, then I-bonds would be better. But there's no way of knowing which type of bond will come out ahead. I guess EE bonds give you a known guaranteed return, which may or may not be better than the rate of inflation.
I suppose buying both types of savings bonds can be a hedge against the unpredictability of inflation: I-Bonds for anticipated periods of high inflation and EE Bonds for anticipated periods of low inflation.
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Re: I don't understand the case for EE bonds

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willthrill81 wrote:The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
EE bonds did not exist in 1970, E bonds did. I don't have the redemption value that an E bond issued in Jan. 1970 would have had in 1990, but I do have what the redemption value would have been in Jan. 1996. Over that period the value of an E bond would have grown at an annualized rate of 7.3%; the CPI-U grew at an annualized rate of 5.6%.
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Re: I don't understand the case for EE bonds

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Re: I don't understand the case for EE bonds

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FactualFran wrote:
willthrill81 wrote:The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
EE bonds did not exist in 1970, E bonds did. I don't have the redemption value that an E bond issued in Jan. 1970 would have had in 1990, but I do have what the redemption value would have been in Jan. 1996. Over that period the value of an E bond would have grown at an annualized rate of 7.3%; the CPI-U grew at an annualized rate of 5.6%.
We know what rate CPI grew though, and if all the EE bonds did was double in value (3.5% nominal for 20 years), you would have lost 41% in real returns.

That's a big part of my point here. At best, these might have a real return of around 1%. But at worst, you could fall far behind and lose your shirt. And if you hold them for a decade and then need the money, you're really hosed by inflation.

As others have said, a major reason why you want bonds of any type is for liquidity. The guarantee behind EE bonds is antithetical to liquidity.
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Re: I don't understand the case for EE bonds

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letsgobobby wrote:
willthrill81 wrote:
DaftInvestor wrote:
willthrill81 wrote:
letsgobobby wrote: Are you 100% stocks?
I'm really not trying to be rude, but that's irrelevant to my question. I would like to know, specifically, why you are attracted to EE bonds.
Didn't he state it above? : "get a guaranteed 3.5% nominal return over the next 20 years"
Stock market doesn't do this.
When I addressed that issue, he merely replied "what you have stated is completely irrelevant to the reason I hold EE bonds."

The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
Please stop comparing EE bonds to stocks. Do you own any fixed income: cash, CDs, treasury bonds, savings bonds, TIPS, international bonds, junk bonds, municipal bonds?
Yes I do own some bonds, but I haven't locked in low yields for twenty years and sacrificed liquidity in buying them. But again, that's irrelevant. And you still haven't answered my question.

Why not compare them? Of course stocks and bonds are different asset classes, but at the end of the day, we all want the best risk-adjusted returns regardless of the asset class. I'm simply asking how EE bonds can provide that, at least in today's environment.

So we shouldn't compare a bond to anything else? That's illogical.

Perhaps you believe that a government guarantee trumps everything else. I just don't know.

EE bonds are not just a different 'flavor' of bonds; most can be sold when you want the money without absolutely taking a bath in terms of lost returns and/or inflation kicking you in the teeth. In order to achieve what EE proponents want, the guaranteed doubling in twenty years, you must completely sacrifice liquidity or the return. You cannot have both. So then the question becomes, if you cannot touch these for two decades, what else could we do with that money? If you don't like stocks, fine, but there are many, many other ways that the money could be invested. Yes, these may be volatile from year to year, but over twenty years, that largely fades away. Do EE bonds provide a good risk-adjusted return? You must think so, but you haven't said why.
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Re: I don't understand the case for EE bonds

Post by SmileyFace »

willthrill81 wrote:
DaftInvestor wrote:
willthrill81 wrote:
letsgobobby wrote:
willthrill81 wrote: May I then ask why you hold EE bonds? People talk about risk, but how much risk is there in holding equities for twenty years? Is it because you want a guarantee, irrespective of inflation risk?
Are you 100% stocks?
I'm really not trying to be rude, but that's irrelevant to my question. I would like to know, specifically, why you are attracted to EE bonds.
Didn't he state it above? : "get a guaranteed 3.5% nominal return over the next 20 years"
Stock market doesn't do this.
When I addressed that issue, he merely replied "what you have stated is completely irrelevant to the reason I hold EE bonds."

The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
He didn't say it guaranteed a real return - he said it guarenteed him a nominal return. Stock market guarantees neither and comparing the two isn't helping the question of why someone would choose EE bonds. Simply comparing the returns to a 20 year period with high inflation doesn't defeat the answer either. The answer still stands - maybe you don't feel the 3.5% guaranteed nominal is worth the space in your portfolio but lots of other folks do.
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Re: I don't understand the case for EE bonds

Post by sreynard »

FactualFran wrote:
willthrill81 wrote:The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
EE bonds did not exist in 1970, E bonds did. I don't have the redemption value that an E bond issued in Jan. 1970 would have had in 1990, but I do have what the redemption value would have been in Jan. 1996. Over that period the value of an E bond would have grown at an annualized rate of 7.3%; the CPI-U grew at an annualized rate of 5.6%.
Not that bad. According to Wikipedia series E bonds had a variable yield based on the interest rate with a guaranteed minimum of 4%. I hadn't realized that they were originally war bonds sold to fund World War II and the government just kept selling them after the war.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

DaftInvestor wrote:He didn't say it guaranteed a real return - he said it guarenteed him a nominal return. Stock market guarantees neither and comparing the two isn't helping the question of why someone would choose EE bonds. Simply comparing the returns to a 20 year period with high inflation doesn't defeat the answer either. The answer still stands - maybe you don't feel the 3.5% guaranteed nominal is worth the space in your portfolio but lots of other folks do.
A nominal return, by itself, is absolutely pointless. That's why nearly every discussion involving long-term returns on this forum is about real returns. Just like I said, people buying EE bonds seem to be ignoring inflation risk, and it's a big one. Looking the other way is not wise.

I know full well that the stock market doesn't guarantee anything (though the historical record for twenty year periods in the stock market speaks for itself as Kevin M has already pointed out), but the nominal return guarantee of EE bonds is a pittance considering you must sacrifice liquidity and accept inflation risk for two decades to get it. Clearly some think this is a good deal, but I'm not hearing a good argument as to why it makes sense for anyone. And apparently I'm not the only one.
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Re: I don't understand the case for EE bonds

Post by sreynard »

DaftInvestor wrote:
willthrill81 wrote:
DaftInvestor wrote:
willthrill81 wrote:
letsgobobby wrote: Are you 100% stocks?
I'm really not trying to be rude, but that's irrelevant to my question. I would like to know, specifically, why you are attracted to EE bonds.
Didn't he state it above? : "get a guaranteed 3.5% nominal return over the next 20 years"
Stock market doesn't do this.
When I addressed that issue, he merely replied "what you have stated is completely irrelevant to the reason I hold EE bonds."

The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
He didn't say it guaranteed a real return - he said it guarenteed him a nominal return. Stock market guarantees neither and comparing the two isn't helping the question of why someone would choose EE bonds. Simply comparing the returns to a 20 year period with high inflation doesn't defeat the answer either. The answer still stands - maybe you don't feel the 3.5% guaranteed nominal is worth the space in your portfolio but lots of other folks do.
So the answer is it comes down to feelings? :twisted:

Maybe that's why I didn't understand! Misquoting one of my favorite books, "What has feelings to do with it? You invest when the necessity arises - no matter the feeling! Feeling's a thing for cattle or making love or playing music. Not for investing." :wink:
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Re: I don't understand the case for EE bonds

Post by SmileyFace »

sreynard wrote:
DaftInvestor wrote:
willthrill81 wrote:
DaftInvestor wrote:
willthrill81 wrote:
I'm really not trying to be rude, but that's irrelevant to my question. I would like to know, specifically, why you are attracted to EE bonds.
Didn't he state it above? : "get a guaranteed 3.5% nominal return over the next 20 years"
Stock market doesn't do this.
When I addressed that issue, he merely replied "what you have stated is completely irrelevant to the reason I hold EE bonds."

The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
He didn't say it guaranteed a real return - he said it guarenteed him a nominal return. Stock market guarantees neither and comparing the two isn't helping the question of why someone would choose EE bonds. Simply comparing the returns to a 20 year period with high inflation doesn't defeat the answer either. The answer still stands - maybe you don't feel the 3.5% guaranteed nominal is worth the space in your portfolio but lots of other folks do.
So the answer is it comes down to feelings? :twisted:

Maybe that's why I didn't understand! Misquoting one of my favorite books, "What has feelings to do with it? You invest when the necessity arises - no matter the feeling! Feeling's a thing for cattle or making love or playing music. Not for investing." :wink:
It's about diversification, not feeling. Someone might want stocks and bonds for diversification. If you have bonds - EE bonds provide tax deferral and a guarenteed 3.5 nominal rate after 20 years and might be worth considering. Sure stock market returns or other types of bonds "might" beat EE bonds - but no one really knows. I don't understand why that's so hard to understand.
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Re: I don't understand the case for EE bonds

Post by letsgobobby »

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jdilla1107
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Re: I don't understand the case for EE bonds

Post by jdilla1107 »

Earl Lemongrab wrote:
jdilla1107 wrote:You are forgetting about the tax deferral which allows one to do tax arbitrage from high income years to low income years.
That will work for some people but current EE bonds only make sense if held exactly 20 years. For a lot of younger people that means cashing them at their peak earnings.
They allow you to expand your tax deferred space.
Only in a fashion similar to non-deductible IRA contributions. The principal is after-tax, so only the earnings are deferred, and that's pretty small in this context.
You are assuming something to call it small. I own a lot of EE bonds and am in a high tax bracket. These things are going to get me through my early retirement and I will save a large amount through tax arbitrage.
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Re: I don't understand the case for EE bonds

Post by Grt2bOutdoors »

If you are in a low tax bracket and you expect to be in a high tax bracket at year 20 when you redeem, sure I can understand your hesitation to purchasing them.

A quick comparison; I bonds vs. EE bonds. A $500 I bond purchased in May 2011 is worth $556.20. The current rate is 2.76%.

A $1000 face value EE bond - equivalent issue price is $500 is worth $533.20. The rate is 1.10%.

For the I bond to be worth $1,000 at exactly 20 years from issuance, the rate of inflation would need to be 4.27% annually.

The EE bond - guaranteed to double at year 20, only needs 3.53%. Those who bought EE's in 2011 are going to come out ahead if inflation remains below 4.27%.
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Re: I don't understand the case for EE bonds

Post by sreynard »

DaftInvestor wrote:
sreynard wrote:
DaftInvestor wrote:
willthrill81 wrote:
DaftInvestor wrote:
Didn't he state it above? : "get a guaranteed 3.5% nominal return over the next 20 years"
Stock market doesn't do this.
When I addressed that issue, he merely replied "what you have stated is completely irrelevant to the reason I hold EE bonds."

The stock market doesn't guarantee you a real return, but EE bonds don't guarantee a real return either. As I've posted above, from 1970 to 1990, holding this type of investment would have lost you a total of 41%. It seems that nearly everyone on this forum is justly concerned about long-term inflation, but when it comes to EE bonds, many seem to be looking the other way.
He didn't say it guaranteed a real return - he said it guarenteed him a nominal return. Stock market guarantees neither and comparing the two isn't helping the question of why someone would choose EE bonds. Simply comparing the returns to a 20 year period with high inflation doesn't defeat the answer either. The answer still stands - maybe you don't feel the 3.5% guaranteed nominal is worth the space in your portfolio but lots of other folks do.
So the answer is it comes down to feelings? :twisted:

Maybe that's why I didn't understand! Misquoting one of my favorite books, "What has feelings to do with it? You invest when the necessity arises - no matter the feeling! Feeling's a thing for cattle or making love or playing music. Not for investing." :wink:
It's about diversification, not feeling. Someone might want stocks and bonds for diversification. If you have bonds - EE bonds provide tax deferral and a guarenteed 3.5 nominal rate after 20 years and might be worth considering. Sure stock market returns or other types of bonds "might" beat EE bonds - but no one really knows. I don't understand why that's so hard to understand.
Sorry, I misunderstood. You said:
The answer still stands - maybe you don't feel the 3.5% guaranteed nominal is worth the space in your portfolio but lots of other folks do.
I thought you were giving the answer. :?

OK, so back to the OP's original question. Under what conditions might EE bonds be worth considering? Money for short and intermediate term needs are certainly out. Needs 20 years out? Would EE bonds be a better than CDs, treasures, TIPS, or a bond fund, or some combination of those? Under what conditions and how would you know that in advance? EE bonds are better than those others right now, but those others aren't locked in for 20 years. Bird in hand is worth two in the bush?

Liability matching for a known, ongoing expense 20 years from now? That would be a good reason. If you were pretty confident 3.5% nominal was going to meet that need, EEs sound really good with the current yield environment. Maybe something like for Medigap plan payments or to supplement income between retirement and start of social security. Personally, I can't see locking in that money in at say age 45 for a retirement at 65, and I certainly wouldn't want it after WMD's start, but that may work for some people.

Thanks, but I'll just stick with my 3 fund portfolio, though I'll probably add TIPS at some point. It just seems to me if I were going to do any locking, it would be for high rate investments and low rate loans. Not the reverse. :)
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Re: I don't understand the case for EE bonds

Post by Earl Lemongrab »

jdilla1107 wrote:
Earl Lemongrab wrote:
jdilla1107 wrote:
They allow you to expand your tax deferred space.
Only in a fashion similar to non-deductible IRA contributions. The principal is after-tax, so only the earnings are deferred, and that's pretty small in this context.
You are assuming something to call it small. I own a lot of EE bonds and am in a high tax bracket. These things are going to get me through my early retirement and I will save a large amount through tax arbitrage.
If you buy 10k each year and hold 20 years, the tax-deferred amount is $350 total over the 20 years each time. If you bought them 20 years running, the total would be about $7000. That's about 1.5 years worth of IRA contributions for a young person. I consider that small.

Again, you better be in a lower tax bracket in 20 years or you'll get very little advantage because you'll need to cash them at a high rate or have that 3.5% rate start dropping. For me, not worth it. But then I have over $1 million in tax-advantaged these days, so things can seem small to me that don't to others.
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Re: I don't understand the case for EE bonds

Post by sreynard »

Grt2bOutdoors wrote:If you are in a low tax bracket and you expect to be in a high tax bracket at year 20 when you redeem, sure I can understand your hesitation to purchasing them.

A quick comparison; I bonds vs. EE bonds. A $500 I bond purchased in May 2011 is worth $556.20. The current rate is 2.76%.

A $1000 face value EE bond - equivalent issue price is $500 is worth $533.20. The rate is 1.10%.

For the I bond to be worth $1,000 at exactly 20 years from issuance, the rate of inflation would need to be 4.27% annually.

The EE bond - guaranteed to double at year 20, only needs 3.53%. Those who bought EE's in 2011 are going to come out ahead if inflation remains below 4.27%.
And you knew that EE bonds would be better in 2011? Well, you probably could estimate that, but you bought I bonds anyway? :twisted:

Well that certainly proves I bonds weren't that good of an investment in 2011. :mrgreen:

The big advantage to your I bonds is that you can dump them and replace them if something better comes along. The risk of course is if something better doesn't come along. . . .
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Re: I don't understand the case for EE bonds

Post by sreynard »

Earl Lemongrab wrote:
jdilla1107 wrote:
Earl Lemongrab wrote:
jdilla1107 wrote:
They allow you to expand your tax deferred space.
Only in a fashion similar to non-deductible IRA contributions. The principal is after-tax, so only the earnings are deferred, and that's pretty small in this context.
You are assuming something to call it small. I own a lot of EE bonds and am in a high tax bracket. These things are going to get me through my early retirement and I will save a large amount through tax arbitrage.
If you buy 10k each year and hold 20 years, the tax-deferred amount is $350 total over the 20 years each time. If you bought them 20 years running, the total would be about $7000. That's about 1.5 years worth of IRA contributions for a young person. I consider that small.

Again, you better be in a lower tax bracket in 20 years or you'll get very little advantage because you'll need to cash them at a high rate or have that 3.5% rate start dropping. For me, not worth it. But then I have over $1 million in tax-advantaged these days, so things can seem small to me that don't to others.
That's my problem. I'm already 50 so it's too late for me to buy any. I sure as heck don't want them coming due at 70! :shock:

Though I guess I could donate them to charity. That would make me look all virtuous. . . . :mrgreen:
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Re: I don't understand the case for EE bonds

Post by jdilla1107 »

Earl Lemongrab wrote:
jdilla1107 wrote:
Earl Lemongrab wrote:
jdilla1107 wrote:
They allow you to expand your tax deferred space.
Only in a fashion similar to non-deductible IRA contributions. The principal is after-tax, so only the earnings are deferred, and that's pretty small in this context.
You are assuming something to call it small. I own a lot of EE bonds and am in a high tax bracket. These things are going to get me through my early retirement and I will save a large amount through tax arbitrage.
If you buy 10k each year and hold 20 years, the tax-deferred amount is $350 total over the 20 years each time. If you bought them 20 years running, the total would be about $7000. That's about 1.5 years worth of IRA contributions for a young person. I consider that small.

Again, you better be in a lower tax bracket in 20 years or you'll get very little advantage because you'll need to cash them at a high rate or have that 3.5% rate start dropping. For me, not worth it. But then I have over $1 million in tax-advantaged these days, so things can seem small to me that don't to others.
I own $140,000 of them today. (20k a year for my spouse and I over 7 years)
At 3.53%, that is $4,952 a year in deferred interest.
At a tax rate of 37% (33% + 4% state), that is $1,828 a year in tax savings
Over 20 years, that tax savings compounds to $53,685 assuming a 3.53% growth rate.

This is assuming that I do not continue adding. (My math is somewhat approximate, but people often forget that the tax savings compounds like any other investment would)

Another way to look at it is the difference in an investment at 3.53% or 4.84% (3.53*1.37) over 15 years, also showing $50k+ in savings
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

letsgobobby wrote:I own lots of bonds. EE bonds are some of the bonds I own. I am completely comfortable sacrificing liquidity in this small portion of my fixed income balances in order to achieve a higher return.
Thank you for your explanation. :)

A small correction: a higher current return. It's anybody's guess what interest rates will be in five years, let alone ten or twenty, but most of us around here suspect that they'll be significantly higher than now. As I've said several times, it wasn't that long ago that people were scared to lock in a 16% 30 year bond.
letsgobobby wrote:I've said repeatedly but you keep ignoring: I own EE bonds because nowhere else can I get a government guaranteed, 3.5% nominal return over 20 years in a tax-deferred account.
You seem to place far greater weight on "government guaranteed" than I do. But that's a personal decision, granted.
letsgobobby wrote:You keep comparing these to stocks, which is ridiculous. Show me another guaranteed investment which defers taxes and returns 3.5% nominal in 20 years.
I could just as easily call a move to sock away money at 3.5% with essentially no liquidity ridiculous when the historic odds of stocks (or a number of other asset classes) beating the pants off of that are above 98%, but I won't for the reason that you place importance on "government guaranteed." I don't need that, but clearly you do.

You say I shouldn't compare these to equities, but we shouldn't care what type of asset class we're investing in apart from factors like (1) expected return, (2) volatility of that return, and (3) risk of principal loss. If I told someone "Here's a great new investment! It's absolutely guaranteed to provide a 1% nominal annual return if you hold it for 50 years," it would be foolish to say "Well it's not a bond, so I can't compare that to my bonds." Like it or not, all investment vehicles compete with each other on some level; if I put a dollar in one, that means I can't put that dollar in all of the other options available.
letsgobobby wrote:Now if we have bad deflation I will be very happy with my EE bonds. You will be very unhappy with stocks.
That's an awfully big if, but it's true enough.
letsgobobby wrote:But the future is unknowable. What if we have very high inflation? Then I will be very unhappy with my EE bonds, but very happy with my stocks, and somewhat happy with my I bonds.
High inflation seems far more likely than rampant deflation in my view and others as well. But we don't know for certain, granted.
letsgobobby wrote:By owning a widely diversified portfolio, I don't have to predict the future.
A three fund portfolio is also widely diversified and, historically, likely to beat the pants off a 3.5% nominal return in the long-term. But to each his own.

Thanks again for the information and your reasoning.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

sreynard wrote:Thanks, but I'll just stick with my 3 fund portfolio, though I'll probably add TIPS at some point. It just seems to me if I were going to do any locking, it would be for high rate investments and low rate loans. Not the reverse. :)
Ditto that. :beer

TIPS make a lot more sense to me than EE bonds on just about every level.
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Re: I don't understand the case for EE bonds

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Re: I don't understand the case for EE bonds

Post by willthrill81 »

letsgobobby wrote:The reason not to compare to equities is their incomparably higher risk compared to fixed income. Yes, stocks go to zero. So do stock markets. Not likely, but my portfolio is designed to protect against tail risk. Low returns I can handle.
Out of curiosity, when has any stock market, the entire market, gone to zero? Wouldn't that mean that the entire publicly-owned economy has completely vanished?

And if that were to happen, how would the government be able to pay you for your EE bonds since they wouldn't have anything to pay you with?
letsgobobby wrote:I was with you just til your last paragraph. There you go again comparing a fixed income investment to a 3 fund portfolio. They are apples and oranges. You can't compare them.
Sure you can compare them. Of course they are different, but all investment vehicles can be compared on a fundamental level. Again, you are placing a lot of weight on "government guaranteed" and believe that you cannot compare an investment without it to one with it. You seem to think that means "zero risk of default," but many here, including me, would disagree with that assessment.
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Re: I don't understand the case for EE bonds

Post by Grt2bOutdoors »

sreynard wrote:
Grt2bOutdoors wrote:If you are in a low tax bracket and you expect to be in a high tax bracket at year 20 when you redeem, sure I can understand your hesitation to purchasing them.

A quick comparison; I bonds vs. EE bonds. A $500 I bond purchased in May 2011 is worth $556.20. The current rate is 2.76%.

A $1000 face value EE bond - equivalent issue price is $500 is worth $533.20. The rate is 1.10%.

For the I bond to be worth $1,000 at exactly 20 years from issuance, the rate of inflation would need to be 4.27% annually.

The EE bond - guaranteed to double at year 20, only needs 3.53%. Those who bought EE's in 2011 are going to come out ahead if inflation remains below 4.27%.
And you knew that EE bonds would be better in 2011? Well, you probably could estimate that, but you bought I bonds anyway? :twisted:
Maximized tax-deferral space, when 1.10% coupon is paying more than savings accounts you take it, still yielding more than most savings accounts today.
Well that certainly proves I bonds weren't that good of an investment in 2011. :mrgreen:

The big advantage to your I bonds is that you can dump them and replace them if something better comes along. The risk of course is if something better doesn't come along. . . .
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Re: I don't understand the case for EE bonds

Post by Swelfie »

willthrill81 wrote:Out of curiosity, when has any stock market, the entire market, gone to zero? Wouldn't that mean that the entire publicly-owned economy has completely vanished?
Happens when economies are nationalized.
willthrill81 wrote:And if that were to happen, how would the government be able to pay you for your EE bonds since they wouldn't have anything to pay you with?
Can? Yes. Will? Highly unlikely. Still more likely than stocks though. Depends on if personal property is honored at all. Either way though, you have bigger issues than your tax deferments at that point.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

Swelfie wrote:
willthrill81 wrote:Out of curiosity, when has any stock market, the entire market, gone to zero? Wouldn't that mean that the entire publicly-owned economy has completely vanished?
Happens when economies are nationalized.
willthrill81 wrote:And if that were to happen, how would the government be able to pay you for your EE bonds since they wouldn't have anything to pay you with?
Can? Yes. Will? Highly unlikely. Still more likely than stocks though. Depends on if personal property is honored at all. Either way though, you have bigger issues than your tax deferments at that point.
Either way, it isn't good. :shock:
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Re: I don't understand the case for EE bonds

Post by itstoomuch »

itstoomuch wrote:We market time getting in 1985-87.
We market timed in getting out 2004-06.
:oops:
You gotta learn to recognise good values. :greedy
YMMV
Ok have this thread bookmarked. It's now bookmark removed. :)
For this who don't have me on ignore, obviously a silly comment;
We bought a bunch of EE , laddered 1985-1987 2005-2007, in a market timing move. EE then was barely sold because the maturity rate was very in comparison to CDs and what could be had in the bond market. Inflation was tamer than previous years but still high. The Gov decided to issue a "inflation EE bonds" with a floor of 4% and a generous redemption policy after 6 mns holding. We bought 6% EE. It was obvious that inflation was coming under control, employment was up, the President had wide support, and stocks were looking good. So why EE ? A diversifying move in an UGMA that held balanced funds that had a ~ total return of ~6%… so the purchase of EE wasn't really an off idea as a market timing decision especially when the Gov announced the stopping sales of inflation EE, in 1987(?).

We sold the Inflation EE s, in a marketing timing move 2003-2006. The guarantee 6% expired and had fallen to the 4% floor yield. Stocks had collapsed after 9/11 swan event and the dotcom was winding down. Bond yields was low and Onlys student loans were as low as 1%. The beginning of the credit bubble. Why get 4% yields when stock returns was +8%(?). ?
YMMV
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Re: I don't understand the case for EE bonds

Post by NiceUnparticularMan »

Obviously any nominal long bond is a deflation hedge of some sort.

[As an aside: except in the case where stocks go to zero. If your bonds were honored they might be useful, but the People's Republic of North America may not be interested in honoring the bonds of the old United States government which it replaced--as usual, for this scenario you are probably better off owning assets in another country.]

What I need help understanding is why people think EE bonds are a better deflationary hedge than ordinary long Treasuries.

I understand that if you hold them for 20 years, you get a higher yield than on current 20-year Treasuries (currently 2.6% or so).

But say there is a deflationary scenario in ten years. The market value of the 20-year Treasuries goes up as market yields go down, and then you can actually make use of that extra return. With EE bonds, what you get if you keep holding them another 10 years may be worth more in real terms than you were originally expecting, but maybe not--it depends on what happens with inflation over the next 10 years which will determine your overall 20-year inflation rate.

But regardless, you can't unlock that possible future benefit while the deflationary scenario is actually happening. This strikes me as a very serious problem, because deflationary scenarios can be associated with lots of other badness. In other words, the complete lack of liquidity is most likely to be harmful precisely in deflationary scenarios.

So that's an odd argument to me. Maybe if you got lucky with your bad luck, so to speak, the deflationary scenario happens right before they double. Otherwise, it seems to me you are running a serious risk of not being able to get the benefit of holding nominal long bonds in a deflationary scenario when you actually need it.
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Re: I don't understand the case for EE bonds

Post by itstoomuch »

Nice, You are correct.^
But in 1985, Bogle was barely known and Reagan had the backing of the people. Our 6% bonds was competitive to CDs although we didn't get a toaster. And it was the toaster that eventually killed the S&Ls in the late 1980s.

Today the bond market is easily understood and bought/sold. Savings Bonds are now difficult to understand and buy/sell. Perhaps the Gov doesn't want you to know??? I no longer pay attention.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

NiceUnparticularMan wrote:So that's an odd argument to me. Maybe if you got lucky with your bad luck, so to speak, the deflationary scenario happens right before they double. Otherwise, it seems to me you are running a serious risk of not being able to get the benefit of holding nominal long bonds in a deflationary scenario when you actually need it.
I concur.

A long-term illiquid bond at a low yield, even if it's higher than other bond yields, just seems like a bad deal all the way around.
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Re: I don't understand the case for EE bonds

Post by Nate79 »

EE bonds are fully liquid after 1 year and can be considered like cash with the upside of doubling in 20 years under current rules. EE bonds are not illiquid assets after the first year.
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Re: I don't understand the case for EE bonds

Post by willthrill81 »

Nate79 wrote:EE bonds are fully liquid after 1 year and can be considered like cash with the upside of doubling in 20 years under current rules. EE bonds are not illiquid assets after the first year.
True, but at current yields (.1%), inflation is creating negative real returns every year you hold these until the twentieth year (and you may still lose out to inflation then). Before the twentieth year, EE bonds are one of the worst possible places, in terms of returns, that you could possibly put your money. As such, anyone buying them cannot consider them to be liquid unless in the direst of circumstances.
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Re: I don't understand the case for EE bonds

Post by Nate79 »

willthrill81 wrote:
Nate79 wrote:EE bonds are fully liquid after 1 year and can be considered like cash with the upside of doubling in 20 years under current rules. EE bonds are not illiquid assets after the first year.
True, but at current yields (.1%), inflation is creating negative real returns every year you hold these until the twentieth year (and you may still lose out to inflation then). Before the twentieth year, EE bonds are one of the worst possible places, in terms of returns, that you could possibly put your money. As such, anyone buying them cannot consider them to be liquid unless in the direst of circumstances.
All of that may be true but that is not what liquid/illiquid means. Posters saying that EE bonds are illiquid either don't understand how they work or need to explain themselves more and not use incorrect term. At today's low fixed rate they are basically cash.
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Re: I don't understand the case for EE bonds

Post by NiceUnparticularMan »

Nate79 wrote:EE bonds are fully liquid after 1 year and can be considered like cash with the upside of doubling in 20 years under current rules. EE bonds are not illiquid assets after the first year.
Well, except "cash" returns more than 0.1%, unless you are talking paper money under the mattress. In the deflationary scenario I mentioned which occurs 10 years in, you are worse off having EE bonds than cash for this reason.

Generally, if you are going to compare EE bond rates after 20 years to 20 year Treasury rates, you can't really claim they are liquid--instead you have an extremely high early-withdrawal penalty. Alternatively you can treat them like little better than paper money stashed under your mattress for 20 years, and if they make it to that point you get your (really pretty small) nominal return. But neither one of these descriptions is really what I want in a deflation hedge.
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