I-bond inflation irony?

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overthought
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I-bond inflation irony?

Post by overthought » Sat Nov 04, 2017 8:28 pm

So I've been learning about I-bonds after being exposed to them on these forums, and they look like a great way to protect money from inflation. However, I find it a bit ironic that an instrument designed to protect against inflation has an annual purchase limit that is not adjusted for inflation. So the amount of real dollars I can protect from inflation with I-bonds actually shrinks each year due to inflation, and the more useful a hedge I-bonds turns out to be, the worse that shrinkage would be as well?

Am I missing something here?

(I know the Treasury occasionally adjusts the annual limit, but I have the impression that those changes are rather arbitrary, not something methodical meant to counter inflation)

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aj76er
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Re: I-bond inflation irony?

Post by aj76er » Sat Nov 04, 2017 10:57 pm

Yes, the purchase limits do make them very difficult to match liabilities. Due to Inflation, $10k today doesn't pay for as much as it did a few years ago.

My cynical side says that by not raising purchase limits, the treasury is trying to slowly phase out IBonds
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Re: I-bond inflation irony?

Post by venkman » Sat Nov 04, 2017 11:08 pm

You can still buy up to $5 million in TIPS at every auction...

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Re: I-bond inflation irony?

Post by Noobvestor » Sun Nov 05, 2017 1:47 am

aj76er wrote:
Sat Nov 04, 2017 10:57 pm
Yes, the purchase limits do make them very difficult to match liabilities. Due to Inflation, $10k today doesn't pay for as much as it did a few years ago.

My cynical side says that by not raising purchase limits, the treasury is trying to slowly phase out IBonds
I assume this to be the case. As I understand it, years ago you could buy up to $30,000 per type (I and EE) per year.

https://www.savingsbonds.gov/news/press ... elimit.htm
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Re: I-bond inflation irony?

Post by nisiprius » Sun Nov 05, 2017 6:51 am

You aren't missing anything. I am, frankly, concerned about my series I savings bonds. We have a significant chunk of change, some in paper bonds in the safe deposit box at the bank, some at Treasury Direct. When I started buying them, I thought that co-owned (paper) I bonds were a very good place to put some savings in a place where my wife could get at it "if anything happens," because co-owned paper bonds can be redeemed by either co-owner--even without the other's knowledge or permission--and in those days, most banks would redeem them, over the counter, and you'd have "available funds" in your account... maybe it was the next day, maybe even that day. No more.

Up until late 2007, the purchase limit had been increased in fits and starts--every few decades they'd bump it up to a new round number. For a long time, it had been $30,000 per person per year.

In December of 2007 it was cut to $5,000 with no warning and with 31 days' notice. It probably took the some people at the Treasury by surprise, because there were reports for several months here in the forum of bold spirits who tried making electronic purchases over the limit and they went through. A few years later, they discontinued selling paper bonds at banks. Not surprisingly, the result is that there are now very few banks that will redeem them.

It's all messy now and it's in a strange limbo. The current redemption process, if you can't find a bank, involves mailing them to the Treasury (but at least, as far as I can tell today, they don't need a medallion signature guarantee!) Some people who decided to "electronify" their paper bonds recently were reporting unbelievably long times, many months, to complete the process.

The Treasury Direct site is worrisome. The problem is that it "errs on the side of safety" and has extremely strict security procedures--and there are frequent glitches, which always take the form of denying access. Time and again I've been told that my computer isn't recognized and they must email me a one-time code, which isn't too bad, but several times I've just been locked out and had to call in during business hours for them to reset my account. I recently asked my wife to verify that she can log in to her account, which is supposed to have transact authority on everything--I need to add that authority manually every time I buy bonds. It told her she needed a one-time code, and it turned out that she hadn't updated her account information and they had an old no-longer-used email address. Which she couldn't update, because she couldn't log in. And she couldn't remember the answers to the security questions...
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Re: I-bond inflation irony?

Post by MarginalCost » Sun Nov 05, 2017 7:31 am

Look on the bright side: much like the real I-Bonds, at least the value of the purchase limit won't go down during periods of deflation!
nisiprius wrote:
Sun Nov 05, 2017 6:51 am
Time and again I've been told that my computer isn't recognized and they must email me a one-time code, which isn't too bad, but several times I've just been locked out and had to call in during business hours for them to reset my account. I recently asked my wife to verify that she can log in to her account, which is supposed to have transact authority on everything--I need to add that authority manually every time I buy bonds. It told her she needed a one-time code, and it turned out that she hadn't updated her account information and they had an old no-longer-used email address.
I don't think I have ever been able to log in without getting a new one-time code. I assumed that party of Treasury Direct was just broken. Is it intermittent or constant for you Nisiprius?

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Re: I-bond inflation irony?

Post by MrDogg » Sun Nov 05, 2017 7:54 am

nisiprius wrote:
Sun Nov 05, 2017 6:51 am

I don't think I have ever been able to log in without getting a new one-time code.
I too have to get a One Time Password (OTP) every time I log on to Treasury Direct. Even when I select the recognize this computer box.

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Re: I-bond inflation irony?

Post by exigent » Sun Nov 05, 2017 8:24 am

venkman wrote:
Sat Nov 04, 2017 11:08 pm
You can still buy up to $5 million in TIPS at every auction...
Yeah, but is that limit indexed to inflation??? ;-)

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Re: I-bond inflation irony?

Post by Mel Lindauer » Sun Nov 05, 2017 8:49 am

aj76er wrote:
Sat Nov 04, 2017 10:57 pm
My cynical side says that by not raising purchase limits, the treasury is trying to slowly phase out IBonds
Here's a Forbes column I wrote on this topic some time ago, speculating that Treasury wanted to phase out Savings Bonds.

https://www.forbes.com/sites/theboglehe ... 0ee06e2a8d
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Re: I-bond inflation irony?

Post by Valuethinker » Sun Nov 05, 2017 9:14 am

overthought wrote:
Sat Nov 04, 2017 8:28 pm
So I've been learning about I-bonds after being exposed to them on these forums, and they look like a great way to protect money from inflation. However, I find it a bit ironic that an instrument designed to protect against inflation has an annual purchase limit that is not adjusted for inflation. So the amount of real dollars I can protect from inflation with I-bonds actually shrinks each year due to inflation, and the more useful a hedge I-bonds turns out to be, the worse that shrinkage would be as well?

Am I missing something here?

(I know the Treasury occasionally adjusts the annual limit, but I have the impression that those changes are rather arbitrary, not something methodical meant to counter inflation)
It's a given that other, private sector, providers of savings and investment products will lobby the US Congress and Administration against these. They see it as unfair competition for savings (and in truth, they are correct in one sense).

The US Treasury is also constrained to find the cheapest source of funding -- best value for the US taxpayer. It's unlikely that these are good value-- it is cheaper to borrow wholesale (bond auctions) and TIPS and nominal bonds are likely cheaper borrowing instruments.

Balanced against this there is a creation of economic utility by providing an asset for the small saver that is inflation protected-- that the private sector does not provide. A similar argument was deployed by Treasury Secretary Robert Rubin in favour of the creation of TIPS when it was opposed (for the reasons above). And, in fact, he was right.

Robert Shiller and others have suggested the creation of GDP-linked bonds, and I think there's merit in that one, too. But I do not expect it to happen. Bonds linked to housing prices might also have a role.

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Re: I-bond inflation irony?

Post by Earl Lemongrab » Sun Nov 05, 2017 1:13 pm

Savings bonds are roughly equivalent to non-deductible IRA contributions (without most of the withdrawal or conversion parts). For people with sufficient tax-deferred space, I don't see much advantage if I-bonds over TIPS in one form or another. They add a bit complexity in dealing with TD, although I don't have much personal experience. Still it's another account to maintain.
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Re: I-bond inflation irony?

Post by Jack FFR1846 » Sun Nov 05, 2017 1:31 pm

Earl Lemongrab wrote:
Sun Nov 05, 2017 1:13 pm
Savings bonds are roughly equivalent to non-deductible IRA contributions (without most of the withdrawal or conversion parts). For people with sufficient tax-deferred space, I don't see much advantage if I-bonds over TIPS in one form or another. They add a bit complexity in dealing with TD, although I don't have much personal experience. Still it's another account to maintain.
Savings bonds are much easier to use as an emergency fund and/or to fund kids' college expenses. I will hedge that statement a bit and say that when I started buying bonds, they held excellent characteristics that made them ideal for me:

- $30k per person per year, available as paper bonds by filling out a form at most banks and credit unions.
- For a time, purchases could be made on Treasury Direct with a credit card for no fee.
- Cashable with interest penalty in 6 months. Everyone cashed paper bonds.
- Within income limits, and other rules (easy), can be cashed for educational expenses with no state, local or federal tax.

I'll also mention that TD didn't keep a very good tally of bonds purchased. I remember one year accidently buying $40k under one ss #.

Of course now:
- $5k per person per year, only available as electronic bonds through Treasury Direct and credit cards are not accepted.
- $5k paper bond from federal tax refund
- Paper bonds may still be cashed at many banks and credit unions and funds are immediately available.
- Cashable in 1 year with penalty. 5 year, no penalty.
- Same educational tax exemption.
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Re: I-bond inflation irony?

Post by dodecahedron » Sun Nov 05, 2017 1:41 pm

Jack FFR1846 wrote:
Sun Nov 05, 2017 1:31 pm

Of course now:
- $5k per person per year, only available as electronic bonds through Treasury Direct and credit cards are not accepted.
- $5k paper bond from federal tax refund
- Paper bonds may still be cashed at many banks and credit unions and funds are immediately available.
- Cashable in 1 year with penalty. 5 year, no penalty.
- Same educational tax exemption.
Everything listed above is correct now EXCEPT that it is $10K per person per year in electronic bonds, not $5K. (And actually, that is $10K per tax ID number, so an individual who has set up a revocable trust with its own EIN can buy $20K per year, $10K under his SSN and $10K under the EIN of his trust.)

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Re: I-bond inflation irony?

Post by nisiprius » Sun Nov 05, 2017 4:50 pm

MarginalCost wrote:
Sun Nov 05, 2017 7:31 am
...I don't think I have ever been able to log in without getting a new one-time code. I assumed that party of Treasury Direct was just broken. Is it intermittent or constant for you Nisiprius?...
It's intermittent. If it's been more than a very short time, though--say, more than a few months--it's pretty much every time. (My theory which I've never bothered to confirm is that they think people used fixed IP addresses, and that every time my ISP changes my dynamic IP address they think I'm using a new computer).
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Re: I-bond inflation irony?

Post by oldcomputerguy » Sun Nov 05, 2017 5:19 pm

MrDogg wrote:
Sun Nov 05, 2017 7:54 am
nisiprius wrote:
Sun Nov 05, 2017 6:51 am

I don't think I have ever been able to log in without getting a new one-time code.
I too have to get a One Time Password (OTP) every time I log on to Treasury Direct. Even when I select the recognize this computer box.
I logged onto my TD account yesterday and did not have any issues, it let me right in. I wonder if this might be an issue with the way cookies are handled on the individual computer?
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Re: I-bond inflation irony?

Post by whodidntante » Sun Nov 05, 2017 5:20 pm

Unless you qualify for one of the exceptions, you have to pay taxes on I bond interest. So they are not a great inflation hedge unless you have one of the older ones with a significant fixed rate.

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Re: I-bond inflation irony?

Post by Sammy_M » Sun Nov 05, 2017 5:44 pm

dodecahedron wrote:
Sun Nov 05, 2017 1:41 pm
so an individual who has set up a revocable trust with its own EIN can buy $20K per year, $10K under his SSN and $10K under the EIN of his trust.)
Doesn't have to be a separate EIN for the trust. See discussion here viewtopic.php?t=77395

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Re: I-bond inflation irony?

Post by Mel Lindauer » Sun Nov 05, 2017 5:45 pm

whodidntante wrote:
Sun Nov 05, 2017 5:20 pm
Unless you qualify for one of the exceptions, you have to pay taxes on I bond interest. So they are not a great inflation hedge unless you have one of the older ones with a significant fixed rate.
But then again, you have to pay taxes every year on CD interest and they're not even guaranteed to keep up with inflation before taxes. And there's no tax deferral on the CDs, so you have to pay annually at your current tax bracket, which, for many in their prime working years, is much higher than it will be once they're retired and they redeem their I Bonds.

So I Bonds offer tax deferral and the opportunity for tax shifting from a current high tax bracket to a future lower tax bracket.
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Re: I-bond inflation irony?

Post by CULater » Sun Nov 05, 2017 6:10 pm

I've been using the TD website for years in order to redeem I-Bonds for my elderly mother for living expenses. Have never had a problem with it. However, I do worry that if I croak and my sister has to start doing it, the process would be difficult for her. Also, I worry about my I-Bonds if I go all marbley and someone has to use TD to redeem bonds for me. For these reasons, I'll consider phasing them out myself. I've also converted paper I-bonds for my mother and that worked OK and didn't take an unusually long time to complete. However, you do have to know what you're doing and that once again might be challenging for a civilian. Half mine are paper and will need to be converted.
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Re: I-bond inflation irony?

Post by hoops777 » Sun Nov 05, 2017 7:51 pm

nisiprius wrote:
Sun Nov 05, 2017 6:51 am
You aren't missing anything. I am, frankly, concerned about my series I savings bonds. We have a significant chunk of change, some in paper bonds in the safe deposit box at the bank, some at Treasury Direct. When I started buying them, I thought that co-owned (paper) I bonds were a very good place to put some savings in a place where my wife could get at it "if anything happens," because co-owned paper bonds can be redeemed by either co-owner--even without the other's knowledge or permission--and in those days, most banks would redeem them, over the counter, and you'd have "available funds" in your account... maybe it was the next day, maybe even that day. No more.

Up until late 2007, the purchase limit had been increased in fits and starts--every few decades they'd bump it up to a new round number. For a long time, it had been $30,000 per person per year.

In December of 2007 it was cut to $5,000 with no warning and with 31 days' notice. It probably took the some people at the Treasury by surprise, because there were reports for several months here in the forum of bold spirits who tried making electronic purchases over the limit and they went through. A few years later, they discontinued selling paper bonds at banks. Not surprisingly, the result is that there are now very few banks that will redeem them.

It's all messy now and it's in a strange limbo. The current redemption process, if you can't find a bank, involves mailing them to the Treasury (but at least, as far as I can tell today, they don't need a medallion signature guarantee!) Some people who decided to "electronify" their paper bonds recently were reporting unbelievably long times, many months, to complete the process.

The Treasury Direct site is worrisome. The problem is that it "errs on the side of safety" and has extremely strict security procedures--and there are frequent glitches, which always take the form of denying access. Time and again I've been told that my computer isn't recognized and they must email me a one-time code, which isn't too bad, but several times I've just been locked out and had to call in during business hours for them to reset my account. I recently asked my wife to verify that she can log in to her account, which is supposed to have transact authority on everything--I need to add that authority manually every time I buy bonds. It told her she needed a one-time code, and it turned out that she hadn't updated her account information and they had an old no-longer-used email address. Which she couldn't update, because she couldn't log in. And she couldn't remember the answers to the security questions...
The exact same thing happened to my wife.Old email and could not answer security questions.We went to a credit union after they mailed us the firms and they stamped the documents and we eventually got her logged in,but a big pain in the butt.
My wife has her original 30,000 paper bonds in her safe deposit.They are now worth about 66,000 from her 2001 purchase.Are you saying that the Federal Bank in SF will probably not cash them?
K.I.S.S........so easy to say so difficult to do.

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Re: I-bond inflation irony?

Post by tetractys » Sun Nov 05, 2017 8:05 pm

oldcomputerguy wrote:
Sun Nov 05, 2017 5:19 pm
I logged onto my TD account yesterday and did not have any issues, it let me right in. I wonder if this might be an issue with the way cookies are handled on the individual computer?
Yes, you lose your cookies and you need authentication. I dump all my cookies every so often and then if logging into TD, go through the authentication process. TD also senses a different computer upon system upgrades. Some of us demand two stage authentication anyway. -- Tet

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Re: I-bond inflation irony?

Post by nisiprius » Sun Nov 05, 2017 8:07 pm

hoops777 wrote:
Sun Nov 05, 2017 7:51 pm
My wife has her original 30,000 paper bonds in her safe deposit.They are now worth about 66,000 from her 2001 purchase.Are you saying that the Federal Bank in SF will probably not cash them?
I haven't tried to redeem savings bonds in a long time. If you mean the Federal Reserve Bank in San Francisco, are you saying that to your knowledge they do redeem paper I bonds? The Treasury Direct website does not mention redemption at a Federal Reserve bank as an option. They currently say this. The part I've boldfaced and put in red may be tricky. Either way, it sounds like it is a good idea to have an established account at a brick-and-mortar bank.

Redeeming (Cashing) Series I Savings Bonds
What will I need to redeem a paper bond?

If you plan to take your bonds to a local bank, check with the financial institution beforehand to see whether it redeems savings bonds. If it does, find out what dollar limit, if any, it has on redemptions and what identification and other documents you need.

If you are a customer of that bank, establishing identity could be as simple as having an active account open for at least six months, plus proper identification.

If you aren’t a customer, banks have varying policies ranging from not redeeming your bonds to redeeming limited amounts (generally less than $1,000 total value) with acceptable identification, such as a valid driver's license.

To redeem your bonds through the Treasury Retail Securities Site, follow these steps:

Have a certifying officer at a bank where you have an account certify your signature in the request for payment on the back of each bond.
Mail the following to Treasury Retail Securities Site, PO Box 214, Minneapolis, MN 55480-0214:
  • the bonds
  • your Social Security Number
  • your direct-deposit information; please send us a canceled check or FS Form 5396
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Re: I-bond inflation irony?

Post by hoops777 » Sun Nov 05, 2017 8:22 pm

nisiprius wrote:
Sun Nov 05, 2017 8:07 pm
hoops777 wrote:
Sun Nov 05, 2017 7:51 pm
My wife has her original 30,000 paper bonds in her safe deposit.They are now worth about 66,000 from her 2001 purchase.Are you saying that the Federal Bank in SF will probably not cash them?
I haven't tried to redeem savings bonds in a long time. If you mean the Federal Reserve Bank in San Francisco, are you saying that to your knowledge they do redeem paper I bonds? The Treasury Direct website does not mention redemption at a Federal Reserve bank as an option. They currently say this. The part I've boldfaced and put in red may be tricky. Either way, it sounds like it is a good idea to have an established account at a brick-and-mortar bank.

Redeeming (Cashing) Series I Savings Bonds
What will I need to redeem a paper bond?

If you plan to take your bonds to a local bank, check with the financial institution beforehand to see whether it redeems savings bonds. If it does, find out what dollar limit, if any, it has on redemptions and what identification and other documents you need.

If you are a customer of that bank, establishing identity could be as simple as having an active account open for at least six months, plus proper identification.

If you aren’t a customer, banks have varying policies ranging from not redeeming your bonds to redeeming limited amounts (generally less than $1,000 total value) with acceptable identification, such as a valid driver's license.

To redeem your bonds through the Treasury Retail Securities Site, follow these steps:

Have a certifying officer at a bank where you have an account certify your signature in the request for payment on the back of each bond.
Mail the following to Treasury Retail Securities Site, PO Box 214, Minneapolis, MN 55480-0214:
  • the bonds
  • your Social Security Number
  • your direct-deposit information; please send us a canceled check or FS Form 5396
Thanks nisprius.You made it sound like local banks would probably not redeem them,or I misread what you said.So in my great wisdom,I assumed the Federal Reserve would certainly redeem them.It will likely be 14 years before she redeems them so I have time to figure it out,if we both last that long :D
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Re: I-bond inflation irony?

Post by nisiprius » Sun Nov 05, 2017 8:30 pm

hoops777 wrote:
Sun Nov 05, 2017 8:22 pm
Thanks nisiprius.You made it sound like local banks would probably not redeem them,or I misread what you said.So in my great wisdom,I assumed the Federal Reserve would certainly redeem them.It will likely be 14 years before she redeems them so I have time to figure it out,if we both last that long :D
Some banks say they will. I have an account at one bank that says it will, but I haven't actually tried. On doing a web search, I found that some websites do say that Federal Reserve banks will do this, but in light of what the Treasury Direct website says, I wonder--I'd certainly check before making a trip.
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Re: I-bond inflation irony?

Post by tetractys » Sun Nov 05, 2017 8:37 pm

This should answer the questions about savings bond redemptions at Federal Reserve and other Banks:
https://www.frbservices.org/resourcefaq ... -news.html

Best regards, Tet
Last edited by tetractys on Sun Nov 05, 2017 8:49 pm, edited 1 time in total.

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Re: I-bond inflation irony?

Post by bradshaw1965 » Sun Nov 05, 2017 8:41 pm

Jack FFR1846 wrote:
Sun Nov 05, 2017 1:31 pm

Savings bonds are much easier to use as an emergency fund and/or to fund kids' college expenses.
Wrong to comment on proposed legislation but I really hope that we don't lose this since repeal is in the first rev of the new tax bill.

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Re: I-bond inflation irony?

Post by Johm221122 » Sun Nov 05, 2017 8:43 pm

nisiprius wrote:
Sun Nov 05, 2017 8:30 pm
hoops777 wrote:
Sun Nov 05, 2017 8:22 pm
Thanks nisiprius.You made it sound like local banks would probably not redeem them,or I misread what you said.So in my great wisdom,I assumed the Federal Reserve would certainly redeem them.It will likely be 14 years before she redeems them so I have time to figure it out,if we both last that long :D
Some banks say they will. I have an account at one bank that says it will, but I haven't actually tried. On doing a web search, I found that some websites do say that Federal Reserve banks will do this, but in light of what the Treasury Direct website says, I wonder--I'd certainly check before making a trip.
I've cashed a few in last couple months,takes about half hour.Go in safe deposit box,write my information on back and wait in line.Once at window it takes about 3-4 minutes per bond
Unfortunately I have lots of small value EE bonds which will hit 20 years soon.I guess I'll be regular at bank window over next few years.I was on automatic monthly plan for EE bonds

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Re: I-bond inflation irony?

Post by overthought » Mon Nov 06, 2017 7:27 am

Thanks everyone for the info.
aj76er wrote:
Sat Nov 04, 2017 10:57 pm
Yes, the purchase limits do make them very difficult to match liabilities. Due to Inflation, $10k today doesn't pay for as much as it did a few years ago.
I get the impression that TIPS and inflation-adjusted annuities are the main alternatives to I-bonds? The former don't protect against deflation, tho, and the latter only make sense for someone who's already retired and looking to protect their income (I'm still very much in accumulation phase). Are there others I've missed?
MarginalCost wrote:
Sun Nov 05, 2017 7:31 am
Look on the bright side: much like the real I-Bonds, at least the value of the purchase limit won't go down during periods of deflation!
That made me smile, thanks.

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Re: I-bond inflation irony?

Post by Da5id » Mon Nov 06, 2017 9:03 am

aj76er wrote:
Sat Nov 04, 2017 10:57 pm
My cynical side says that by not raising purchase limits, the treasury is trying to slowly phase out IBonds
I'm generally pretty cynical too. But not really here. I think that there isn't much of a constituency for I-bonds, and if they just announced "no more I-bonds" the uproar would be big in bogleheads but wouldn't make much of a splash in the wider world. Treasury direct has sold $332M in I-bonds in the past 12 months and just $53M in series E bonds (see link at top of https://www.treasurydirect.gov/indiv/re ... bsales.htm). In terms of government income, really pretty small. Not predicting that it will or won't die as a program, just saying that if they want to kill the program they will just kill it I think.

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KlingKlang
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Re: I-bond inflation irony?

Post by KlingKlang » Mon Nov 06, 2017 9:42 am

Da5id wrote:
Mon Nov 06, 2017 9:03 am
Not predicting that it will or won't die as a program, just saying that if they want to kill the program they will just kill it I think.
I'm frankly amazed at how long the Treasury Department keeps some old programs around. As an example I still have about $50k of Treasury Bonds in the old Legacy Treasury Direct system which won't come due until 2032. I love how I get my printed 1099s in the mail weeks before the new Treasury Direct gets around to posting theirs online.

Getting back to EE and I Bonds the problem is similar. Even if they do stop issuing new savings bonds immediately they would still have to support redeeming the existing bonds for at least another 30 years. Unless they take the draconian measure of saying that you have a limited amount of time to cash your bonds and then after that they are worthless.

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Re: I-bond inflation irony?

Post by Da5id » Mon Nov 06, 2017 9:48 am

KlingKlang wrote:
Mon Nov 06, 2017 9:42 am
Getting back to EE and I Bonds the problem is similar. Even if they do stop issuing new savings bonds immediately they would still have to support redeeming the existing bonds for at least another 30 years. Unless they take the draconian measure of saying that you have a limited amount of time to cash your bonds and then after that they are worthless.
That would be shocking, given that the bonds aren't callable as far as I know (are they???). But yes, given that they have to support existing bonds, maybe not much incentive to terminate issuing new ones. And the amount, while trivial in scope compared to a $4T budget, still is probably counted on somewhere.

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Re: I-bond inflation irony?

Post by nisiprius » Mon Nov 06, 2017 10:08 am

overthought wrote:
Mon Nov 06, 2017 7:27 am
.,.I get the impression that TIPS and inflation-adjusted annuities are the main alternatives to I-bonds?...
Series I savings bonds are really very different from TIPS. Not necessarily better, but very different. They are not really comparable, even though they are both called "bonds" and are both inflation-adjusted. TIPS are ordinary marketable securities. They have a known real value at maturity, but during their lifetime they are subject to market fluctuations, i.e. they have interest rate sensitivity. (A good deal of the criticism of TIPS is that the characteristics of these market fluctuations may be less desirable than those of other bonds).

Series I savings bonds are only called "bonds" because they represent a fixed, legal contract to do specific things. However, they are non-marketable securities. (The very idea of a "non-marketable security" is something that some people have difficulty with, but let's not go down that rabbit-hole). But in practical terms, it means that (after the first year) you do not sell your bond in a marketplace to a willing buyer, you redeem it directly with the Treasury on pre-stated term. There is no interest rate sensitivity. Some people call this a "free put." They are said to have a thirty-year maturity but I think it is more accurate to say that the maturity is anything you want it to be, between one and thirty years. The value, month by month, only goes up. Whatever the redemption value is after 120 months, it will be higher after 121 months. There may be some weird corner cases and it may not be literally true to five-place accuracy, but the inflation-adjusted value only goes up.

All of this needs to be balanced against other details, but as far as I know there is no other investment that is like series I saving bonds.
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Re: I-bond inflation irony?

Post by overthought » Mon Nov 06, 2017 10:22 am

nisiprius wrote:
Mon Nov 06, 2017 10:08 am
overthought wrote:
Mon Nov 06, 2017 7:27 am
.,.I get the impression that TIPS and inflation-adjusted annuities are the main alternatives to I-bonds?...
Series I savings bonds are really very different from TIPS. Not necessarily better, but very different.

...

All of this needs to be balanced against other details, but as far as I know there is no other investment that is like series I saving bonds.
Yeah, unfortunately that was my impression as well. You have to just buy what you can and do something else with the rest of the money that would have gone into them.

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Re: I-bond inflation irony?

Post by overthought » Mon Nov 06, 2017 10:49 am

Da5id wrote:
Mon Nov 06, 2017 9:03 am
Treasury direct has sold $332M in I-bonds in the past 12 months
I guess that comes back to the point I saw somewhere, that people don't generally buy I-bonds because the big players (brokers, banks, etc.) don't have any incentive educate their clients about the merits of I-bonds, let alone to recommend them as part of a portfolio or financial strategy. Instead (if my experience is any indication) they recommend a municipal bond mutual fund with a 1% back-end load and 1% 12b-1 fee, which is an easy sell to a naive client whose bank offers such abysmal money market and CD rates that the mutual fund looks wonderful by comparison.

In reality, I-bonds make a really nice addition to the arsenal. For example, I really like the idea of storing my emergency fund in a short I-bond ladder (say 3-5 years). They're better than 5-year CDs I've been able to find: higher (or at least similar) earning rate today, inflation protection for the future, tax deferred earnings should I choose not to redeem, 3-month penalty instead of the usual 6-month penalty if I redeem before 5 years, and unlike a CD there's no risk of a bank blocking me if I tried to redeem them in a rising interest rate environment.
Last edited by overthought on Mon Nov 06, 2017 12:09 pm, edited 2 times in total.

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Re: I-bond inflation irony?

Post by KlingKlang » Mon Nov 06, 2017 11:07 am

nisiprius wrote:
Mon Nov 06, 2017 10:08 am
The value, month by month, only goes up. Whatever the redemption value is after 120 months, it will be higher after 121 months.
This is a minor quibble, but if the I Bond semiannual inflation rate is zero or negative the bonds' values will remain the same if their fixed rate isn't high enough to overcome the inflation adjustment. Their values will never go down however. The last time this happened was May - October 2015.

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Re: I-bond inflation irony?

Post by Da5id » Tue Nov 07, 2017 8:44 am

overthought wrote:
Mon Nov 06, 2017 10:49 am
[I guess that comes back to the point I saw somewhere, that people don't generally buy I-bonds because the big players (brokers, banks, etc.) don't have any incentive educate their clients about the merits of I-bonds, let alone to recommend them as part of a portfolio or financial strategy.
I think it is that and more. Most people don't know about the savings bonds one can buy, just kind of remembering getting paper E/EE bonds as a kid perhaps. The government doesn't push/advertise them in any way, so unless one looks for them one doesn't see them as part of the investing universe. Even beyond knowing about the products, Treasury Direct is a clunky and rather off putting experience, so unless one is somewhat committed to investing in I/EE bonds it is easy to see why most don't. Add in the smallish (in terms of total retirement funding) purchase limits and it is easy enough to understand why so few use these bonds. I wish I had been aware of them earlier, particularly in the glory days of >3% fixed rate, as I only have 2 years worth myself. Even with 0-0.1% fixed rate, I like them for short term reserves as they compete favorably with other products even without the insurance they provide if inflation suddenly spikes.

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