Series EE savings bonds attractive now?

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catundercouch
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Joined: Wed Mar 20, 2019 12:20 am

Series EE savings bonds attractive now?

Post by catundercouch » Thu Aug 29, 2019 9:39 am

What do you think of Series EE savings bonds these days? If held for 20 years, the effective return is 3.5%. 20 year treasuries currently yield 1.76%. There are definitely drawbacks - mostly, you get crushed if you sell early (return drops to 0.1%). I am finding them oddly compelling.

Angst
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Re: Series EE savings bonds attractive now?

Post by Angst » Thu Aug 29, 2019 11:06 am

catundercouch wrote:
Thu Aug 29, 2019 9:39 am
What do you think of Series EE savings bonds these days? If held for 20 years, the effective return is 3.5%. 20 year treasuries currently yield 1.76%. There are definitely drawbacks - mostly, you get crushed if you sell early (return drops to 0.1%). I am finding them oddly compelling.
At 0.1%, the fixed rate is essentially irrelevant - it might as well be zero. If you have the wherewithal to never have to redeem them prior to maturity, and if their 20-yr maturity complements the remainder of your bond holdings (you'll have to decide that :) ), then absolutely, buy them. I've been cautiously buying them over the past decade, but always ready to bail if I feel rates and expectations justify it (you'll have to decide this too :) ). Here's some data that can help in making that decision. As you can see, over time the interest rate bar to bailing on them rises:

Code: Select all

EE Bond Purchased in 2010

Year    YTM   Yrs left
2010    3.53%    20
2011    3.72%    19
2012    3.93%    18
2013    4.16%    17
2014    4.43%    16
2015    4.73%    15
2016    5.08%    14
2017    5.48%    13
2018    5.95%    12
2019    6.50%    11
2020    7.18%    10
2021    8.01%     9
2022    9.05%     8
2023   10.41%     7
2024   12.25%     6
2025   14.87%     5
2026   18.92%     4
2027   25.99%     3
2028   42.42%     2
2029  100.00%     1

germark
Posts: 59
Joined: Thu Sep 06, 2018 2:18 pm

Re: Series EE savings bonds attractive now?

Post by germark » Thu Aug 29, 2019 11:21 am

catundercouch wrote:
Thu Aug 29, 2019 9:39 am
What do you think of Series EE savings bonds these days? If held for 20 years, the effective return is 3.5%. 20 year treasuries currently yield 1.76%. There are definitely drawbacks - mostly, you get crushed if you sell early (return drops to 0.1%). I am finding them oddly compelling.
My biggest concern would be inflation. For such a long term bet I would be doing a comparison with i-bonds / TIPS as well as the 20 year treasury.

HEDGEFUNDIE
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Re: Series EE savings bonds attractive now?

Post by HEDGEFUNDIE » Thu Aug 29, 2019 12:17 pm

I am torn between buying:

1. EE bonds that pay 3.5% but are illiquid for 20 years, or
2. Putting that money in my 401k stable value fund paying a guaranteed 3%

HomeStretch
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Re: Series EE savings bonds attractive now?

Post by HomeStretch » Thu Aug 29, 2019 12:22 pm

HEDGEFUNDIE wrote:
Thu Aug 29, 2019 12:17 pm
I am torn between buying:

1. EE bonds that pay 3.5% but are illiquid for 20 years, or
2. Putting that money in my 401k stable value fund paying a guaranteed 3%
Any other factors that would influence your decision? Do you live in a high tax state and/or could qualify/use the EE bond proceeds tax free for education expenses?

HEDGEFUNDIE
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Re: Series EE savings bonds attractive now?

Post by HEDGEFUNDIE » Thu Aug 29, 2019 12:48 pm

HomeStretch wrote:
Thu Aug 29, 2019 12:22 pm
HEDGEFUNDIE wrote:
Thu Aug 29, 2019 12:17 pm
I am torn between buying:

1. EE bonds that pay 3.5% but are illiquid for 20 years, or
2. Putting that money in my 401k stable value fund paying a guaranteed 3%
Any other factors that would influence your decision? Do you live in a high tax state and/or could qualify/use the EE bond proceeds tax free for education expenses?
No idea where I will live in 20 years. Won't qualify for the education tax break.

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bligh
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Re: Series EE savings bonds attractive now?

Post by bligh » Thu Aug 29, 2019 1:01 pm

Yes. To me they are not just attractive.. they are downright gorgeous. To me they are and have been a no brainer.

1) Already in a high tax bracket and in a high tax state. I already max out my tax advantaged space. These allow me to extend it. Also if I happen to remain in this state, the state tax exemption will be the cherry on top.

2) Have absolutely no plan or desire to sell for the 20 years. If I do need to end up selling them, I will have much bigger issues than worrying about the lost interest. ie. Liquidity is a non issue for me.

3) I am worried about the interest rate going up sharply. But these long term bonds make up only a small part of my over all portfolio. If I owned these as 20 year treasuries, the NAV would get hosed anyway as the yield rose. I would end up right where I started, or close to that.

4) See Mel Lindauer's excellent article on Forbes : A Simple Way To Build Your Own Annuity ... I am not sure I will actually purchase a full 20 year ladder of these, for now I am taking it one year at a time. Depending on how things turn out in 20 years, I might choose to treat these as an annuity or a bridge until I take Social security. Ideally they will just get added to my "liquid" portfolio.

So I basically make double the yield on 20 year treasuries for essentially no cost to me, while simultaneously increasing my tax deferred space while in a high tax bracket. Talk about a free lunch.

:sharebeer

aristotelian
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Re: Series EE savings bonds attractive now?

Post by aristotelian » Thu Aug 29, 2019 3:25 pm

HEDGEFUNDIE wrote:
Thu Aug 29, 2019 12:17 pm
I am torn between buying:

1. EE bonds that pay 3.5% but are illiquid for 20 years, or
2. Putting that money in my 401k stable value fund paying a guaranteed 3%
For just .5% difference I would go with the stable value fund, no question. No way the EE bond premium of .5% is enough compensation for the duration risk. Isn't Swedroe's rule 20 bp per year of duration? The EE rate would only justify 2-3 years vs the stable value.

Day9
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Re: Series EE savings bonds attractive now?

Post by Day9 » Thu Aug 29, 2019 3:32 pm

On one hand, yes they are absolutely attractive compared to a similar duration treasury you will hold to maturity.

On the other hand, if I am forced to not cash out for 20 years, wouldn't stocks be the better investment? Almost surely stocks will return more than 3.5% nominal over 20 years, no? I would love to see analysis for the percent chance stocks will return lower than this over a 20 year period.

I wrote this post in another thread (some minor tweaks):

"EE bonds can be used to "build your own annuity". You can buy your full allotment each year to create an income stream the future 20 years from now. This could allow you to delay when you will buy an SPIA or deferred annuity late in retirement. Or perhaps you can do something like buy your full allotment between ages 40-50 so that you can retire at 60 and use your maturing EE bonds as income, allowing you to defer social security until age 70.

I am a long way until retirement so I do not buy EE bonds for that purpose. I buy long term treasuries but I plan on rolling them to maintain a long duration similar to a fund like TLT or EDV. I do not plan on holding them to maturity. Given that I have to hold the investment for 20 years, at this point in my accumulation stage I would prefer stocks because I put the odds extremely low that they return under 3.53% over that period."
I'm just a fan of the person I got my user name from

jdilla1107
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Re: Series EE savings bonds attractive now?

Post by jdilla1107 » Thu Aug 29, 2019 6:01 pm

aristotelian wrote:
Thu Aug 29, 2019 3:25 pm
HEDGEFUNDIE wrote:
Thu Aug 29, 2019 12:17 pm
I am torn between buying:

1. EE bonds that pay 3.5% but are illiquid for 20 years, or
2. Putting that money in my 401k stable value fund paying a guaranteed 3%
For just .5% difference I would go with the stable value fund, no question. No way the EE bond premium of .5% is enough compensation for the duration risk. Isn't Swedroe's rule 20 bp per year of duration? The EE rate would only justify 2-3 years vs the stable value.
EE bonds don't have the anywhere close to the duration risk of a 20 year treasury because you can cash them in at any time for the purchase price. This option lowers their risk considerably. So, for example if interest rates rise considerably in the next 5 years, you would only be out 2% a year in lost opportunity cost. A 20 year treasury would get hammered by comparison.

jdilla1107
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Joined: Sun Jun 24, 2012 8:31 pm

Re: Series EE savings bonds attractive now?

Post by jdilla1107 » Thu Aug 29, 2019 6:06 pm

I have been maxing my EE bonds for the last 10 years. They are a fantastic deal. They are an even more fantastic deal right now that they have been in the recent past. But, you have to hold them for exactly 20 years.

- They have a free put option if interest rates go up. (You can always redeem for your purchase price.) This is big and often overlooked.
- They are tax deferred. (Effectively expand your tax deferred space)
- A 20 year treasury yields 1.78% while they yield effectively 3.53%

Just don't go too wild with them as you can't use them to re-balance with. So, I wouldn't make them more than 25% of my bond portfolio.

jdilla1107
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Re: Series EE savings bonds attractive now?

Post by jdilla1107 » Thu Aug 29, 2019 6:10 pm

Day9 wrote:
Thu Aug 29, 2019 3:32 pm
On the other hand, if I am forced to not cash out for 20 years, wouldn't stocks be the better investment? Almost surely stocks will return more than 3.5% nominal over 20 years, no? I would love to see analysis for the percent chance stocks will return lower than this over a 20 year period.
Comparing stocks to bonds isn't that helpful for analysis, in my opinion. Comparing EE bonds to 20 year treasuries is the better comparison.

Consider that anyone that holds a total bond market index fund has about 20% of their bond portfolio in long term bonds. Instead of holding TBM, I hold EE bonds and an intermediate fund.

If your point is that no one should hold a bond fund for 20 years, then that's a different argument that really has nothing to do with EE bonds.
Last edited by jdilla1107 on Thu Aug 29, 2019 6:19 pm, edited 3 times in total.

HEDGEFUNDIE
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Joined: Sun Oct 22, 2017 2:06 pm

Re: Series EE savings bonds attractive now?

Post by HEDGEFUNDIE » Thu Aug 29, 2019 6:13 pm

jdilla1107 wrote:
Thu Aug 29, 2019 6:06 pm
I have been maxing my EE bonds for the last 10 years. They are a fantastic deal. They are an even more fantastic deal right now that they have been in the recent past. But, you have to hold them for exactly 20 years.

- They have a free put option if interest rates go up. (You can always redeem for your purchase price.) This is big and often overlooked.
- They are tax deferred. (Effectively expand your tax deferred space)
- A 20 year treasury yields 1.78% while they yield effectively 3.53%

Just don't go too wild with them as you can't use them to re-balance with. So, I wouldn't make them more than 25% of my bond portfolio.
The rebalancing thing is what is holding me back...

R2D2
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Re: Series EE savings bonds attractive now?

Post by R2D2 » Fri Aug 30, 2019 9:28 am

jdilla1107 wrote:
Thu Aug 29, 2019 6:10 pm
Comparing stocks to bonds isn't that helpful for analysis, in my opinion. Comparing EE bonds to 20 year treasuries is the better comparison.
...
If your point is that no one should hold a bond fund for 20 years, then that's a different argument that really has nothing to do with EE bonds.
Bingo.

If, for the next 20 years, you're definitely going to be holdings at least 20k in Treasuries at all times (this describes a lot of people), then EE bonds are a good deal. No reason to compare them to equities.

A lot of people will be holding much more than 20k in Treasuries for the next 20 years (consider a 40 year old with a 400k portfolio). That individual should consider loading up on EE's a few years in a row.

People should also note that the option to redeem them back at cost (plus a negligible amount of interest) is actually worth quite a bit. A normal 20 year Treasury does not have that feature and its price can fluctuate a lot. If 20 year rates jump to 6% next year, you would probably want to cash in the EE's that you bought yesterday. It's not very likely, but it is a sort of tail event protection.

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