Why not go EE bonds (instead of bond funds)?

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SnowBog
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

Mel Lindauer wrote: Wed Apr 08, 2020 12:02 am 3. Buying EE Bonds when a child is born and using them 20 years later when they're in college would be a 3.5% guaranteed tax-free use.
I assume that's subject to income limits? https://www.treasurydirect.gov/indiv/pl ... cation.htm

[edited: answered in another thread - posted response in next post]

Timely post - as I was just asking about adding EE and/or I Bonds to my portfolio to help bridge early retirement as posted here: viewtopic.php?f=1&t=311073&newpost=5168721
SnowBog wrote: Tue Apr 07, 2020 1:29 am Given that I'm on track to "have enough" (I don't need to take additional risk, and arguably I have more to lose than gain), the apparent additional safety seems a big benefit...

And my rough estimates show that even at 0% interest (return of I Bonds capital) with EE Bonds doubling @ 20 years covers roughly 50% of estimated annual expenses (granted those are nominal rates - not adjusted for inflation which could dramatically change things). Based on current conservative portfolio projections - 20% muni bonds @ 55 covers roughly 14 years of expenses (with other 50% covered by I & EE bonds) + 1 year cash = 15 years of "safe"(ish) assets. While not the "highest returns" possible - this seems to remove a lot of risk from our plan (but requires that we start ASAP to get the 20 year clock running.)
But I really like the idea of the "Build Your Own Annuity".

I had only thought about this to offset my potential early retirement years, but since I was starting late (age 43), I was struggling if it was worth the effort for only 7 years (63 - 70).

But my projected delayed SS & pensions only cover about 75% of estimated expenses - so using these as an "annuity" to cover some of the delta could give me even more flexibility! And the longer horizon where these "make sense" overcomes most of my concerns on the hassle of managing these (mainly for survivors/heirs).
Last edited by SnowBog on Wed Apr 08, 2020 2:37 am, edited 1 time in total.
SnowBog
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

Looks like Mel & megabad had already answered my question on EE/I Bonds for education in the parallel "I Bonds are a screaming buy" topic: viewtopic.php?f=10&t=306555&start=50
Mel Lindauer wrote: Tue Apr 07, 2020 11:15 pm
megabad wrote: Mon Apr 06, 2020 4:46 am
FoolStreet wrote: Mon Apr 06, 2020 12:05 am Does this benefit extend to high-income families? I think you lose the benefits, so I stopped buying them and stick to munis. I have another few years before college, so if I'm missing something, please let me know.
You are correct, high income individuals do lose the tax deductible nature of the interest (for educational purposes). It would take some income planning for those 4 years if you really wanted this advantage. A 529 might be a little easier to deal with if you know you are going to spend a lot on college in the near future. Of course you can’t own ibonds in one but you could try to find a suitable alternative.
Actually, if you own I Bonds prior to hitting the income limit, you can redeem them and put the proceeds into a 529 Plan and still get the tax exemption. (A 529 Plan is considered to be a qualifying educational expense, so that's a tax-free use when you still meet the income limits.)
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vineviz
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Re: Why not go EE bonds (instead of bond funds)?

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Noobvestor wrote: Tue Apr 07, 2020 10:24 pm
On the other hand, for something like a 20-year Treasury to win, yields would have to go significantly into negative territory. Unprecedented.
This isn't quite right, at least if we consider the topic in the OP (EE bonds vs bond funds). There are a variety of scenarios in which, say, a hypothetical long-term Treasury bond fund could outperform EE bonds over the next 20 years that do NOT negative yields. For instance, if the10-year yield were to rise enough during the middle of the period (e.g to 3% or so) and then come back down to present levels at the end of the period you would see $10k grow to >$20k.

Heck, even if the 10-year yield stays flat for the next 13 years and drops to zero at the end then a 10-30 year maturity bond fund would double from $10k today.

In other words, the future returns of a bond fund are path-dependent, and some non-extreme paths can result in quite strong returns over the next two decades for LTTs.

That said, I wouldn't bet on one of those idiosyncratic paths materializing when I had a plain-vanilla instrument that returns 3.5% (EE bonds) right in front of me. Not if the low purchase amounts and poor liquidity of the EE bonds were non-factors for me.
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Noobvestor
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

vineviz wrote: Wed Apr 08, 2020 6:34 amThere are a variety of scenarios in which, say, a hypothetical long-term Treasury bond fund could outperform EE bonds over the next 20 years that do NOT negative yields. For instance, if the10-year yield were to rise enough during the middle of the period (e.g to 3% or so) and then come back down to present levels at the end of the period you would see $10k grow to >$20k.
Please explain to me how that would work. As I see it (but open to other math), 20-year Treasuries go from 1% to 3% and you get around a 40% NAV loss. They stay at 3%, so your interest return is in the 1-to-3% range overall, they then recover NAV going from 3% to 1%. In short: you have no net NAV gain and an interest rate somewhere between 1% and 3% (let's call it 2% for simplicity, but it doesn't matter): in total, EE Bonds win at 3.5%.
vineviz wrote: Wed Apr 08, 2020 6:34 amHeck, even if the 10-year yield stays flat for the next 13 years and drops to zero at the end then a 10-30 year maturity bond fund would double from $10k today.
Now you've lost me entirely. You're saying the 10-year yield stays flat at .5%, then drops to zero, which should result in around a 5% gain, and that's going to instead result in a 90% gain (which when added to the interest return is about what you'd need for the total to be 100%, which is what EE Bonds return at 20 years)? If we use 20-years: that's 1%/year then at the end a 20% NAV boost if rates go to zero. So: 40% vs 100%.

Premise: I'm using the rule in thumb of duration x interest rate change = NAV change. Of course, you could argue that at the longer end of the spectrum that relationship is less linear, but in example (1) whatever it is, it goes up and down equally, and in (2) it isn't enough. Even if we assumed in the latter scenario that NAV gains would be twice what we'd expect from this calculation, they would be insufficient.

I do appreciate someone taking me up on my request to lay out scenarios in which the EE Bond could lose to something else, but your math isn't adding up for me in these. In one case, the NAV boomerangs and yield undeperforms. In the other, the NAV goes up but not nearly enough.
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vineviz
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Re: Why not go EE bonds (instead of bond funds)?

Post by vineviz »

Noobvestor wrote: Wed Apr 08, 2020 11:47 am Please explain to me how that would work. As I see it (but open to other math), 20-year Treasuries go from 1% to 3% and you get around a 40% NAV loss. They stay at 3%, so your interest return is in the 1-to-3% range overall, they then recover NAV going from 3% to 1%. In short: you have no net NAV gain and an interest rate somewhere between 1% and 3% (let's call it 2% for simplicity, but it doesn't matter): in total, EE Bonds win at 3.5%.
My examples were using a hypothetical bond fund that holds Treasuries with a maturity of 10+ years. Think VLGSX. So the math is a little more complicated than for a single bond, but more realistic. It captures the roll down and also accounts for convexity, which is significant in the I example I presented. Remember, duration is just a first-order estimate of price sensitivity to yield.

The higher yields in the middle years create returns that compound at 3% for a while, so before that final boost in the end the returns are decent though not great. But the NAV boost of going from 3% down to 0.8% at the end is more like 50% vs the 30% drop when they went from 0.8% to 3%.

Again, these scenarios are just hypothetical . Plus, I think my calculations were including the YTD return for 2020 which perhaps makes it something other than apples-to-apples. It may not be a likely scenario but it is, IMHO, a plausible one.
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Noobvestor
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

vineviz wrote: Wed Apr 08, 2020 2:26 pm
Noobvestor wrote: Wed Apr 08, 2020 11:47 am Please explain to me how that would work. As I see it (but open to other math), 20-year Treasuries go from 1% to 3% and you get around a 40% NAV loss. They stay at 3%, so your interest return is in the 1-to-3% range overall, they then recover NAV going from 3% to 1%. In short: you have no net NAV gain and an interest rate somewhere between 1% and 3% (let's call it 2% for simplicity, but it doesn't matter): in total, EE Bonds win at 3.5%.
My examples were using a hypothetical bond fund that holds Treasuries with a maturity of 10+ years. Think VLGSX. So the math is a little more complicated than for a single bond, but more realistic. It captures the roll down and also accounts for convexity, which is significant in the I example I presented. Remember, duration is just a first-order estimate of price sensitivity to yield.

The higher yields in the middle years create returns that compound at 3% for a while, so before that final boost in the end the returns are decent though not great. But the NAV boost of going from 3% down to 0.8% at the end is more like 50% vs the 30% drop when they went from 0.8% to 3%.

Again, these scenarios are just hypothetical . Plus, I think my calculations were including the YTD return for 2020 which perhaps makes it something other than apples-to-apples. It may not be a likely scenario but it is, IMHO, a plausible one.
I was also doing the math based on bond funds, just hypothetical ones of 10 or 20-year duration (VLGSX is in between at around 16, so that base is covered). Also I don't think you're factoring in recovery percentages properly - you need a nigher number (like 50%) just to offset the lower loss (like 30%). For instance if the market goes down 50%, you need 100% returns to recover. Again, the NAV cancels out, EE Bonds win.

If you're also doing anything that involves starting at the beginning of this year, that changes a lot, because yields were much higher. If you want to roll back the tape to a different starting point, we're really out of the range of future-focused hypotheticals. If you play the tape forward and yields go back up, then NAV drops, but again: in that case, you just cash in the EE Bonds and avoid the NAV hit. Win-win for EE Bonds.

I appreciate that examples can be hypothetical - that's precisely what I'm looking for - but by my math, yours aren't outpacing EE Bonds.
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vineviz
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Re: Why not go EE bonds (instead of bond funds)?

Post by vineviz »

Noobvestor wrote: Wed Apr 08, 2020 3:37 pm

I was also doing the math based on bond funds, just hypothetical ones of 10 or 20-year duration (VLGSX is in between at around 16, so that base is covered).
But you can’t accurately model it using a point duration estimate. Certainly not without accounting for convexity.


Also I don't think you're factoring in recovery percentages properly - you need a nigher number (like 50%) just to offset the lower loss (like 30%). For instance if the market goes down 50%, you need 100% returns to recover. Again, the NAV cancels out, EE Bonds win.
Again, to get it right you need to estimate it more closely than duration alone will get you. Which I’m factoring in, and I do t think you are. And a 30% drop followed by a 50% gain isn’t quite a break even. It’s a modest gain, and that’s before accounting for the compounding in between.

Anyway, the key takeaway is only that yields don’t NEED to go negative for a bond fund to win the horse race. Personally I’d bet on the EE bonds, but the Treasury bonds do have an outside chance.
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raven15
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Re: Why not go EE bonds (instead of bond funds)?

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Here is a back test of Vanguard Long Term Treasury Admiral from December 1 2008 to November 30 2018 (ten years). The starting 2008 treasury yields were 3.22% for 30yr, 3.51% for 20 yr, 2.72% for 10yr. The ending 2018 treasury yields were 3.30% for 30yr, 3.19% for 20yr, 3.01% for 10yr. The fund has a duration of around 18 now, but was a little lower through much of the period.

The Vanguard fund returned 4.54% after expenses over that time, which is over 1% greater than the underlying bond yields at the start of the period. Assuming this affect becomes stronger at lower yields we could very well see a 1.5% or even 2% improvement for another 10 year period. But even if we assume a starting rate will be 1.5%ish, it does seem likely that this fund in isolation will not return more than 3.5% over the next ten years.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

I always like to see these how these things work in real life.
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watchnerd
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Re: Why not go EE bonds (instead of bond funds)?

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raven15 wrote: Wed Apr 08, 2020 4:24 pm Here is a back test of Vanguard Long Term Treasury Admiral from December 1 2008 to November 30 2018 (ten years). The starting 2008 treasury yields were 3.22% for 30yr, 3.51% for 20 yr, 2.72% for 10yr. The ending 2018 treasury yields were 3.30% for 30yr, 3.19% for 20yr, 3.01% for 10yr. The fund has a duration of around 18 now, but was a little lower through much of the period.

The Vanguard fund returned 4.54% after expenses over that time, which is over 1% greater than the underlying bond yields at the start of the period. Assuming this affect becomes stronger at lower yields we could very well see a 1.5% or even 2% improvement for another 10 year period. But even if we assume a starting rate will be 1.5%ish, it does seem likely that this fund in isolation will not return more than 3.5% over the next ten years.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

I always like to see these how these things work in real life.

Oh, you picked the non-index LTT fund.

Technically, it's not pure LTT, but that may not matter much.
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raven15
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Re: Why not go EE bonds (instead of bond funds)?

Post by raven15 »

watchnerd wrote: Wed Apr 08, 2020 4:39 pm
raven15 wrote: Wed Apr 08, 2020 4:24 pm Here is a back test of Vanguard Long Term Treasury Admiral from December 1 2008 to November 30 2018 (ten years). The starting 2008 treasury yields were 3.22% for 30yr, 3.51% for 20 yr, 2.72% for 10yr. The ending 2018 treasury yields were 3.30% for 30yr, 3.19% for 20yr, 3.01% for 10yr. The fund has a duration of around 18 now, but was a little lower through much of the period.

The Vanguard fund returned 4.54% after expenses over that time, which is over 1% greater than the underlying bond yields at the start of the period. Assuming this affect becomes stronger at lower yields we could very well see a 1.5% or even 2% improvement for another 10 year period. But even if we assume a starting rate will be 1.5%ish, it does seem likely that this fund in isolation will not return more than 3.5% over the next ten years.

https://www.portfoliovisualizer.com/bac ... ion1_1=100

I always like to see these how these things work in real life.

Oh, you picked the non-index LTT fund.

Technically, it's not pure LTT, but that may not matter much.
I know but it made my point better than TLT did :mrgreen: . Anyhow, everyone is free to pick their own fund.
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Noobvestor
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Re: Why not go EE bonds (instead of bond funds)?

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Still waiting (but losing hope) on someone presenting any plausible scenario in which EE Bonds lose to basically any duration of Treasuries for the next 20 years. On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
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watchnerd
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Re: Why not go EE bonds (instead of bond funds)?

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Noobvestor wrote: Thu Apr 09, 2020 1:05 am Still waiting (but losing hope) on someone presenting any plausible scenario in which EE Bonds lose to basically any duration of Treasuries for the next 20 years. On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
Any plausible scenario?

High inflation plus long TIPS.

Or is it only for nominals?
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Re: Why not go EE bonds (instead of bond funds)?

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watchnerd wrote: Thu Apr 09, 2020 1:07 am
Noobvestor wrote: Thu Apr 09, 2020 1:05 am Still waiting (but losing hope) on someone presenting any plausible scenario in which EE Bonds lose to basically any duration of Treasuries for the next 20 years. On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
Any plausible scenario?

High inflation plus long TIPS.

Or is it only for nominals?
Correct - we are talking about nominal bonds, as per the question and poster who started this thread. Apples to apples, no oranges. I wrote very clearly in the post you are responding to that we're talking about Treasuries, not TIPS.
Last edited by Noobvestor on Thu Apr 09, 2020 1:11 am, edited 1 time in total.
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Re: Why not go EE bonds (instead of bond funds)?

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Noobvestor wrote: Thu Apr 09, 2020 1:05 am On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
Thanks Noobvestor! They've helped me reach a similar conclusion.
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Noobvestor
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Re: Why not go EE bonds (instead of bond funds)?

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SnowBog wrote: Thu Apr 09, 2020 1:11 am
Noobvestor wrote: Thu Apr 09, 2020 1:05 am On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
Thanks Noobvestor! They've helped me reach a similar conclusion.
Great - it was a good exercise for me in thinking through possibilities, and I'm glad it was helpful for you as well!
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Re: Why not go EE bonds (instead of bond funds)?

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Noobvestor wrote: Thu Apr 09, 2020 1:10 am
watchnerd wrote: Thu Apr 09, 2020 1:07 am
Noobvestor wrote: Thu Apr 09, 2020 1:05 am Still waiting (but losing hope) on someone presenting any plausible scenario in which EE Bonds lose to basically any duration of Treasuries for the next 20 years. On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
Any plausible scenario?

High inflation plus long TIPS.

Or is it only for nominals?
Correct - we are talking about nominal bonds, as per the question and poster who started this thread. Apples to apples, no oranges. I wrote very clearly in the post you are responding to that we're talking about Treasuries, not TIPS.
Well, TIPS *are* Treasuries.

But, okay.
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Noobvestor
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

watchnerd wrote: Thu Apr 09, 2020 1:38 am
Noobvestor wrote: Thu Apr 09, 2020 1:10 am
watchnerd wrote: Thu Apr 09, 2020 1:07 am
Noobvestor wrote: Thu Apr 09, 2020 1:05 am Still waiting (but losing hope) on someone presenting any plausible scenario in which EE Bonds lose to basically any duration of Treasuries for the next 20 years. On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
Any plausible scenario?

High inflation plus long TIPS.

Or is it only for nominals?
Correct - we are talking about nominal bonds, as per the question and poster who started this thread. Apples to apples, no oranges. I wrote very clearly in the post you are responding to that we're talking about Treasuries, not TIPS.
Well, TIPS *are* Treasuries.

But, okay.
Please, let's not let this devolve into semantics. TIPS and Treasuries are conventionally used to refer to real-return and nominal Treasury-issued securities, respectively, on this forum and otherwise. Regardless, OP asked about Total Bond versus EE Bonds - a nominal-to-nominal comparison.

Edit to add that your signature line reads as follows: 70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash. Clearly you are not confused about the 'Treasuries' versus 'TIPS' distinction, so I confess I'm baffled as to why you would suggest conflating them.
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watchnerd
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Re: Why not go EE bonds (instead of bond funds)?

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Noobvestor wrote: Thu Apr 09, 2020 1:48 am
Please, let's not let this devolve into semantics. TIPS and Treasuries are conventionally used to refer to real-return and nominal Treasury-issued securities, respectively, on this forum and otherwise. Regardless, OP asked about Total Bond versus EE Bonds - a nominal-to-nominal comparison.

Edit to add that your signature line reads as follows: 70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash. Clearly you are not confused about the 'Treasuries' versus 'TIPS' distinction, so I confess I'm baffled as to why you would suggest conflating them.
Because, in the real world, choices aren't limited to nominal vs nominal trade-offs.

Inflation could crush any long nominal bond, whether that's E bonds or Long Treasuries -- which is why I also hold TIPS.

Constraining the discussion to E bonds vs nominal Treasuries doesn't reflect the real-life decision tree.

Inflation is the elephant in the room. We can pretend it's not there for the sake of debating bonds, but that doesn't make it go away.
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Re: Why not go EE bonds (instead of bond funds)?

Post by raven15 »

Noobvestor wrote: Thu Apr 09, 2020 1:05 am Still waiting (but losing hope) on someone presenting any plausible scenario in which EE Bonds lose to basically any duration of Treasuries for the next 20 years. On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
From my example "even if we assume a starting rate will be 1.5%ish, it does seem likely that this fund in isolation will not return more than 3.5% over the next ten years" I meant if we assume rates will end up at their starting level, and also for a ten year period. If they end up 1% lower than now then it is easier to imagine a 3.5% return. The effect should be more powerful for extreme duration STRIPS bonds (EDV or ZROZ), which having run that exercise I now think have a reasonable chance of exceeding 3.5% after 20 years in isolation. I don't have yield info for STRIPS bonds, but based on the 20 and 30 year vanilla yields in 2008 EDV probably added 1.5% to the starting yields over that period. With a starting yield of 1.5% a 2% improvement to 3.5% seems plausible from these two funds.

If they do end up exceeding EE bonds it will most likely be during a period of very poor stock returns, which is when they will be needed most, and thus would be most beneficial to a balanced portfolio of mostly stocks. Good returns in bad times: perfect! Whereas EE bonds provide the same returns in all times. Still waiting but losing hope to see any plausible scenario in which EE bonds prove beneficial to a balanced and rebalanced portfolio of 60%+ stocks, or any situation in history where they would have done so. :beer (Actually that is false, I already saw such a scenario but nobody else has brought it up yet.)
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

watchnerd wrote: Thu Apr 09, 2020 8:52 am
Noobvestor wrote: Thu Apr 09, 2020 1:48 am
Please, let's not let this devolve into semantics. TIPS and Treasuries are conventionally used to refer to real-return and nominal Treasury-issued securities, respectively, on this forum and otherwise. Regardless, OP asked about Total Bond versus EE Bonds - a nominal-to-nominal comparison.

Edit to add that your signature line reads as follows: 70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash. Clearly you are not confused about the 'Treasuries' versus 'TIPS' distinction, so I confess I'm baffled as to why you would suggest conflating them.
Because, in the real world, choices aren't limited to nominal vs nominal trade-offs.

Inflation could crush any long nominal bond, whether that's E bonds or Long Treasuries -- which is why I also hold TIPS.

Constraining the discussion to E bonds vs nominal Treasuries doesn't reflect the real-life decision tree.

Inflation is the elephant in the room. We can pretend it's not there for the sake of debating bonds, but that doesn't make it go away.
There is no elephant in this thread. OP asked to compare nominal-yield bonds. Perhaps OP believes in a stock-heavy portfolio that the stocks will do the inflation-fighting. I happen to hold both real and nominal. I can't speak for them. Either way, we're getting off-topic.

To use your decision tree framework: we are already past the 'bonds' branch and out on the 'nominal bonds' sub-branch. If we're going back to more fundamental advice, well, I generally advise 25% in bonds as a minimum, but again, that's getting away from the question at hand.
raven15 wrote: Thu Apr 09, 2020 10:25 am
Noobvestor wrote: Thu Apr 09, 2020 1:05 am Still waiting (but losing hope) on someone presenting any plausible scenario in which EE Bonds lose to basically any duration of Treasuries for the next 20 years. On the upside, thinking through all of these scenarios has convinced me more than ever before they are a great deal. :beer
From my example "even if we assume a starting rate will be 1.5%ish, it does seem likely that this fund in isolation will not return more than 3.5% over the next ten years" I meant if we assume rates will end up at their starting level, and also for a ten year period. If they end up 1% lower than now then it is easier to imagine a 3.5% return. The effect should be more powerful for extreme duration STRIPS bonds (EDV or ZROZ), which having run that exercise I now think have a reasonable chance of exceeding 3.5% after 20 years in isolation. I don't have yield info for STRIPS bonds, but based on the 20 and 30 year vanilla yields in 2008 EDV probably added 1.5% to the starting yields over that period. With a starting yield of 1.5% a 2% improvement to 3.5% seems plausible from these two funds.
We're straying now into longer-than-20-year-duration bonds. If those are on the table, well, EDV has an average duration of 25 years. Monthly SEC yields aside (because we have to-the-day numbers from the Treasury we can use that are more accurate) we see a yield of around 1.25%.

https://www.treasury.gov/resource-cente ... data=yield

Again, let's look at three scenarios:

1) Rising yields now - EE Bonds win because you can cash them in and avoid NAV loss.
2) Rising yields later - You get 1.25% for a while, NAV gets crushed, then you get a higher rate for whatever period going forward. Still, EE Bonds presumably win, because the break-even time is around the duration (25 years) - it could take 30 to 40+ years to see EDV outpace
3) Falling yields later- You get 1.25% for a a while, then: NAV gets a boost as bonds go to zero. Woo! If we use the duration x percent change math, though, we get a boost of only around 32%. Shoot. Meanwhile, yield adds up to 28%. So 70%, far shy of 100%. The change in NAV, though, may not be linear. So if we assume this perfect-case scenario and double NAV gains ... EDV does about the same (104%) as EE Bonds. Ouch.
raven15 wrote: Thu Apr 09, 2020 10:25 amIf they do end up exceeding EE bonds it will most likely be during a period of very poor stock returns, which is when they will be needed most, and thus would be most beneficial to a balanced portfolio of mostly stocks. Good returns in bad times: perfect! Whereas EE bonds provide the same returns in all times. Still waiting but losing hope to see any plausible scenario in which EE bonds prove beneficial to a balanced and rebalanced portfolio of 60%+ stocks, or any situation in history where they would have done so. :beer (Actually that is false, I already saw such a scenario but nobody else has brought it up yet.)
We're retreading here. Please look upthread. OP isn't rebalancing and I agree that if an investor plans to rebalance they should keep some percentage in more flexible bond types (Treasuries, TIPS, I Bonds are my own options on that front). We're also not comparing to stocks.

TL;DR EE Bonds are still winning on every scenario relevant to OP's question as far as I can see. If we start branching out into other topics, like TIPS, stocks, etc... or relying heavily on back-tested returns in a falling-yield environment, well, we're just getting way off track.
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Re: Why not go EE bonds (instead of bond funds)?

Post by watchnerd »

Noobvestor wrote: Thu Apr 09, 2020 11:46 am

There is no elephant in this thread. OP asked to compare nominal-yield bonds.
Are threads constrained to only what the OP asked about?

Or perhaps is a broader context useful to other readers?
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Re: Why not go EE bonds (instead of bond funds)?

Post by willthrill81 »

Noobvestor wrote: Thu Apr 09, 2020 11:46 amOP asked to compare nominal-yield bonds.
Why are nominal yields relevant? 20 years from now, I'm not going to give a whit about how my investments have performed nominally. I only care about real returns. Further, there are very few instances I'm aware of where an investor has a future 20 year nominal obligation that EE bonds could match.

This sounds more than a bit like defining the problem in terms of the proposed solution.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

watchnerd wrote: Thu Apr 09, 2020 11:48 am
Noobvestor wrote: Thu Apr 09, 2020 11:46 am

There is no elephant in this thread. OP asked to compare nominal-yield bonds.
Are threads constrained to only what the OP asked about?

Or perhaps is a broader context useful to other readers?
Up to you. I'm just pointing out that OP's question has been asked and answered. You can of course branch out here or in a new thread. /2 cents
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Re: Why not go EE bonds (instead of bond funds)?

Post by vineviz »

willthrill81 wrote: Thu Apr 09, 2020 11:59 am
Noobvestor wrote: Thu Apr 09, 2020 11:46 amOP asked to compare nominal-yield bonds.
Why are nominal yields relevant? 20 years from now, I'm not going to give a whit about how my investments have performed nominally.
Nominal returns may be relevant to some investors, whether or not you view them as relevant to you.

I agree that most retirees can think of their future liabilities as being MOSTLY in real terms, virtually no retirees are best served by modeling them in ENTIRELY real terms.
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Re: Why not go EE bonds (instead of bond funds)?

Post by willthrill81 »

vineviz wrote: Thu Apr 09, 2020 12:34 pm
willthrill81 wrote: Thu Apr 09, 2020 11:59 am
Noobvestor wrote: Thu Apr 09, 2020 11:46 amOP asked to compare nominal-yield bonds.
Why are nominal yields relevant? 20 years from now, I'm not going to give a whit about how my investments have performed nominally.
Nominal returns may be relevant to some investors, whether or not you view them as relevant to you.

I agree that most retirees can think of their future liabilities as being MOSTLY in real terms, virtually no retirees are best served by modeling them in ENTIRELY real terms.
A 20+ year mortgage, long-term commercial debt, or future insurance premiums are the only nominal such liabilities that I'm aware of. Aside from those, I'm not aware of any such liabilities that could be effectively matched with EE bonds, though I would very much like to be made aware of others.
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Re: Why not go EE bonds (instead of bond funds)?

Post by watchnerd »

willthrill81 wrote: Thu Apr 09, 2020 12:43 pm
vineviz wrote: Thu Apr 09, 2020 12:34 pm
willthrill81 wrote: Thu Apr 09, 2020 11:59 am
Noobvestor wrote: Thu Apr 09, 2020 11:46 amOP asked to compare nominal-yield bonds.
Why are nominal yields relevant? 20 years from now, I'm not going to give a whit about how my investments have performed nominally.
Nominal returns may be relevant to some investors, whether or not you view them as relevant to you.

I agree that most retirees can think of their future liabilities as being MOSTLY in real terms, virtually no retirees are best served by modeling them in ENTIRELY real terms.
A 20+ year mortgage, long-term commercial debt, or future insurance premiums are the only nominal such liabilities that I'm aware of. Aside from those, I'm not aware of any such liabilities that could be effectively matched with EE bonds, though I would very much like to be made aware of others.
Maybe a tontine?

I'd totally buy one if I could...
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

willthrill81 wrote: Thu Apr 09, 2020 12:43 pm
vineviz wrote: Thu Apr 09, 2020 12:34 pm
willthrill81 wrote: Thu Apr 09, 2020 11:59 am
Noobvestor wrote: Thu Apr 09, 2020 11:46 amOP asked to compare nominal-yield bonds.
Why are nominal yields relevant? 20 years from now, I'm not going to give a whit about how my investments have performed nominally.
Nominal returns may be relevant to some investors, whether or not you view them as relevant to you.

I agree that most retirees can think of their future liabilities as being MOSTLY in real terms, virtually no retirees are best served by modeling them in ENTIRELY real terms.
A 20+ year mortgage, long-term commercial debt, or future insurance premiums are the only nominal such liabilities that I'm aware of. Aside from those, I'm not aware of any such liabilities that could be effectively matched with EE bonds, though I would very much like to be made aware of others.
Liability-matching isn't the only reason to hold bonds. Nominal bonds hedge deflation. Real-return bonds hedge inflation. Both are good diversifiers for a stock portfolio in terms of reducing volatility and narrowing ranges of outcomes (both good and bad). I hold both, and yet I hold neither in the expectation of meeting any specific nominal or real obligations at any particular date. They're just part of my AA. I have no idea what my real or nominal obligations will be in the future, so I hold a mix of asset classes around a big-picture view of risk-adjusted return.
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Re: Why not go EE bonds (instead of bond funds)?

Post by vineviz »

willthrill81 wrote: Thu Apr 09, 2020 12:43 pm A 20+ year mortgage, long-term commercial debt, or future insurance premiums are the only nominal such liabilities that I'm aware of. Aside from those, I'm not aware of any such liabilities that could be effectively matched with EE bonds, though I would very much like to be made aware of others.
We're probably drifting off-topic, but generally speaking the ultimate goal of any saving/investing strategy is to fund future consumption. That future consumption is the liability, right?

There can be little doubt that future non-discretionary expenditures can be considered to be real liabilities, since they are definitionally obligatory (conditional on being alive, of course). But discretionary expenditures should NOT be considered to be purely real liabilities since they are, well, discretionary: if they are too expensive they can be avoided, substituted, or postponed. In other words, even if we say that non-discretionary expenses have an inflation beta of 1.0 we must consider that discretionary expenses have an inflation beta of <1.0. This is one explanation for the well-documented phenomenon of annual expenses growing at something LESS than the rate of inflation on average during retirement.

Additionally, it is important to note that the real assets/incomes available to most US investors (series I savings bonds, TIPS, Social Security benefits ) are all linked to CPI-U. Technically CPI-U isn't actually a measure of monetary inflation even though it's a major component and closely related. There are persuasive arguments, however, that CPI-U systematically overstates the true rate of national inflation. And the mix of consumption for retired Americans isn't quite the same as the mxi for working Americans.

So if your inflation-linked assets have a beta to CPI-U of exactly 1.0 but your retirement consumption has an inflation beta <1.0 then the most efficient way to fund that consumption must be some mix of real assets and nominal assets.
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Re: Why not go EE bonds (instead of bond funds)?

Post by willthrill81 »

vineviz wrote: Thu Apr 09, 2020 1:25 pm
willthrill81 wrote: Thu Apr 09, 2020 12:43 pm A 20+ year mortgage, long-term commercial debt, or future insurance premiums are the only nominal such liabilities that I'm aware of. Aside from those, I'm not aware of any such liabilities that could be effectively matched with EE bonds, though I would very much like to be made aware of others.
We're probably drifting off-topic, but generally speaking the ultimate goal of any saving/investing strategy is to fund future consumption. That future consumption is the liability, right?

There can be little doubt that future non-discretionary expenditures can be considered to be real liabilities, since they are definitionally obligatory (conditional on being alive, of course). But discretionary expenditures should NOT be considered to be purely real liabilities since they are, well, discretionary: if they are too expensive they can be avoided, substituted, or postponed. In other words, even if we say that non-discretionary expenses have an inflation beta of 1.0 we must consider that discretionary expenses have an inflation beta of <1.0. This is one explanation for the well-documented phenomenon of annual expenses growing at something LESS than the rate of inflation on average during retirement.

Additionally, it is important to note that the real assets/incomes available to most US investors (series I savings bonds, TIPS, Social Security benefits ) are all linked to CPI-U. Technically CPI-U isn't actually a measure of monetary inflation even though it's a major component and closely related. There are persuasive arguments, however, that CPI-U systematically overstates the true rate of national inflation. And the mix of consumption for retired Americans isn't quite the same as the mxi for working Americans.

So if your inflation-linked assets have a beta to CPI-U of exactly 1.0 but your retirement consumption has an inflation beta <1.0 then the most efficient way to fund that consumption must be some mix of real assets and nominal assets.
That makes sense. Thanks.
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Re: Why not go EE bonds (instead of bond funds)?

Post by raven15 »

Noobvestor wrote: Thu Apr 09, 2020 11:46 am We're straying now into longer-than-20-year-duration bonds. If those are on the table, well, EDV has an average duration of 25 years. Monthly SEC yields aside (because we have to-the-day numbers from the Treasury we can use that are more accurate) we see a yield of around 1.25%.

https://www.treasury.gov/resource-cente ... data=yield
That seems like a false dichotomy. EE bonds are being compared to Total Bond which is very different in that it has much shorter duration, contains mortgages and corporate bonds. The nearest bond fund comparison to EEs is a vanilla 20+ year treasury bond fund such as TLT or VGLT. A 20+ year STRIPS fund such as EDV is a very close second.

EE bonds are a pretty exotic type of bond. The tiny return until sudden doubling after 20 years is unique in the world or nearly so. To do what OP is proposing will require to make a TD account in addition to any other brokerage accounts and use it whenever a transaction must be made. Comparatively, any bond fund accessible through Vanguard is less quirky and easier to implement. If OP is willing to consider EE then pretty much anything else can also be considered a reasonable alternative.
Again, let's look at three scenarios:
1) Rising yields now - EE Bonds win because you can cash them in and avoid NAV loss.
2) Rising yields later - You get 1.25% for a while, NAV gets crushed, then you get a higher rate for whatever period going forward. Still, EE Bonds presumably win, because the break-even time is around the duration (25 years) - it could take 30 to 40+ years to see EDV outpace
3) Falling yields later- You get 1.25% for a a while, then: NAV gets a boost as bonds go to zero. Woo! If we use the duration x percent change math, though, we get a boost of only around 32%. Shoot. Meanwhile, yield adds up to 28%. So 70%, far shy of 100%. The change in NAV, though, may not be linear. So if we assume this perfect-case scenario and double NAV gains ... EDV does about the same (104%) as EE Bonds. Ouch.
There are many possible scenarios. I guess there is a 1 in 4 chance of VGLT doing better than EEs over 20 years, and a 1/3 chance of EDV doing better, where those are for scenarios where long term rates in 20 years are at or below their current rates. My best guess is that long term yields will now trend upward for a few years. If they then fall again to their current rates or lower then that sequence will benefit them, but impossible to predict by how much. Selling EE bonds to buy something else will not make sense for most cases which would end up being favorable to long term bonds. If long term bonds do end up being best then their yields will probably not cross above 3% or 5%, which may not cross the EE decision threshold.
... or relying heavily on back-tested returns in a falling-yield environment, well, we're just getting way off track.
I disagree with this characterization. In isolation Total Bond and EE are reasonably close to mathematically determinate that we can see EE is likely to be relatively better going forward and we can then say that backtesting is wrong. If we include 90% stocks in the mix then backtesting becomes highly relevant because stocks are well within their historic valuation range, including that of their lowest 20 year nominal return. Therefore saying a 90%/10% portfolio has returned more than 3.5% nominal in all known 20 year+ periods without exception is very relevant.
We're retreading here. Please look upthread. OP isn't rebalancing and I agree that if an investor plans to rebalance they should keep some percentage in more flexible bond types (Treasuries, TIPS, I Bonds are my own options on that front). We're also not comparing to stocks.
If we are giving advice in theory, then yes we can say adding 5% EE to 5% Total Bond in isolation is an improvement over 10% total bond. If we are giving advice in practice, then we can say it will be easier to use 10% bonds in whatever brokerage or account the stocks are kept in, rebalance annually or using bands, and that doing so also has a 99%ish chance of higher nominal returns after 20 years on the portfolio level, especially if the most directly comparable VGLT/TLT/similar is used.
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Re: Why not go EE bonds (instead of bond funds)?

Post by patrick »

vineviz wrote: Thu Apr 09, 2020 1:25 pmWe're probably drifting off-topic, but generally speaking the ultimate goal of any saving/investing strategy is to fund future consumption. That future consumption is the liability, right?

There can be little doubt that future non-discretionary expenditures can be considered to be real liabilities, since they are definitionally obligatory (conditional on being alive, of course). But discretionary expenditures should NOT be considered to be purely real liabilities since they are, well, discretionary: if they are too expensive they can be avoided, substituted, or postponed. In other words, even if we say that non-discretionary expenses have an inflation beta of 1.0 we must consider that discretionary expenses have an inflation beta of <1.0. This is one explanation for the well-documented phenomenon of annual expenses growing at something LESS than the rate of inflation on average during retirement.

Additionally, it is important to note that the real assets/incomes available to most US investors (series I savings bonds, TIPS, Social Security benefits ) are all linked to CPI-U. Technically CPI-U isn't actually a measure of monetary inflation even though it's a major component and closely related. There are persuasive arguments, however, that CPI-U systematically overstates the true rate of national inflation. And the mix of consumption for retired Americans isn't quite the same as the mxi for working Americans.

So if your inflation-linked assets have a beta to CPI-U of exactly 1.0 but your retirement consumption has an inflation beta <1.0 then the most efficient way to fund that consumption must be some mix of real assets and nominal assets.
If "discretionary expenses have an inflation beta of <1.0" means that discretionary expenses tend to have smaller price changes than CPI-U, note that CPI-U is a weighted average including both discretionary and non-discretionary expenditures. If the discretionary part changes less than average then the non-discretionary part would have to change more than average. If your spending has a lower weight on non-discretionary spending than CPI-U, that would make you less exposed to inflation than CPI-U, but a higher weight on non-discretionary spending than CPI-U would make you more exposed to inflation than CPI-U.

If you only meant that inflation risk could be tolerated once non-discretionary expenses are covered, that doesn't mean the risk isn't there. If you only put enough in real assets to cover the bare necessities with everything else in nominal assets, and then the nominal assets suffer a severe loss of purchasing power due to inflation leaving you unable to purchase much beyond the bare necessities in retirement, I would consider that a case of the risk showing up.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

EE bonds are a pretty exotic type of bond. The tiny return until sudden doubling after 20 years is unique in the world or nearly so.
You say exotic, I say amazing. Relatively high nominal-yields beating anything on the market with no risk of NAV loss. Bonus: if better yields do come along, you can cash them out early to take advantage of those new high yields. Amazing!
raven15 wrote: Thu Apr 09, 2020 2:50 pm I guess there is a 1 in 4 chance of VGLT doing better than EEs over 20 years, and a 1/3 chance of EDV doing better, where those are for scenarios where long term rates in 20 years are at or below their current rates. My best guess is that long term yields will now trend upward for a few years. If they then fall again to their current rates or lower then that sequence will benefit them, but impossible to predict by how much. Selling EE bonds to buy something else will not make sense for most cases which would end up being favorable to long term bonds. If long term bonds do end up being best then their yields will probably not cross above 3% or 5%, which may not cross the EE decision threshold.
It really feels like we're talking in circles. I am not interested in guesses. I'm interested in numbers. I have run numbers for a variety of durations and scenarios, including ones that heavily favor non-EE Treasury bonds. All results have favored EE Bonds. Among my various simulations is exactly what you describe: yields going up for a while, then back down. Even this optimal-for-Treasuries scenario still loses. Instead of fractional guessing, can you math out exactly how superior returns might be achieved by either of the funds you suggest have a chance of outperformance? Thanks.
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Re: Why not go EE bonds (instead of bond funds)?

Post by vineviz »

Noobvestor wrote: Thu Apr 09, 2020 3:09 pm It really feels like we're talking in circles. I am not interested in guesses. I'm interested in numbers. I have run numbers for a variety of durations and scenarios, including ones that heavily favor non-EE Treasury bonds. All results have favored EE Bonds.
I don't quite grasp the stridency here.

The future is, by its very nature, uncertain. Any numerical approach to forecasting FUTURE bond returns unavoidably amounts to a GUESS about the future path of yields.

Rather than approach this argument with absolute statements, broadly general and probabilistic answers should be sufficient for most investors.

Given the yield curve and term structure as it exists today, is it LIKELY that a Treasury bond fund or even a total bond market fund will return >3.5% over the next 20 years? No. Definitely "not likely".

Given the yield curve and term structure as it exists today, is it POSSIBLE that a Treasury bond fund or even a total bond market fund will return >3.5% over the next 20 years? Yes. Definitely "possible".
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

vineviz wrote: Thu Apr 09, 2020 3:22 pmRather than approach this argument with absolute statements, broadly general and probabilistic answers should be sufficient for most investors.

Given the yield curve and term structure as it exists today, is it LIKELY that a Treasury bond fund or even a total bond market fund will return >3.5% over the next 20 years? No. Definitely "not likely".

Given the yield curve and term structure as it exists today, is it POSSIBLE that a Treasury bond fund or even a total bond market fund will return >3.5% over the next 20 years? Yes. Definitely "possible".
Surely, probabilistic and general answers should at least be grounded in possibilities - I hope we can agree on that. So far, I haven't seen anyone present even a possible scenario in which EE Bonds lose to the various things they're being compared to. Until such a scenario is presented (however improbable), I can't imagine on what basis people would be making probabilistic assessments. It seems like pure guesswork to me. The poster I was responding to suggested odds along the lines of 1/3 or 1/4, but I see no mathematical basis for that (IMHO optimistic) assessment.
vineviz wrote: Thu Apr 09, 2020 3:22 pmThe future is, by its very nature, uncertain. Any numerical approach to forecasting FUTURE bond returns unavoidably amounts to a GUESS about the future path of yields.
But we don't have to guess - we can simply run an array of yield path simulations like I have, including ones designed to favor competitors to EE Bonds, and see what comes out ahead. What I'm asking for and have yet to see is any model - not the likely one, just a possible one - in which EE Bonds lose. So far, I've dutifully run numbers on various suggested scenarios and come up with the same result in each case: EE Bonds win. There probably are some scenarios where they lose, but if we don't have them in hand, we can't even begin to assess their probabilities.

I confess this thread is confounding, but also reassuring - the more I model, the more I become convinced to hold EE Bonds.
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Re: Why not go EE bonds (instead of bond funds)?

Post by vineviz »

Noobvestor wrote: Thu Apr 09, 2020 4:44 pm
Surely, probabilistic and general answers should at least be grounded in possibilities - I hope we can agree on that. So far, I haven't seen anyone present even a possible scenario in which EE Bonds lose to the various things they're being compared to.
Yet just such scenarios have been presented.

Whether you choose to ignore them because they failed to confirm your prior opinion or because your attempts to understand them failed, plausible scenarios in which bond funds outperform EE bonds do exist.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

vineviz wrote: Thu Apr 09, 2020 5:04 pm
Noobvestor wrote: Thu Apr 09, 2020 4:44 pm
Surely, probabilistic and general answers should at least be grounded in possibilities - I hope we can agree on that. So far, I haven't seen anyone present even a possible scenario in which EE Bonds lose to the various things they're being compared to.
Yet just such scenarios have been presented.

Whether you choose to ignore them because they failed to confirm your prior opinion or because your attempts to understand them failed, plausible scenarios in which bond funds outperform EE bonds do exist.
Alright, so I scrolled up, reread your posts, and my math-based refutations. I (literally) have nothing else to add. Good luck and godspeed. :beer
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Re: Why not go EE bonds (instead of bond funds)?

Post by ChrisBenn »

Noobvestor wrote: Thu Apr 09, 2020 4:44 pm (...)
I confess this thread is confounding, but also reassuring - the more I model, the more I become convinced to hold EE Bonds.
From my POV most of your arguments and conclusions seems correct and reasonable for the constraints laid out - which is totally fine.

My hard stop though is the relative illiquidity/20 year horizon. For a 20 year horizon I would just hold stocks. If, instead, I cared about the interim values of my portfolio I would hold high duration treasuries with the stock not for the yield, but for the low/negative correlation (presumed) to stocks. If I had a shorter than 20 year horizon obv. EE bonds are out.

So to me it seems like they have good individual points, but they don't come together in a useful holistic manner.

The only use case that makes sense to me is Mel L's article linked earlier in the thread proposing them as a diy 20 year out annuity. I would personally speculate on a 60/40 or similar instead -- but if I was risk averse enough that I needed absolute security of a base level income augment - then that makes sense.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

ChrisBenn wrote: Thu Apr 09, 2020 7:01 pm So to me it seems like they have good individual points, but they don't come together in a useful holistic manner.
Here's my scenario (more details in my portfolio review post):
  • AA 60/40 (close enough for this example)
  • Looking to be able retire in 10 (around 55)
  • Planning on delaying SS and Pensions as late as possible (where they will fund estimated 75% of expenses)
  • So I need a portfolio that will deliver 10 - 25 years from now (give or take)
Of course, the bulk of my investments are in stocks! I don't think anyone is arguing that EE Bonds will typically out preform stocks in 20 years. I don't think that's the debate...

To me the question is the makeup of my non-stock holdings. Which I also expect to hold for 20+ years.

Candidly, the recent volatility of bonds (total bond, muni, etc) had me questioning the makeup for my non-stock holdings... I didn't have anything inflation linked... I didn't have anything as "safe" as I thought (I understand normal bonds are linked to interest rates, but the recent volatility had nothing to do with interest rates [at least as I understand it]).

At the current, I'm not aware of anything "as safe" as I and EE Bonds with a 20+ horizon, with the potential returns. As have been noted, I Bonds add inflation protection, EE Bonds add deflation protection. Maxing out both for myself and spouse is $40k/year. In 20+ years, that is guaranteed to return $60k (maybe more with interest).

I realize that if inflation takes off, that might be a loss in "real" money (some of it offset by holding I Bonds). But the bulk of my portfolio is in stocks, which is what I expect to better keep pace with inflation. That's primarily the job of my stocks!

Edited to add: Because I/EE bonds are tax deferred, this also means that I can purchase more stocks in my 401k - with more tax-deferred growth (with potential low tax conversions to Roth). Which helps with inflation as well...

I view my bonds as providing safety. That $60k+/year floor from I and EE Bonds reduces my risks of bridging between "early retirement" and SS/Pensions. Ideally, I'd get that floor all 15+ years helping to ensure I can delay my SS/pensions. (I'll settle for the 7-8 years I can get.)

I've yet to hear a better way of removing a sequence of returns risk. (Other than just having such a surplus of excess money, nothing else matters...) That $60k floor buys me peace of mind. As Mel's article put it, it's basically a "build your own annuity". And it's something I'm tempted to do even past my initial 15 year window.

Now for clarity, I'm not reducing my investments to buy I or EE Bonds. I'm still buying as much stock as I was going to buy before. Unlike OP, I have a higher bond AA (but I'm likely closer to a potential retirement). While I have a high savings rate, my portfolio is large enough that I'll likely need to buy/sell to maintain AA, so unlike OP I don't plan on holding 100% EE - instead my fixed income will be a mix of total bond, muni bond, and now I'll be adding I and EE bonds.

To me, this adds more diversification to my fixed investments than total bond above provided, and in my mind they definitely come together in a useful holistic manner.
Last edited by SnowBog on Thu Apr 09, 2020 8:22 pm, edited 1 time in total.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

ChrisBenn wrote: Thu Apr 09, 2020 7:01 pm
Noobvestor wrote: Thu Apr 09, 2020 4:44 pm (...)
I confess this thread is confounding, but also reassuring - the more I model, the more I become convinced to hold EE Bonds.
From my POV most of your arguments and conclusions seems correct and reasonable for the constraints laid out - which is totally fine.
Thanks!
ChrisBenn wrote: Thu Apr 09, 2020 7:01 pmMy hard stop though is the relative illiquidity/20 year horizon. For a 20 year horizon I would just hold stocks. If, instead, I cared about the interim values of my portfolio I would hold high duration treasuries with the stock not for the yield, but for the low/negative correlation (presumed) to stocks. If I had a shorter than 20 year horizon obv. EE bonds are out.
Relative is a pretty key term in here. Rates are low. If they go up, you can cash out the EE Bonds (which aren't yielding much less than Treasauries) and use that money to buy Treasuries without the NAV loss. It's that combination that is critical - no NAV risk, flexibility, high yields if kept. If I had to guess, I would guess the opposite will happen - the yields will continue their steady march downward - but EE Bonds work either way, unless we see unprecedented sub-zero yields on Treasuries, in which case I suppose all bets are off (again: something never seen in human history).
ChrisBenn wrote: Thu Apr 09, 2020 7:01 pm So to me it seems like they have good individual points, but they don't come together in a useful holistic manner.

The only use case that makes sense to me is Mel L's article linked earlier in the thread proposing them as a diy 20 year out annuity. I would personally speculate on a 60/40 or similar instead -- but if I was risk averse enough that I needed absolute security of a base level income augment - then that makes sense.
Since you mentioned 60/40, I'll use my own portfolio again as an example, which has something around 10% in EE Bonds. Those can't be rebalanced and that's fine - the other 30% can be. My point is that two aren't mutually exclusive - EE Bonds can fit into a 60/40 plan. I would note that if the last decade is any indicator, 20 years after I bought my EE Bonds they'll be the best-performing of my four bond types. To me they aren't about being risk-adverse, just managing different kinds of risks. I didn't expect them to do as well as they have, but here we are.

So, on the one hand, if we're doing a bond-to-bond comparison between safe, nominal bonds, they look pretty good. Once we view them as part of a portfolio, the trick is to work around them - for instance by holding shorter-duration bond funds to balance out duration and for rebalancing. To put it another way: if I had the option to have 100% of my bonds in EE Bonds, I wouldn't take it. As appealing as they are as part of a bond allocation, I value the ability to rebalance and want a more intermediate duration overall. Their fitness depends on the whole portfolio.

That said, if they're not for you, they're not for you - they're just an option to consider if one plans on holding nominals long-term. :beer
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Re: Why not go EE bonds (instead of bond funds)?

Post by vineviz »

Noobvestor wrote: Thu Apr 09, 2020 5:19 pm
vineviz wrote: Thu Apr 09, 2020 5:04 pm
Noobvestor wrote: Thu Apr 09, 2020 4:44 pm
Surely, probabilistic and general answers should at least be grounded in possibilities - I hope we can agree on that. So far, I haven't seen anyone present even a possible scenario in which EE Bonds lose to the various things they're being compared to.
Yet just such scenarios have been presented.

Whether you choose to ignore them because they failed to confirm your prior opinion or because your attempts to understand them failed, plausible scenarios in which bond funds outperform EE bonds do exist.
Alright, so I scrolled up, reread your posts, and my math-based refutations. I (literally) have nothing else to add. Good luck and godspeed. :beer
"Math-based refutations" only work if the math is correct. Check it again.

For a bond fund holding Treasuries of 10+ years to maturity, assume the following path of yields (as of 4/8 for the years presented) on the 10-year note with typical yield curve slopes:

Code: Select all

2020	0.8%
2021	0.8%
2022	0.8%
2023	0.8%
2024	0.8%
2025	0.8%
2026	2.4%
2027	2.4%
2028	2.4%
2029	2.4%
2030	2.4%
2031	2.4%
2032	2.4%
2033	2.4%
2034	2.4%
2035	2.4%
2036	2.4%
2037	2.4%
2038	2.4%
2039	2.4%
2040	0.8%
Start with $10,000 on 4/8/2020 and end with $20,532.86 as of 4/8/2040. Again, this simply illustrates a PLAUSIBLE path in with a long-term Treasury bond fund can outperform the EE bonds purchased today. I don't think this path is LIKELY, but it's simply incorrect to say that it's not POSSIBLE.

Image
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Re: Why not go EE bonds (instead of bond funds)?

Post by patrick »

Noobvestor wrote: Thu Apr 09, 2020 4:44 pmSurely, probabilistic and general answers should at least be grounded in possibilities - I hope we can agree on that. So far, I haven't seen anyone present even a possible scenario in which EE Bonds lose to the various things they're being compared to.
Here is a simple scenario where EE bonds lose to 3-month treasury bills:

1. You purchase EE bonds
2. Interest rates rise to 8% (at all maturities) the next day
3. Interest rates stay at 8% (at all maturities) for the next 20 years

In this scenario, you would shift your money out of EE bonds into 8% treasuries. But you can't sell them for a year. In the meantime, the treasury bill investor would have gotten 6% returns while the EE bond gets only 0.1%.

Here is a slightly more complex scenario where EE bonds lose to long-term treasuries (no roll yield needed):

1. You purchase EE bonds
2. Interest rates rise to 3.52% (at all maturities) the next day
3. Interest rates stay at 3.52% (at all maturities) for almost 20 years
4. Interest rates fall back to their current level two days before the you reach the 20 year point
5. Interest rates fall to 0.01% (at all maturities) the final day before you reach the 20 year point

In this scenario, you would stay with EE bonds since their 3.53% yield is still slightly better. Total interest for the treasury investor would be only a tiny bit less than you get with EE bonds. If you had 20 year bonds they would lose more than 1% in yield in the final step, giving a capital gain much larger than the missing interest.

EE bonds still might win in this scenario due to their tax advantages. If you replace 3.52% with whatever number would make treasuries just a tiny bit worse than EE bonds after accounting for your tax situation, you'd have a scenario in which you still shouldn't switch based on the interest rate, but the capital gain at the very end still puts treasury bonds ahead.
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Re: Why not go EE bonds (instead of bond funds)?

Post by SnowBog »

So sure - there can be a scenario where a specific bond purchase with a one year lock up isn't the absolute best possible scenario...

But you don't buy EE bonds once in your life (at least I can't see where that would make sense).

I think the point is that if you do it over time, it has lots of benefits.

SInce EE/I bonds don't have a NAV, you can redeploy 100% (ok 19 / 20 = 95%) of your capital plus accrued interest, if something better comes along.

Whereas if you were holding another type of bond fund, it's NAV would have gone down if interest rates jumped that much, leaving you less to invest (likely far less than the 95% above) in your "something better" scenario.

I view this the same as buying into the total stock market. I don't regret my large purchase of VTI in February before it lost a bunch of value... Sure - had I only known that prices were going to drop in a few weeks - I could have done much better... But I've been wrong way more times in my life trying to "time" things, so I'll just pick Investments that make sense "over time" and keep buying them when I can and let them do their jobs...
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

patrick wrote: Thu Apr 09, 2020 9:27 pm
Noobvestor wrote: Thu Apr 09, 2020 4:44 pmSurely, probabilistic and general answers should at least be grounded in possibilities - I hope we can agree on that. So far, I haven't seen anyone present even a possible scenario in which EE Bonds lose to the various things they're being compared to.
Here is a simple scenario where EE bonds lose to 3-month treasury bills:

1. You purchase EE bonds
2. Interest rates rise to 8% (at all maturities) the next day
3. Interest rates stay at 8% (at all maturities) for the next 20 years

In this scenario, you would shift your money out of EE bonds into 8% treasuries. But you can't sell them for a year. In the meantime, the treasury bill investor would have gotten 6% returns while the EE bond gets only 0.1%.

Here is a slightly more complex scenario where EE bonds lose to long-term treasuries (no roll yield needed):

1. You purchase EE bonds
2. Interest rates rise to 3.52% (at all maturities) the next day
3. Interest rates stay at 3.52% (at all maturities) for almost 20 years
4. Interest rates fall back to their current level two days before the you reach the 20 year point
5. Interest rates fall to 0.01% (at all maturities) the final day before you reach the 20 year point

In this scenario, you would stay with EE bonds since their 3.53% yield is still slightly better. Total interest for the treasury investor would be only a tiny bit less than you get with EE bonds. If you had 20 year bonds they would lose more than 1% in yield in the final step, giving a capital gain much larger than the missing interest.

EE bonds still might win in this scenario due to their tax advantages. If you replace 3.52% with whatever number would make treasuries just a tiny bit worse than EE bonds after accounting for your tax situation, you'd have a scenario in which you still shouldn't switch based on the interest rate, but the capital gain at the very end still puts treasury bonds ahead.
Great. Finally some math in all of this to evaluate. Thanks. These illustrate the point pretty well I think, regarding the usefulness of the early-sell option. Both scenarios are so highly artificial and unprecedented neither seems really plausible, but setting that aside: they ultimately show how little the difference would be. So: highly unlikely, much riskier, and with either scenario Treasuries only beat EE Bonds by a few percent. I would also point out that this would only impact EE buyers for one year - subsequent years, clearly, they would opt for the better-yielding Treasuries. So if we figure something like an 8% loss on a max buy, that amounts to around $800 total. I wouldn't lose sleep over that.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

vineviz wrote: Thu Apr 09, 2020 9:03 pm"Math-based refutations" only work if the math is correct. Check it again.
I ran a variety of scenarios. I will confess to a bit of oversimplification and rounding, but I think the math holds up well enough (and when Treasuries fell short, I made generous assumptions about NAV values, etc... and they still lost). You made a good point that I had understated the return of Treasuries in one case, but it was a minimal difference - EE Bonds still won by a landslide in that scenario. But I digress. More math! Yes!
vineviz wrote: Thu Apr 09, 2020 9:03 pm For a bond fund holding Treasuries of 10+ years to maturity, assume the following path of yields (as of 4/8 for the years presented) on the 10-year note with typical yield curve slopes:

Code: Select all

2020	0.8%
2021	0.8%
2022	0.8%
2023	0.8%
2024	0.8%
2025	0.8%
2026	2.4%
2027	2.4%
2028	2.4%
2029	2.4%
2030	2.4%
2031	2.4%
2032	2.4%
2033	2.4%
2034	2.4%
2035	2.4%
2036	2.4%
2037	2.4%
2038	2.4%
2039	2.4%
2040	0.8%
Start with $10,000 on 4/8/2020 and end with $20,532.86 as of 4/8/2040. Again, this simply illustrates a PLAUSIBLE path in with a long-term Treasury bond fund can outperform the EE bonds purchased today. I don't think this path is LIKELY, but it's simply incorrect to say that it's not POSSIBLE.

Image
Thanks for the example. Again, I think it's worth noting two things: (1) this sequence is highly unlikely and very artificial, the last step in particular. So I think its safe to say that the odds of something like this are less than the 1/4 to 1/3 another poster suggested. Probably worth defining plausible too for this discussion: "(of an argument or statement) seeming reasonable or probable." This scenario seems implausible to me.

To be more precise: in this case you need two things to happen in sequence: (1) slowly rising rates - unlikely, but not unreasonable and certainly not unprecedented, good start, but then (2) the rates to suddenly drop at the very end so that (per your chart) you catch up. Meanwhile, you get to spend 19 long years wondering if you should have just locked in the higher EE Bond rate. That seems stressful to me.

Anyway, the whole point of getting to the possible is to see what seems plausible or not - I ran various scenarios, some quite plausible, and mostly designed to optimize the chances of EEs losing, not winning - the more you try to find edge cases where EEs fail, you get these really specific, outside-odds contenders that look highly artificial and still barely win. This example shows that if you have something reasonable (e.g. slowly rising rates) you still need lighting to strike to save it in the end. It's a very unique and fragile model where everything has to work just right. I get that you could probably do more of a middle-year yield increase and boost it, but it's still a one-shot deal of hoping for the best possible timing.

So the margin of error here is really thin. Getting slowly rising yields, no act-of-god, last-minute drop? It loses by a landslide. As I see it, you've demonstrated that even under pretty optimal and unrealistic conditions, one might hope to slightly beat out EE Bonds. Of course, if one is buying EE Bonds year after year, it all falls apart, too, because the now-low-yielding Treasuries will fall further and further behind. So for someone buying EE Bonds annually, they'll lose slightly in year 20, win a bit more in 21, even more in 22, and so on. I also just realized the same works in reverse - if someone was already buying before year 1 in this scenario, they'd beat out Treasuries every year but one, on both sides! But I digress.
Last edited by Noobvestor on Fri Apr 10, 2020 3:41 am, edited 1 time in total.
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

SnowBog wrote: Thu Apr 09, 2020 8:17 pm
ChrisBenn wrote: Thu Apr 09, 2020 7:01 pm So to me it seems like they have good individual points, but they don't come together in a useful holistic manner.
Here's my scenario (more details in my portfolio review post):
  • AA 60/40 (close enough for this example)
  • Looking to be able retire in 10 (around 55)
  • Planning on delaying SS and Pensions as late as possible (where they will fund estimated 75% of expenses)
  • So I need a portfolio that will deliver 10 - 25 years from now (give or take)

Of course, the bulk of my investments are in stocks! I don't think anyone is arguing that EE Bonds will typically out preform stocks in 20 years. I don't think that's the debate...

To me the question is the makeup of my non-stock holdings. Which I also expect to hold for 20+ years.
I think you're a perfect contender for EE Bonds, personally. You start a ladder now, it kicks in at age 65, and you balance it out with I Bonds. If there's a risk (it doesn't sound like there is) of EE Bonds being more than 10-15% of your portfolio, you could consider capping them at some point for liquidity reasons, but in all likelihood the annual cap will just take that off the table for you based on what you'd said about your income.

When I started buying, I was expecting higher inflation and thus I Bonds to beat EE Bonds. Thankfully, I know better than to go with my gut on these things and diversified. My I Bonds have done their job, keeping up with inflation, but inflation has been low - oh well. Maybe it'll reverse at some point and I Bonds will do well for a while. I figure I've got the bases covered either way.
SnowBog wrote: Thu Apr 09, 2020 8:17 pmWhile I have a high savings rate, my portfolio is large enough that I'll likely need to buy/sell to maintain AA, so unlike OP I don't plan on holding 100% EE - instead my fixed income will be a mix of total bond, muni bond, and now I'll be adding I and EE bonds.
Sounds good to me. And if you want more inflation protection, there's always TIPS or short Treasuries, which do petty well in those environments. Stocks do fight inflation, on some level but tend to lag it a bit more and can't be counted on to do it in realtime as well (at least hitorically). Also/alternatively, my intermediate Treasuries have proved helpful for rebalancing during equity downturns accompanied by flights to safety.
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Re: Why not go EE bonds (instead of bond funds)?

Post by alluringreality »

Noobvestor wrote: Fri Apr 10, 2020 3:17 amMy I Bonds have done their job, keeping up with inflation, but inflation has been low - oh well. Maybe it'll reverse at some point and I Bonds will do well for a while. I figure I've got the bases covered either way.
This is basically my direction of thought. Setting up a bond ladder is the main appeal I see for EE bonds, in case rates remain low long-term. Monetary policy from the Fed is targeting 2% PCE inflation, so if they approximately hit their target over the next two decades then EE bonds slightly outperform I bonds or TIPS in real terms for me, assuming something around historical taxes. If there's higher inflation, then I also have I bonds for approximately a 0% real return until I can sell them for higher rates. Playing both sides of inflation does not have the same potential upside as protecting against only one side of rate changes, but it also does not have identical downsides either if rates go the other direction. If I was convinced that rates can only go down, then something like EDV is probably the way to go, but looking at price volatility in the last year, I question how many people are really cross comparing EDV and savings bonds. I tend to think of total bond as being closer to playing both sides of rate changes than only buying EE bonds, mainly based on shorter maturity and AGG listing positive convexity.
Targets: 15% I Bonds, 15% EE Bonds, 45% US Stock (Mid & Small Tilt), 25% Ex-US Stock (Small Tilt)
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Re: Why not go EE bonds (instead of bond funds)?

Post by WolfgangPauli »

neurosphere wrote: Sun Apr 05, 2020 3:07 pm
WolfgangPauli wrote: Sun Apr 05, 2020 5:47 am My only issue is my advisor wants everything in a revocable trust. This means we are stuck with only buying $10K per year (the limit on the trust account is as if it is one person). Any thoughts on this? If I buy them outside the trust and register "with" do I protect us so if one dies the other gets it or does that complicate?
What's so bad about having some assets outside the trust? As you state, you can title the bonds "with" such that they immediately go to that other person (but of course that other person can cash at any time). You can also be a single owner and set a beneficiary with a "payable on death" registration. It seems one could work out a viable estate plan with these option. It unlikely that the amount of your savings bond holdings would become so large that it messes up an estate plan due to a little less flexibility, or if so, only purchase as much savings bonds as allows for whatever plan you want to be executed successfully. I wonder if one could name a trust as the beneficiary. I've never looked into that.
If I max out this year it will total $400K between I and EE..
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Re: Why not go EE bonds (instead of bond funds)?

Post by Noobvestor »

WolfgangPauli wrote: Fri Apr 10, 2020 7:55 pm
neurosphere wrote: Sun Apr 05, 2020 3:07 pm
WolfgangPauli wrote: Sun Apr 05, 2020 5:47 am My only issue is my advisor wants everything in a revocable trust. This means we are stuck with only buying $10K per year (the limit on the trust account is as if it is one person). Any thoughts on this? If I buy them outside the trust and register "with" do I protect us so if one dies the other gets it or does that complicate?
What's so bad about having some assets outside the trust? As you state, you can title the bonds "with" such that they immediately go to that other person (but of course that other person can cash at any time). You can also be a single owner and set a beneficiary with a "payable on death" registration. It seems one could work out a viable estate plan with these option. It unlikely that the amount of your savings bond holdings would become so large that it messes up an estate plan due to a little less flexibility, or if so, only purchase as much savings bonds as allows for whatever plan you want to be executed successfully. I wonder if one could name a trust as the beneficiary. I've never looked into that.
If I max out this year it will total $400K between I and EE..
Eventually I may get there, but I've only been doing it for a decade. In the early years, it felt like more of a tossup - Treasury and TIPS yields were higher, at least sometimes, so locking in wasn't always clear-cut. But I kept doing it in part for taxable reasons (tax deferral, state tax exemption, flexibility about cash-in dates, etc...) and each year looks better than the last, so now it's a lot easier each year to go with it. I'm still (always) ready to cash in recent-year ones to rebalance or go to higher yields, but with yields heading steadily down, the choice is pretty clear cut.
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Re: Why not go EE bonds (instead of bond funds)?

Post by raven15 »

Noobvestor wrote: Thu Apr 09, 2020 3:09 pm You say exotic, I say amazing.
I am not at all saying they not mutually exclusive.
raven15 wrote: Thu Apr 09, 2020 2:50 pm I guess there is a 1 in 4 chance of VGLT doing better than EEs over 20 years, and a 1/3 chance of EDV doing better, where those are for scenarios where long term rates in 20 years are at or below their current rates. My best guess is that long term yields will now trend upward for a few years. If they then fall again to their current rates or lower then that sequence will benefit them, but impossible to predict by how much. Selling EE bonds to buy something else will not make sense for most cases which would end up being favorable to long term bonds. If long term bonds do end up being best then their yields will probably not cross above 3% or 5%, which may not cross the EE decision threshold.
It really feels like we're talking in circles. I am not interested in guesses. I'm interested in numbers. I have run numbers for a variety of durations and scenarios, including ones that heavily favor non-EE Treasury bonds. All results have favored EE Bonds. Among my various simulations is exactly what you describe: yields going up for a while, then back down. Even this optimal-for-Treasuries scenario still loses. Instead of fractional guessing, can you math out exactly how superior returns might be achieved by either of the funds you suggest have a chance of outperformance? Thanks.
I took some time in the last few days to either develop my own bond fund return spreadsheet or find one by someone else, but failed resoundingly on both accounts in the time I wanted to spend on it, so I really can't say much more (unless someone shares one...I am still very interested in this!). I note though that vineviz's calcaulation was for a 10+ year bond fund would have a shorter duration. A 20+ plus year fund which is most nearly 20 years in duration would have a larger effect. Especially if we consider yield climbing above 3% or ending below 0.5% it seems to quite plausible to end with 3.5%+ returns, although a lower return is more likely.
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Re: Why not go EE bonds (instead of bond funds)?

Post by LilyFleur »

Big Dog wrote: Sun Apr 05, 2020 11:56 am
Mel Lindauer wrote: Sun Apr 05, 2020 12:21 am
beyou wrote: Sat Apr 04, 2020 12:12 pm Bought these over the years (I bonds too when their fixed rates were higher). Given ER is essentially a 20 yr bond, plan to buy 20 years before you need to redeem. Personally would not buy once in your 50s or older, but in 30s/40s as some portion of your bond allocation, why not ?

Any shorter time horizon and this is a poor substitute for a gov short term bond fund.
I think you have this backwards.

Purchasing when 50 and older and holding for 20 years provides a nice annuity starting at age 70. See my Forbes column on this here:
https://www.forbes.com/sites/theboglehe ... 7889087ba3

And purchasing in one's 30s and 40s most likely puts the investor in his/her highest earning years, thus one's highest tax bracket when the bond's mature in their 50s and 60s.
.
Really like Mel's article. But living in a HCOL area with kids in college, didn't have $20k extra to 'invest' in savings bonds at age 50. So now at age 66, not interested in investing for a payout starting at age 86. Plus, the Treasury Direct site is terrible. (Makes Vanguard's look state of the art.) For (heir) simplicity, we're cashing out inherited bonds as they become due over the next couple of years. Will not replace. So the answer to the OP is, 'no more bonds for us.'
I have EEs that are 20 to 30 years old. The beneficiary is my ex-husband but they belong to me. Yes, the Treasury Direct site is time-consuming, and I don't want to deal with the convoluted process to make my children the beneficiaries. So, I will be cashing them in this year to use for living expenses as my part-time job is currently off the table. I have a stack of low-denomination paper bonds so it's going to be a long visit to my credit union. It has been on my list, though, for simplifying/streamlining my estate for my children. As I am 60 with a high-risk health condition, it has been wonderful to not have to physically visit a bank or credit union recently, as everything else is available online. Even checks that come in the mail can be deposited to my credit union through an app on my phone.
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