Saturday, October 9, 2010

More EE Savings Bonds Thoughts

EE Savings Bonds currently pay 1.4% per year.

1. It is a rate higher than my online savings account.
2. If interest rates rise, I can cash them out without experiencing pain.
3. If held 20 years, they are guaranteed to double in price. That's equivalent to a 3.53% annual rate (2^(1/20) = 1.0353).

If we slide into Japan's ongoing deflationary mess, then that 3.53% rate is going to look pretty good.

If we slide into the 1970s again, then they can be cashed out early (must be held one year, 3 month interest penalty if cashed out before 5 years).

Here's the downside risk. Let's say inflation stays tame for 10 years and then we slide into 1970s style inflation. You only get 3.53% if held the full 20 years. You might wish to bail at the 10 year point though. Tough call.

Just something to think about. The 20 year treasury rate is currently 3.39%. EE Savings Bonds are clearly superior to that no matter what happens, since they offer a higher rate if held 20 years and they offer other perks.

EE/E Bonds Rates & Terms

EE/E Bonds issued May 2005 and after earn a fixed rate of interest. The fixed rate is determined by adjusting the market yields of the 10-year Treasury Note by the value of components unique to savings bonds, including early redemption and tax deferral options.

The 1.4% fixed rate on EE Savings bonds will most likely drop substantially on November 1st. The 10-Year Treasury Note was 3.69% on April 30, 2010. It now sits at just 2.53%. That's a drop of 1.16%.

It is also quite possible that the time frame needed to hold them in order to double in price will also increase. As seen in the link above, it would not be the first time.

I consider this to be a one-time opportunity based solely on relative value. I will be a buyer this month before rates reset on November 1st. I do not expect to make an EE Savings Bond ladder part of my nest egg.

2 comments:

EconomicDisconnect said...

You do know this stuff!

Stagflationary Mark said...

GYSC,

I suspect that my purchase won't be held the full 20 years. I expect to bail early but who really knows?

20 Year Treasury: 3.39%
20 Year TIPS: 1.27%

If the bond market is right, then inflation will average roughly 2.12% per year over the next 20 years.

It could be right. I wouldn't claim to know more than the treasury bond market as a whole. In hindsight, it has been fairly rational over the last decade considering what has happened.

October 8, 2010
The Market Ticker: The Mythical World Of The Mainstream Media

Get this one through your head folks: The bond market believes The Fed will FAIL.

So why the huge stock market rally this month? Because in the general sense the stock market is comprised of the short-bus riders, and you listen to CNBS and others who are trying to "jawbone" people into believing The Fed is omnipotent.


Short-bus riders? Karl Denninger sure has a way of making me both laugh and feel guilty for laughing, lol.