Interesting post on the Bogleheads with calculations comparing the returns of 0% I bonds to nominal treasuries. In all cases, the iBonds had a higher return.
The issue of 0% Fixed Rate I Bonds (last offered from May of 2020 to October of 2022) comes up a great deal.
Let’s take a look at the numbers and examine why comments that reject 0% I Bonds as if they are worthless just don’t match up with the facts.
Here are the total nominal returns that purchasers of 0.00% Fixed Rate I Bonds from three different dates compared to the same amount invested in rolling Short Term and Intermediate Treasuries during the same timeframe.
They’re “worthless” because you can sell them and immediately purchase an I bond with the same inflation rate plus a .9% fixed rate. And that difference is only going to go up for November, when the new fixed rate is announced later this week - the fixed rate could be anywhere from 1.2% to close to 2%. It isnt 0% I bonds and short term treasuries, it’s 0% I bond vs .9%+ I bonds vs Treasuries. I sold a bunch of 0% I bonds this month, fully expecting I might repurchase some in November.
And did they really try to sell this claim by including the recent span of record low interest rates while including the last 2 years of decades-high inflation rates? Try taking those same numbers and stop at October 2021 instead of October 2023 and see what it nets you…
It is not either/or. If you do not pull shenanigans with trusts, etc. you are limited to buying $10,000 per year. Most people on this board can continue to hold the 0% Ibond, and also buy the higher interest rate new bond. The question is whether to sell the 0% bond.
The post does calculations for purchases in 2008, 2011, and 2017. Yes, all of these are in the era of helicopter Ben Bernanke’s quantitative easing. That has changed recently, but who knows what policies will be held in the future by the Fed? The highly inverted yield curve indicates that the market expects some return to Bernanke’s policy.
Ibonds have tax advantages over tips and nominals since they are only taxed when you sell them. If you were going to sell, you can pick a year when you have lower income.
That adds the variable of wanting to increase your allocation. If you have the funds allocated to bonds that you want allocated to bonds, then you can sell and repurchase. And as you noted, the $10k limit is far from being a hard limit.
It also means spiking your income in a single year when redeemed, which can have other adverse effects. And right now, TIPS have you netting more after taxes than 0% I bonds gross before tax.
My only point is that there are way too many variables involved to draw “0% I bonds are better” conclusions based solely on comparing recent I bonds returns with rolling short term treasuries. It’s an exercise designed to “prove” the desired conclusion.
With the current world situation, I think the SHTF soon and I am looking to increase my inflation indexed allocation. I would like to hold treasury bonds in a taxable account so I get the exclusion from state income tax.
Given the flaky behavior of the treasury direct website, I want to KISS so I limit myself to $10 K per year.
With these constraints, I stand by the point of the article that the zeros are not trash.
If that’s the point, that’s fair. Holding shouldnt be dismissed as an option. But “Hint, the 0% I Bonds always win. !” is saying more than that.
Also dont forget that there are tons of people currently with 0% I bonds who are only in them because of the past two years of high inflation; the expected return was calculated based on a 15-month investment period going in. That drives a lot of the negative sentiment with the 0% plus low(er) inflation.
If you expect inflation to start running really hot again soon, then of course holding through a period of underperforming makes sense. But a followup post to that breakdown says that a period of deflation could happen, so that is why he’s holding 0% I bonds. Which makes no sense to me.
An example: you have a fixed rate of 1% and the inflation rate is 2%. These are calculated together to give you the current rate of 3% on your bond for the next six months. (The 3% rate is a rough example as the calculation process may give you slightly more.) The interest accumulates on the I Bond since the bonds do not payout until you cash them in.
Then deflation hits. In this example, inflation drops to -1% (deflation). Now the fixed rate is cut by the deflation rate. (1% fixed – 1% deflation = zero (roughly based on calculations). Your bond is no longer earning interest. The good news is that the interest rate will never drop below zero. You may have a fixed rate of 1% and deflation is -3% but your bond will hold its accumulated value. It will not lose principal. This applies to whenever you choose to sell as long as it is past the five year hold period. Prior to the five years, you will pay a penalty to withdraw. That applies whether in an inflation or deflation cycle.
My only takeaway from that is the implication that the fixed rate isnt guaranteed and is subject to be reduced by deflation. I had been under the impression that the inflation portion couldnt go below 0%.
My takeaway is that the iBond fixed rate is a number that is added to the inflation rate to give the effective interest rate. If the inflation is negative, the effective rate never drops below zero so the principal value with previous inflation is not reduced. If you take that to mean that a fixed rate is not guaranteed then so be it. I don’t agree.
BTW this behavior is different from Tips with deflation. My understanding is that with Tips deflation can reduce the accumulated gain from inflation, but the principal amount will not drop below the face value. I prefer the way Ibonds respond.
This says your gain that period would be 0%. I had thought the gain would be 1% - the fixed rate plus 0% for inflation - but instead -1% inflation would also negate the fixed rate.
I havent said anything was better or worse than anything else. I just noted a fundamental misunderstanding.
And to begin with, I only objected to the tunnel vision of the posted exercise, that ignored lots of alternatives and the fact that right now people have 0% I bonds for numerous reasons that will affect how they look at them. You keep defending them when there hasnt been any sort of attack against them. Unless you consider acknowledging there are individual circumstances that make such bonds not the best option to be an attack.
You are misrepresenting the BH post that I linked. Nowhere does the author say that 0% iBonds are always better than nominal or other bonds. He only said that for the cases that he studied the iBonds came out better.
Exqueeze me? Shenanigans implies something, at best devious, and at worst illegal. I have done nothing illegal by following the written rules of the Fed, and if following the rules implies deviousness … well, write rules that don’t require devious actions. It’s not hard, but requires thought. Oh wait … it’s the Fed, so never mind.
Poorly chosen word. Better would be complexity. TreasuryDirect makes it hard enough to manage an account in my name but a trust account takes it to another level.
I have not looked into the details, but I manage a trust account for another purpose and I have to file a 1041 and a 541, for California, whenever there is income. If I transfer the income to a beneficiary, I have to file a K-1.
If the fixed rate is higher than the current 0.9% the total interest rate could be above 5%.
But investors holding I Bonds with a 0.0% fixed rate will be getting an annualized return of 3.94% for six months.
I’m still holding on to my zeros, Probably a longshot given that Biden’s handlers are all Obama followers, but if Israel can get US approval, now would be a good time for them to wipe out Iran’s nuclear program. Then the SHTF in the world financial markets.
The new fixed rate was set by the treasury at 1.3%. That is the highest in 20 years. Although not directly comparable, it can be be compared to the five-year Tips, which has a reall rate about 2 5%
Here’s what David Enna of Tipswatch writes
Conclusion. For longer-term investors, I’d say this new I Bond with a 1.3% fixed rate is a solid investment, considering the benefits of tax-deferral, deflation protection and exemption from state income taxes. We’ve had a long wait for a super-safe return this attractive.
I think I will sell my 0% fixed rate iBonds after the new year when I can defer the tax bite for another year.
I was considering to sell all my old I-bonds also and reinvest but now not that sure.
Majority I have are with fixed 0%, some have 0.2%, but our federal marginal tax rate will be 24%. Assuming a) 0% fixed for all and b) that we will pay taxes using other funds (reinvest the same amount as we currently have before taxes) We will need to make up extra tax by having extra 1.3% on the same base amount. Back of the envelope calculation gives about 5 years to break even. And that does not include lost gain on the tax amount that could be sitting for example in saving account for all that time.
I have argued in this thread about holding on to 0% ibonds. I may yet hold on to mine but I don’t think I’ll be buying new ones. The 1.3% fixed rate is better but still not competitive with alternatives like tips or even short term tbills.
I’m planning to cash mine out in January 2024 since I bought them in April 2022 (+ final gift becoming transferrable then). Not sure if I’ll go for the 1.3% fixed rate though. It’s somewhat attractive for keeping them long term. But I’m kinda wondering if that rate will not push even further as many people keep redeeming I-bonds from the Nov 21 - Apr 22 period.
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