Cons of i bonds?

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justsomeguy2018
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Cons of i bonds?

Post by justsomeguy2018 »

I have been looking recently into i bonds and they seem like a decent deal at the moment. Higher interest than savings accounts plus inflation protection.

What am I missing?

Is paper or electronic better to own?
fwellimort
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Re: Cons of i bonds?

Post by fwellimort »

Paper is better. But you won't get paper outside through tax returns.
With paper bonds, even if your paper bonds get stolen or lost, the money is tied to your identity: the risk falls on the US government, not you.
With electronic, if your TreasuryDirect account gets hacked, it's over. You can lose the money. The risk falls on you, not the US government.

The biggest cons of i bonds are:
1. $10K limit a year ($5k more through tax returns)
2. Is CPI an accurate measure of inflation. CPI formulas have constantly adjusted over time to report lower and lower numbers. Some past historical CPI formulas would rate our inflation nowadays at 6~9%. What's to prevent the government from adjusting CPI formulas again to report even 'lower' numbers than today.
3. Lack of ability to re-balance
4. Having to deal with TreasuryDirect site. The site is very 'safe' in the sense your account gets locked for even going back one page in your browser. It's a paranoid site (which is good in terms of safety/security).

But #2 I think isn't the 'con'. The major con is the low limit.
I think in terms of bonds today, EE/I bonds are some of the best deals in risk adjusted sense (in that there's no risk).
And many here now think so too.

Surprising even after how much interest rates crashed, EE bonds are still returning 3.5% if held for 20 years.
Because I/EE bonds don't have to compete with the market, its returns can be far higher than the market returns in terms of risk adjusted sense.

TL;DR: It's a good buy. There's not much con if any at all outside the $10k limit. You won't have to worry about TreasuryDirect account being hacked. Logging in the account is such a huge pain that you won't be opening the account in your local library computer anyways.
Dominic
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Re: Cons of i bonds?

Post by Dominic »

The only cons I can think of:

- They have to be held at Treasury Direct (or in paper, if you buy with your refund). Treasury Direct is a little awkward.
- Can't rebalance into them because of purchase limits.
- Difficult to rebalance out of them because you realize the interest on your taxes.
- The quality of the inflation protection depends entirely on CPI, which might be redefined to reduce the government's liability.

And that's about it. Not a bad deal for a tax-deferred, inflation-protected, Treasury-backed instrument which can be redeemed with very little penalty after 1 year, and no penalty after 5 years.

I think they're a very good emergency fund option, and excellent to use as part of a Bernstein-style liability matching portfolio. As part of a traditional bond portfolio, you'll have to find a way to accommodate the rebalancing issues I mentioned.
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JoMoney
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Re: Cons of i bonds?

Post by JoMoney »

I think they're a great option, with numerous benefits.
But the "cons" as far as I can tell are:
-The $10,000 annual limit, although there are methods to work around doing more, it makes it a bit more convoluted.
-There is a one year holding period to be able to withdraw money from them, and a 3 months interest penalty for withdrawing before 5 years
-It's a bit unclear to me if there are protections in the event of electronic fraud/theft if someone did manage to get into your Treasury Direct account. With most consumer banking and even brokerage accounts, there are policies limiting the liability of an individual consumer that would make them whole. I don't believe the same or even similar protections apply to directly held securities at treasury direct. ... I imagine this would be very hard to do, and even if they got into the account they could only transfer to a linked bank account (which would then provide some protection if that bank account was hacked)... so it may be a bit superfluous to concern about TD.. but there may be something there worth thinking about :confused
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Mel Lindauer
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Re: Cons of i bonds?

Post by Mel Lindauer »

Besides being tax-deferred and free from state and local taxation, Savings Bonds can also be used tax-free for qualifying educational expenses.

And here's a Forbes column I did some time ago on creating your own annuity using EE Bonds which double in 20 years.

https://www.forbes.com/sites/theboglehe ... e302d17ba3
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dcabler
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Re: Cons of i bonds?

Post by dcabler »

Cons?
The $10K limit per SS number + $5K through tax refund (though more if you set up a trust).
The hassle, if you so choose, of converting the $5K paper bonds from your tax refund to electronic form.
Once you do sell them, if not used for educational expenses, you still have to pay taxes on the interest earned. That's life.

After next year, I will have purchased all of the Ibonds I have intended to for the purposes I plan to use them. So from that point on, I get an extra hassle of doing calculations to determine whether to cash some in and purchase new ones, should interest rates rise. But that's why we have spreadsheets. :D

Cheers
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Re: Cons of i bonds?

Post by Call_Me_Op »

justsomeguy2018 wrote: Sat Apr 11, 2020 10:58 pm I have been looking recently into i bonds and they seem like a decent deal at the moment. Higher interest than savings accounts plus inflation protection.

What am I missing?
You are missing that for most of us, the $10k per year limit ain't gonna cut it. Also, you cannot get the money for a year and can't get it for 5 years without a penalty.
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Rainier
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Re: Cons of i bonds?

Post by Rainier »

Since every state is now a federal disaster area I believe the 5 year rule for selling is gone. Not sure how long that lasts, but it could be waived for a long time.
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Phineas J. Whoopee
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Re: Cons of i bonds?

Post by Phineas J. Whoopee »

Rainier wrote: Sun Apr 12, 2020 7:44 am Since every state is now a federal disaster area I believe the 5 year rule for selling is gone. Not sure how long that lasts, but it could be waived for a long time.
The selling restriction is only for one year. Yes, in a federally-declared disaster area the restriction does not apply.

Selling prior to five years costs the three most recent months of interest. If you look at the Treasury Direct website they list the redemption value less the penalty, prior to the savings bonds aging out.

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anon_investor
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Re: Cons of i bonds?

Post by anon_investor »

Call_Me_Op wrote: Sun Apr 12, 2020 7:38 am
justsomeguy2018 wrote: Sat Apr 11, 2020 10:58 pm I have been looking recently into i bonds and they seem like a decent deal at the moment. Higher interest than savings accounts plus inflation protection.

What am I missing?
You are missing that for most of us, the $10k per year limit ain't gonna cut it. Also, you cannot get the money for a year and can't get it for 5 years without a penalty.
I am using I Bonds as a layer of my emergency fund and count it as part of my fixed income allocation. However, because of the annual purchase limit and the liquidity limitation (although apparently those are waived right now), they are not good for rebalancing. So for most people, you still need to have a normal bond fund (e.g. VBTLX) in order to be able to properly rebalance when necessary.
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justsomeguy2018
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Re: Cons of i bonds?

Post by justsomeguy2018 »

anon_investor wrote: Sun Apr 12, 2020 1:45 pm
Call_Me_Op wrote: Sun Apr 12, 2020 7:38 am
justsomeguy2018 wrote: Sat Apr 11, 2020 10:58 pm I have been looking recently into i bonds and they seem like a decent deal at the moment. Higher interest than savings accounts plus inflation protection.

What am I missing?
You are missing that for most of us, the $10k per year limit ain't gonna cut it. Also, you cannot get the money for a year and can't get it for 5 years without a penalty.
I am using I Bonds as a layer of my emergency fund and count it as part of my fixed income allocation. However, because of the annual purchase limit and the liquidity limitation (although apparently those are waived right now), they are not good for rebalancing. So for most people, you still need to have a normal bond fund (e.g. VBTLX) in order to be able to properly rebalance when necessary.
How about i-bonds as part of the emergency fund?
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anon_investor
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Re: Cons of i bonds?

Post by anon_investor »

justsomeguy2018 wrote: Sun Apr 12, 2020 6:07 pm
anon_investor wrote: Sun Apr 12, 2020 1:45 pm
Call_Me_Op wrote: Sun Apr 12, 2020 7:38 am
justsomeguy2018 wrote: Sat Apr 11, 2020 10:58 pm I have been looking recently into i bonds and they seem like a decent deal at the moment. Higher interest than savings accounts plus inflation protection.

What am I missing?
You are missing that for most of us, the $10k per year limit ain't gonna cut it. Also, you cannot get the money for a year and can't get it for 5 years without a penalty.
I am using I Bonds as a layer of my emergency fund and count it as part of my fixed income allocation. However, because of the annual purchase limit and the liquidity limitation (although apparently those are waived right now), they are not good for rebalancing. So for most people, you still need to have a normal bond fund (e.g. VBTLX) in order to be able to properly rebalance when necessary.
How about i-bonds as part of the emergency fund?
I Bonds are part of my emergency fund, but I also have funds in no penalty CDs, high yield savings accounts and Vanguard money market funds. I would draw from I Bonds last. All of these options have a stable principal value if redeemded (unlike bond funds or regular bonds, like VBTLX or VWITX). I do count my emergency fund as part of my fixed income allocation.
protagonist
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Re: Cons of i bonds?

Post by protagonist »

If you set up a revocable trust (easy), you can buy $25K/year.

- $10K in your personal account
- $10K in your trust account
- $5K in tax rebate (just overpay your taxes before you file your return)

This is what I have been doing.
hudson
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Re: Cons of i bonds?

Post by hudson »

protagonist wrote: Sun Apr 12, 2020 6:29 pm If you set up a revocable trust (easy), you can buy $25K/year.
How do you do it?
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Re: Cons of i bonds?

Post by Jack FFR1846 »

dcabler wrote: Sun Apr 12, 2020 7:33 am Cons?

The hassle, if you so choose, of converting the $5K paper bonds from your tax refund to electronic form.
I had to laugh to think anyone would voluntarily convert from great paper bonds to electronic. (I currently hold $381k in paper bonds after my $5k fed refund in paper came last week)
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Mel Lindauer
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Re: Cons of i bonds?

Post by Mel Lindauer »

Jack FFR1846 wrote: Sun Apr 12, 2020 8:06 pm
dcabler wrote: Sun Apr 12, 2020 7:33 am Cons?

The hassle, if you so choose, of converting the $5K paper bonds from your tax refund to electronic form.
I had to laugh to think anyone would voluntarily convert from great paper bonds to electronic. (I currently hold $381k in paper bonds after my $5k fed refund in paper came last week)
Couldn't agree more.
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dcabler
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Re: Cons of i bonds?

Post by dcabler »

Mel Lindauer wrote: Mon Apr 13, 2020 12:52 am
Jack FFR1846 wrote: Sun Apr 12, 2020 8:06 pm
dcabler wrote: Sun Apr 12, 2020 7:33 am Cons?

The hassle, if you so choose, of converting the $5K paper bonds from your tax refund to electronic form.
I had to laugh to think anyone would voluntarily convert from great paper bonds to electronic. (I currently hold $381k in paper bonds after my $5k fed refund in paper came last week)
Couldn't agree more.
Couldn't disagree more. But to each his own.

Cheers.
protagonist
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Re: Cons of i bonds?

Post by protagonist »

hudson wrote: Sun Apr 12, 2020 7:56 pm
protagonist wrote: Sun Apr 12, 2020 6:29 pm If you set up a revocable trust (easy), you can buy $25K/year.
How do you do it?
Well, I think it is easy.

I set mine up online many years ago. I don't recall what software I used but when I just googled "revocable living trust", this is the first link that came up: https://www.lawdepot.com/contracts/living-trust/?loc=US

I cannot vouch for this website.
Perhaps somebody else could guide you through this better than I can.
hudson
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Re: Cons of i bonds?

Post by hudson »

Thanks Protagonist!
I probably should call the attorney who set up my will and related documents.
I'm too chicken to do it myself.
Thanks for explaining how to get 20K in iBonds per year!
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justsomeguy2018
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Re: Cons of i bonds?

Post by justsomeguy2018 »

After doing some more research I am surprised no one mentioned what I found to be a major flaw in these - there are potentially 6 month periods (or more) where there will be 0% interest earned.

The current fixed rate is 0.2% - if there is deflation (negative inflation) the interest tier will be negative and your interest will likely go to 0%. 0.2% isn't much of a cushion against deflation. The rate can't go negative but can be 0% and has been several times in the past decade.

I guess in theory bank rates could also go to 0% in a major deflationary environment, but IDK.

A CD ladder would seem like a better strategy to deal with inflation risk, no? In the sense that rates should rise if there is inflation and you can roll the CD into the higher rate.
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Re: Cons of i bonds?

Post by VikingThor »

It's actually an additional benefit not a flaw.

If there were actual deflation, zero percent interest with a guaranteed return of principal on demand may be a good rate, since prices are declining.

If it were not a good rate you could simply sell the ibond and invest in something else.

So you get inflation and deflation protection.
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justsomeguy2018
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Re: Cons of i bonds?

Post by justsomeguy2018 »

VikingThor wrote: Tue Apr 14, 2020 8:27 pm It's actually an additional benefit not a flaw.

If there were actual deflation, zero percent interest with a guaranteed return of principal on demand may be a good rate, since prices are declining.

If it were not a good rate you could simply sell the ibond and invest in something else.

So you get inflation and deflation protection.
What is good about 0% interest? Name 1 period in U.S. history where a bank savings, MM, etc charged less than 0% interest. I don't see how it is deflation protection, unless you think savings or MM will be chargimg negative rates at the same time.

I am also wondering if it is truly inflation protetction, since rates will likely rise anyway during inflationary periods.
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Re: Cons of i bonds?

Post by Mel Lindauer »

VikingThor wrote: Tue Apr 14, 2020 8:27 pm It's actually an additional benefit not a flaw.

If there were actual deflation, zero percent interest with a guaranteed return of principal on demand may be a good rate, since prices are declining.

If it were not a good rate you could simply sell the ibond and invest in something else.

So you get inflation and deflation protection.
This is true. And the greater the DEflation, the higher your REAL return on I Bonds, even when they're returning 0%.

Folks need to understand the REAL returns.
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Re: Cons of i bonds?

Post by whodidntante »

Steep, protracted deflation is when the disco ball drops for I bond holders! You'll be the only ones partying though.
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Re: Cons of i bonds?

Post by VikingThor »

justsomeguy2018 wrote: Tue Apr 14, 2020 8:46 pm
VikingThor wrote: Tue Apr 14, 2020 8:27 pm It's actually an additional benefit not a flaw.

If there were actual deflation, zero percent interest with a guaranteed return of principal on demand may be a good rate, since prices are declining.

If it were not a good rate you could simply sell the ibond and invest in something else.

So you get inflation and deflation protection.
What is good about 0% interest? Name 1 period in U.S. history where a bank savings, MM, etc charged less than 0% interest. I don't see how it is deflation protection, unless you think savings or MM will be chargimg negative rates at the same time.

I am also wondering if it is truly inflation protetction, since rates will likely rise anyway during inflationary periods.
There is only one short period in recent history with deflation, during financial crisis, when ibonds were at zero for 6 months. Deflation is not likely but it's great protection for the reasons I mentioned. If there were steep deflation banks would certainly charge a fee for savings/checking along with 0% interest. And as I mentioned and you glossed over, if the ibond were ever not a good investment at 0% interest you could easily sell it with no loss of principal. So how could deflation be a risk?

If rates rise during an inflationary period, people with existing CDs or bonds would lose money because they are locked into the lower interest rate, while the ibond adjusts upwards with inflation.

So it is great protection for inflation and deflation, that's the entire point of ibonds. However you are not really going to build wealth off them, just protect wealth against inflation or deflation.
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Re: Cons of i bonds?

Post by ChrisBenn »

whodidntante wrote: Tue Apr 14, 2020 9:00 pm Steep, protracted deflation is when the disco ball drops for I bond holders! You'll be the only ones partying though.
Wouldn't any nominal treasury of the same or longer duration be better than i-bonds during deflation?
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Re: Cons of i bonds?

Post by whodidntante »

ChrisBenn wrote: Tue Apr 14, 2020 11:05 pm
whodidntante wrote: Tue Apr 14, 2020 9:00 pm Steep, protracted deflation is when the disco ball drops for I bond holders! You'll be the only ones partying though.
Wouldn't any nominal treasury of the same or longer duration be better than i-bonds during deflation?
True. You'll need someone to party with. :happy
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Re: Cons of i bonds?

Post by billthecat »

protagonist wrote: Sun Apr 12, 2020 6:29 pm If you set up a revocable trust (easy), you can buy $25K/year.

- $10K in your personal account
- $10K in your trust account
- $5K in tax rebate (just overpay your taxes before you file your return)

This is what I have been doing.
How does the trust part work?
  • Create a revocable living trust
  • Open an entity account for the trust
    (https://www.treasurydirect.gov/indiv/he ... rnmore.htm)
  • Use my name and social security as grantor
  • Link it to the same bank account I use for my personal account (Not required but OK to do? Or does the trust need it’s own bank account?)
Are those the steps?
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justsomeguy2018
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Re: Cons of i bonds?

Post by justsomeguy2018 »

VikingThor wrote: Tue Apr 14, 2020 9:44 pm
justsomeguy2018 wrote: Tue Apr 14, 2020 8:46 pm
VikingThor wrote: Tue Apr 14, 2020 8:27 pm It's actually an additional benefit not a flaw.

If there were actual deflation, zero percent interest with a guaranteed return of principal on demand may be a good rate, since prices are declining.

If it were not a good rate you could simply sell the ibond and invest in something else.

So you get inflation and deflation protection.
What is good about 0% interest? Name 1 period in U.S. history where a bank savings, MM, etc charged less than 0% interest. I don't see how it is deflation protection, unless you think savings or MM will be chargimg negative rates at the same time.

I am also wondering if it is truly inflation protetction, since rates will likely rise anyway during inflationary periods.
There is only one short period in recent history with deflation, during financial crisis, when ibonds were at zero for 6 months. Deflation is not likely but it's great protection for the reasons I mentioned. If there were steep deflation banks would certainly charge a fee for savings/checking along with 0% interest. And as I mentioned and you glossed over, if the ibond were ever not a good investment at 0% interest you could easily sell it with no loss of principal. So how could deflation be a risk?

If rates rise during an inflationary period, people with existing CDs or bonds would lose money because they are locked into the lower interest rate, while the ibond adjusts upwards with inflation.

So it is great protection for inflation and deflation, that's the entire point of ibonds. However you are not really going to build wealth off them, just protect wealth against inflation or deflation.
Sorry but I just don't see a bank charging a fee for a savings account or MM account. What is the point of a savings account where you pay the bank and have no savings? I mean I guess it is possible, I would just expect depositors to pull their deposits in that scenario.

Let me rephrase my concern another way.

Right now I can earn 1.7% in a HYS account. Since the fixed rate on i bonds is only 0.2%, any mild deflation over the next few periods is going to create a 0% return. I am skeptical the HYS will go to 0% over that same time period. Also while yes you can sell i bonds, you lose 3 months of interest if held less than 5 years.
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Re: Cons of i bonds?

Post by Dude2 »

The only negatives in my mind revolve around TreasuryDirect website and the government bureaucratic mindset in general. Specifically there have been posts about some difficulties people encounter when the bond holder dies. He/she had better have been very clear about the existence of these assets down to the nitty gritty details. You won't get the government helping you out in your time of distress unless you observe every step required, some of which make no sense, but are probably in place in the spirit of ultra paranoia/identity theft concerns. In general, TreasuryDirect is not a website that has any concerns about pleasing the customer (despite the satisfaction surveys they heap on you). You get what they have decided is the right answer. Isn't it funny how it differs so much from websites where a company has to actually make money and stay in business?
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Re: Cons of i bonds?

Post by anon_investor »

justsomeguy2018 wrote: Wed Apr 15, 2020 12:19 am
VikingThor wrote: Tue Apr 14, 2020 9:44 pm
justsomeguy2018 wrote: Tue Apr 14, 2020 8:46 pm
VikingThor wrote: Tue Apr 14, 2020 8:27 pm It's actually an additional benefit not a flaw.

If there were actual deflation, zero percent interest with a guaranteed return of principal on demand may be a good rate, since prices are declining.

If it were not a good rate you could simply sell the ibond and invest in something else.

So you get inflation and deflation protection.
What is good about 0% interest? Name 1 period in U.S. history where a bank savings, MM, etc charged less than 0% interest. I don't see how it is deflation protection, unless you think savings or MM will be chargimg negative rates at the same time.

I am also wondering if it is truly inflation protetction, since rates will likely rise anyway during inflationary periods.
There is only one short period in recent history with deflation, during financial crisis, when ibonds were at zero for 6 months. Deflation is not likely but it's great protection for the reasons I mentioned. If there were steep deflation banks would certainly charge a fee for savings/checking along with 0% interest. And as I mentioned and you glossed over, if the ibond were ever not a good investment at 0% interest you could easily sell it with no loss of principal. So how could deflation be a risk?

If rates rise during an inflationary period, people with existing CDs or bonds would lose money because they are locked into the lower interest rate, while the ibond adjusts upwards with inflation.

So it is great protection for inflation and deflation, that's the entire point of ibonds. However you are not really going to build wealth off them, just protect wealth against inflation or deflation.
Sorry but I just don't see a bank charging a fee for a savings account or MM account. What is the point of a savings account where you pay the bank and have no savings? I mean I guess it is possible, I would just expect depositors to pull their deposits in that scenario.

Let me rephrase my concern another way.

Right now I can earn 1.7% in a HYS account. Since the fixed rate on i bonds is only 0.2%, any mild deflation over the next few periods is going to create a 0% return. I am skeptical the HYS will go to 0% over that same time period. Also while yes you can sell i bonds, you lose 3 months of interest if held less than 5 years.
I Bonds should not be your only fixed income investment. It offers inflation protection. You should have nominal bonds for deflation protection. If you can wait 20 years, EE Bonds have an effective interest rate of 3.53% (because value is guaranteed to double in 20 years).
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Re: Cons of i bonds?

Post by l1am »

Cons: Unnecessarily introducing another account to track when you could just adjust your stock/bond AA to fit your risk profile.
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Re: Cons of i bonds?

Post by alluringreality »

justsomeguy2018 wrote: Wed Apr 15, 2020 12:19 am Right now I can earn 1.7% in a HYS account. Since the fixed rate on i bonds is only 0.2%, any mild deflation over the next few periods is going to create a 0% return. I am skeptical the HYS will go to 0% over that same time period. Also while yes you can sell i bonds, you lose 3 months of interest if held less than 5 years.
If the rate goes to 0%, as noted by Tipswatch.com, it's possible to sell 3 months that earned 0% interest. A 1.7% rate on $10k for 2.5 months is less than $40, and some of that would go to state taxes for me. I'm fully aware that buying this month could end up underperforming other options over certain periods, and historically it probably would have also slightly overperformed HYS for me the past few years. I don't think I'm performance chasing by buying this month, because I know the future outlook is not exactly pristine, and that's not why I'm buying. I'm buying primarily for convenience compared to chasing better deals, because of the yearly limit, and because I doubt if I can necessarily predict the future direction of rate changes long-term, so I think a treasury bond barbell that includes both nominal and inflation protected bonds may be a decent strategy for me. I bonds fit the short and inflation protected side of the barbell, and I can use longer-term nominal bonds (including EE bonds) for the other portion of the barbell. I'm not sure it's worth my time to try maximizing earning something around $170 for $10k over a year, less state taxes, although I'm aware that it's completely possible to do that by chasing bank bonuses and various other options. Basically my thinking is that I don't see much money to be earned in short term rates of any sort, so using I bonds as inflation protection seems as good a bet as any, regardless of current deflationary outlooks.
Last edited by alluringreality on Wed Apr 15, 2020 9:02 am, edited 1 time in total.
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Re: Cons of i bonds?

Post by SmileyFace »

justsomeguy2018 wrote: Tue Apr 14, 2020 4:31 pm A CD ladder would seem like a better strategy to deal with inflation risk, no? In the sense that rates should rise if there is inflation and you can roll the CD into the higher rate.
I used iBonds to also extend tax-deferred space by $20K yearly - which I can't do with CDs. This was a deciding factor for me. So for me I hold for three purposes:
1) 2nd Tier Emergency Fund.
2) adds to Inflation-Protected investment space
3) adds to tax-deferred investments space

Although many always respond to these threads saying they don't like the website experience - the majority that use the website rate it as "Excellent". Only a small percent rate it as either Fair or Poor. Personally - I have never had an issue with it.
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Unexpected Inflation...iBonds are the king

Post by hudson »

Ibonds...and TIPs...the only place you can get protection from unexpected inflation....nothing else will do. You probably already knew that...apologies.
Sure they don't pay anything...the biggest con or disadvantage.
Constantly renewing short term treasuries or CDs will protect against inflation, but not unexpected inflation.
The real dilemma is what to do? Stay away, use Ibonds, buy individual tips, buy a short tips fund, or buy an intermediate tips fund?
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justsomeguy2018
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Re: Cons of i bonds?

Post by justsomeguy2018 »

All additional fair points, thanks for chiming in
protagonist
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Re: Cons of i bonds?

Post by protagonist »

billthecat wrote: Tue Apr 14, 2020 11:56 pm
protagonist wrote: Sun Apr 12, 2020 6:29 pm If you set up a revocable trust (easy), you can buy $25K/year.

- $10K in your personal account
- $10K in your trust account
- $5K in tax rebate (just overpay your taxes before you file your return)

This is what I have been doing.
How does the trust part work?
  • Create a revocable living trust
  • Open an entity account for the trust
    (https://www.treasurydirect.gov/indiv/he ... rnmore.htm)
  • Use my name and social security as grantor
  • Link it to the same bank account I use for my personal account (Not required but OK to do? Or does the trust need it’s own bank account?)
Are those the steps?

Sorry, but I did this about 10 years ago and I don't recall the steps. That said the steps you outlined seem logical. Certainly you need to create the trust first. I just recall going onto the TD website and it all seemed self-explanatory from there. I did not use a separate bank account.
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anon_investor
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Re: Cons of i bonds?

Post by anon_investor »

DaftInvestor wrote: Wed Apr 15, 2020 8:54 am
justsomeguy2018 wrote: Tue Apr 14, 2020 4:31 pm A CD ladder would seem like a better strategy to deal with inflation risk, no? In the sense that rates should rise if there is inflation and you can roll the CD into the higher rate.
I used iBonds to also extend tax-deferred space by $20K yearly - which I can't do with CDs. This was a deciding factor for me. So for me I hold for three purposes:
1) 2nd Tier Emergency Fund.
2) adds to Inflation-Protected investment space
3) adds to tax-deferred investments space

Although many always respond to these threads saying they don't like the website experience - the majority that use the website rate it as "Excellent". Only a small percent rate it as either Fair or Poor. Personally - I have never had an issue with it.
The extra tax-deferred space is a big selling point for me since I already max out all tax advantaged vehicles (401k, IRA, HSA, etc.). Also no state income tax (I am subject to it). I use I Bonds more like an emergency fund, but I do count it as part of my fixed income allocation.
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#Cruncher
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Re: Cons of i bonds?

Post by #Cruncher »

justsomeguy2018 wrote: Tue Apr 14, 2020 4:31 pm... I am surprised no one mentioned what I found to be a major flaw in these - there are potentially 6 month periods (or more) where there will be 0% interest earned.
This is not a flaw. It's the way inflation indexing works. If the CPI increases, the composite rate will be greater than the fixed rate. If the CPI decreases, it will be less -- subject to a minimum composite rate of 0%. Without this 0% composite rate floor feature [1], I Bonds would be guaranteed to deliver a pretax real return equal to the fixed rate. However, with the floor feature, they may deliver a pretax real return higher than their fixed rate.

This can most easily be illustrated with a 0% fixed rate I Bond. Consider a $100 I Bond with 0.00% Fixed Rate Purchased May 2008. After two years, its value had increased to $106.56. During this time there were four 6-month periods each with a semi-annual inflation rate that was combined with the 0% fixed rate to produce the composite rate for 6 months. During the first two and the last of these four periods the CPI rose; but during the third period if fell significantly.

Code: Select all

                   --- Change ---
CPI [2]    Month    6 mo    2 yr
-------  --------  ------  ------
208.490  Sep 2007
213.528  Mar 2008  +2.42%
218.783  Sep 2008  +2.46%
212.709  Mar 2009  -2.78%
215.969  Sep 2009  +1.53%  +3.59%
Without the floor feature, during the third six month period the composite rate would have been twice -2.78%; but because of the feature it was 0%. Over the two years the floor feature made the annual real return +1.4% even though the fixed rate was only 0%. The floor feature then is definitely not a flaw; rather it is a bonus feature of I Bonds.
1.4% = (106.56 / 103.59) ^ (1 / 2) - 1

After 12 years in May 2020, the I Bond's value will increase to $127.80. The corresponding CPI increased to 256.759 in September 2019 [2], 23.15% more than September 2007's 208.49. During the 12 years there was one other 6-month period when the inflation rate was negative (-0.80% from May to November 2015). These two periods when the 0% floor feature kicked in, caused the annual real return to be +0.3% instead of the 0% fixed rate it would have been without the floor feature:
0.3% = (127.80 / 123.15) ^ (1 / 12) - 1

  1. See Combining the two rates:
    The combined rate [aka composite or earnings rate] will never be less than zero. However, the combined rate can be lower than the fixed rate. If the inflation rate is negative (because we have deflation, not inflation), it can offset some of the fixed rate. (underline added)
  2. Choose U.S. city average, All items - CUUR0000SA0 on BLS Top Picks, click [Retrieve data], change From year to 2007, and click (GO) to see CPI.
rj49
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Re: Cons of i bonds?

Post by rj49 »

I thought of ibonds, but with low inflation likely for some time, they don't make sense at .4%. Instead, I put my cash spending buffer in a CD ladder at Discover Bank at 1.75-1.80% (and spending for next year in their savings account, still at 1.5%).

I used to have lots of ibonds, but they are hard to hold when there's low inflation and the stock and bond markets are doing well, so I eventually cashed mine in. The TreasuryDirect site is also a pain to use and was always confusing, especially when I had a mix of electronic and paper bonds that I converted to electronic.. There's also a possibility that you could pass away and heirs not know that they're even there, whereas banks and Vanguard are easier to access and track with monthly statements.

They're tempting now as safety, but would you keep them if there's extended deflation and the stock market goes into a new bull market, or if nominal bond interest rates rise to 5% or so, or if the government issues some sort of Covid Bond with a good rate? It's been gone over endlessly by others, but with trillions of new government spending and a tsunami of social security and medicare obligations in the coming decades, there's a strong incentive to change inflation measurements. I've found that over the past 30 years that simple CDs have outpaced inflation, and I remember buying them at 10% in the 1990s and 6% in 2007, which was far superior than anything I would have had with ibonds, with FDIC insurance. I've also found that the best way to cope with inflation for someone reasonably well off is simply to cut back and economize, the hedonic adjustment approach. So when gas was high, I rode my bike or took the bus, when rents skyrocketed I bought a house, and with the coronavirus, it makes it easy to cut back on spending and counter inflation. No more cruises, European tours, concerts, or adult education/lifelong learning classes, and I'll do most of my movie-watching and dining and drinking at home now. Then the best way to counter health cost inflation is to lose weight, exercise, find happiness, and eat healthier.
hudson
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Re: Cons of i bonds?

Post by hudson »

rj49 wrote: Wed Apr 15, 2020 3:07 pm I used to have lots of ibonds, but they are hard to hold when there's low inflation and the stock and bond markets are doing well, so I eventually cashed mine in.

over the past 30 years that simple CDs have outpaced inflation,
Me too...I cashed them and moved the funds to a muni fund.
I did not have a problem with the Treasury Direct Website....but I always kept good notes. I also left financial notes with my will.
CDs are great! I'm roughly 90%.
I also live cheap and could go cheaper...if necessary
Many of us remember how ugly inflation was.
The cost of inflation protection is high....as returns are low. The risk of inflation appears low.
I am weighing whether to buy iBonds, TIPS, or TIPS funds. I'll likely just keep on weighing and won't do anything.
Bill Bernstein on the subject...April 4th.... viewtopic.php?p=5160087#p5160087
Finally, TIPS are usually a fine holding for defeasing years and decades of upcoming consumption needs, though their current prices and yields are atrocious.
Later in the post, he said this...which made me blink...
I.e., a suboptimal approach you can execute (ie, a large Treasury/CD teddy bear to hug at night) is better than an optimal one you can't.
mdu113
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Re: Cons of i bonds?

Post by mdu113 »

Jack FFR1846 wrote: Sun Apr 12, 2020 8:06 pm
dcabler wrote: Sun Apr 12, 2020 7:33 am Cons?

The hassle, if you so choose, of converting the $5K paper bonds from your tax refund to electronic form.
I had to laugh to think anyone would voluntarily convert from great paper bonds to electronic. (I currently hold $381k in paper bonds after my $5k fed refund in paper came last week)
Not to argue, but I'm genuinely curious what's so good about paper bond and so bad about electronic bonds? I mean aside from dealing with treasurydirect web site, which isn't such a big problem in my opinion. I'd think it should be the other way around as with electronic bonds I don't need to keep and worry about another piece of paper.
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Re: Cons of i bonds?

Post by SciurusVulgaris »

mdu113 wrote: Wed Apr 15, 2020 5:58 pm Not to argue, but I'm genuinely curious what's so good about paper bond and so bad about electronic bonds? I mean aside from dealing with treasurydirect web site, which isn't such a big problem in my opinion. I'd think it should be the other way around as with electronic bonds I don't need to keep and worry about another piece of paper.
The above post here is the problem most people cite:
fwellimort wrote: Sat Apr 11, 2020 11:06 pm With paper bonds, even if your paper bonds get stolen or lost, the money is tied to your identity: the risk falls on the US government, not you.
With electronic, if your TreasuryDirect account gets hacked, it's over. You can lose the money. The risk falls on you, not the US government.
2pedals
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Re: Cons of i bonds?

Post by 2pedals »

I have found them to be a hassle. Dealing with TD and setting up joint ownership with my wife and heirs does not work. I Bonds can be jointly owned, or they can be registered in POD form, but not both; only sole owners can designate a POD beneficiary. I don't want DW and/or DD to have to deal with probate for a small portion of my estate. Also they can not be placed in tax-deferred of nontaxable accounts. I am planning on selling them soon after I do some partial Roth conversions. I didn't pay taxes on I bonds or EE bonds yet for years and they are maturing now. This has increased my taxable income making strategic Roth conversions slighter harder.
mdu113
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Re: Cons of i bonds?

Post by mdu113 »

SciurusVulgaris wrote: Wed Apr 15, 2020 6:41 pm
mdu113 wrote: Wed Apr 15, 2020 5:58 pm Not to argue, but I'm genuinely curious what's so good about paper bond and so bad about electronic bonds? I mean aside from dealing with treasurydirect web site, which isn't such a big problem in my opinion. I'd think it should be the other way around as with electronic bonds I don't need to keep and worry about another piece of paper.
The above post here is the problem most people cite:
fwellimort wrote: Sat Apr 11, 2020 11:06 pm With paper bonds, even if your paper bonds get stolen or lost, the money is tied to your identity: the risk falls on the US government, not you.
With electronic, if your TreasuryDirect account gets hacked, it's over. You can lose the money. The risk falls on you, not the US government.
I'm not sure I understand. If somebody steals my paper bonds and then gets into nearest bank and somehow impersonates as me and cashes the bond, does it mean that government still reimburses me? I guess not and that means whatever I do I carry some risk. Do people think that hacking TreasuryDirect is more probable then what I described?
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justsomeguy2018
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Re: Cons of i bonds?

Post by justsomeguy2018 »

2pedals wrote: Wed Apr 15, 2020 7:02 pm I have found them to be a hassle. Dealing with TD and setting up joint ownership with my wife and heirs does not work. I Bonds can be jointly owned, or they can be registered in POD form, but not both; only sole owners can designate a POD beneficiary. I don't want DW and/or DD to have to deal with probate for a small portion of my estate. Also they can not be placed in tax-deferred of nontaxable accounts. I am planning on selling them soon after I do some partial Roth conversions. I didn't pay taxes on I bonds or EE bonds yet for years and they are maturing now. This has increased my taxable income making strategic Roth conversions slighter harder.
This was another concern of mine. Not knowing the tax impact of what will happen once they hit maturity.
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Re: Cons of i bonds?

Post by Mel Lindauer »

mdu113 wrote: Wed Apr 15, 2020 8:10 pm
SciurusVulgaris wrote: Wed Apr 15, 2020 6:41 pm
mdu113 wrote: Wed Apr 15, 2020 5:58 pm Not to argue, but I'm genuinely curious what's so good about paper bond and so bad about electronic bonds? I mean aside from dealing with treasurydirect web site, which isn't such a big problem in my opinion. I'd think it should be the other way around as with electronic bonds I don't need to keep and worry about another piece of paper.
The above post here is the problem most people cite:
fwellimort wrote: Sat Apr 11, 2020 11:06 pm With paper bonds, even if your paper bonds get stolen or lost, the money is tied to your identity: the risk falls on the US government, not you.
With electronic, if your TreasuryDirect account gets hacked, it's over. You can lose the money. The risk falls on you, not the US government.
I'm not sure I understand. If somebody steals my paper bonds and then gets into nearest bank and somehow impersonates as me and cashes the bond, does it mean that government still reimburses me? I guess not and that means whatever I do I carry some risk. Do people think that hacking TreasuryDirect is more probable then what I described?
It's not really hard to understand. It means exactly what it says.
Lost, stolen or fraudulently redeemed paper I Bonds will be replaced.
If someone cleans out your TD account, you're on your own; TD accepts no responsibility.
Best Regards - Mel | | Semper Fi
mdu113
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Re: Cons of i bonds?

Post by mdu113 »

Mel Lindauer wrote: Wed Apr 15, 2020 10:15 pm
mdu113 wrote: Wed Apr 15, 2020 8:10 pm
I'm not sure I understand. If somebody steals my paper bonds and then gets into nearest bank and somehow impersonates as me and cashes the bond, does it mean that government still reimburses me? I guess not and that means whatever I do I carry some risk. Do people think that hacking TreasuryDirect is more probable then what I described?
It's not really hard to understand. It means exactly what it says.
Lost, stolen or fraudulently redeemed paper I Bonds will be replaced.
If someone cleans out your TD account, you're on your own; TD accepts no responsibility.
Well, I must confess I didn't know it and couldn't even imagine it. Yesterday I did some read-up about it and I'm a little scared. I was going to purchase I Bonds by the end of April before the rate change, but now I'm thinking again.
Are there any known cases when someone's TD account was emptied? Just trying to estimate the risk...
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Re: Cons of i bonds?

Post by alluringreality »

mdu113 wrote: Thu Apr 16, 2020 9:48 am I was going to purchase I Bonds by the end of April before the rate change, but now I'm thinking again.
Are there any known cases when someone's TD account was emptied? Just trying to estimate the risk...
There is a thread where someone reported having contacted the treasury about this, but I haven't ran across any discussion about actual fraud.
viewtopic.php?t=225415
45% US Indexes, 25% Ex-US Indexes, 30% Fixed Income - Buy & Hold
mdu113
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Re: Cons of i bonds?

Post by mdu113 »

alluringreality wrote: Thu Apr 16, 2020 9:55 am
mdu113 wrote: Thu Apr 16, 2020 9:48 am I was going to purchase I Bonds by the end of April before the rate change, but now I'm thinking again.
Are there any known cases when someone's TD account was emptied? Just trying to estimate the risk...
There is a thread where someone reported having contacted the treasury about this, but I haven't ran across any discussion about actual fraud.
viewtopic.php?t=225415
Yes, that thread was one of the first things I discovered when I started to look at it. Reading through it wasn't very reassuring and left a taste that my decision to deal with TD might not be the best one.
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