3.5% APY on US-backed 20-year bonds?

[twaddle]

Is it just me, or are those crusty old EE savings bonds suddenly very sexy?

$10K per year per SSN, including minor kids. Guaranteed to double after 20 years. That's 3.5%/year.

(OK, not as exciting as bitcoin, but I'm getting old.)

 

[Ready]

Where are you finding 3.5%? I’m seeing a current rate of .10%.

https://www.treasurydirect.gov/indiv/products/prod_eebonds_glance.htm

 

[twaddle]

The annual interest rate for EE bonds issued from November 2020 through April 2021 is 0.10%. Regardless of the rate, at 20 years the bond will be worth twice what you pay for it.

 

[Ready]

So if you can hold the bonds for a full 20 years you will get your 3.5%. But are you expecting 3.5% to be a competitive rate for the next 20 years? And with a $10K maximum per year how meaningful is this to your portfolio?

 

[twaddle]

I view it like any other bond or CD. For me, with a kid and wife, I can buy $30K/year, which is not far from what I had been doing for an annual CD ladder. And those 7-year and 10-year CD's I bought turned out to be fantastic bargains.

I have no idea what interest rates will do. If rates skyrocket, then you can cash these out with a "penalty" in the form of that paltry 0.1%/year.

 

[mrfeh]

20 year horizon is too long for me.

For that amount of time, I'd sooner hold well-diversified equities.

 

[Dtail]

20 year horizon is too long for me.

For that amount of time, I'd sooner hold well-diversified equities.

I guess I look at it in that would I invest in an FDIC insured brokered CD for 20 years at 3.5% (if it was available), and my answer is no.

 

[RunningBum]

I guess I look at it in that would I invest in an FDIC insured brokered CD for 20 years at 3.5% (if it was available), and my answer is no.

And that CD would have a severe penalty of almost all interest if you broke it early.

For me, cash investments are for near term or very specific purposes. For 20 years, I use equities.

 

[twaddle]

For me, cash investments are for near term or very specific purposes. For 20 years, I use equities.

The difference, of course, is a guaranteed value after the 20-year term.

If you use a CD ladder, as I do, then "term" becomes fairly meaningless. Eventually my 5-year CD's become 1-year CD's. Looking 20 years back, I've never had to break one.

But if somebody were to be adverse to CD's and US-backed bonds, then something like this with a 150 bp bump vs "regular" treasuries would be of no interest.

 

[pb4uski]

I might consider them and holding them for 20 years as ballast for the very bottom of the keel.... if I don't live that long then my kids would inherit them.... it would be money that I will never need.

But the $10k/year pp limit and separate accounts at Treasury Direct are a bit of a nuisance. If I could buy and hold them in a brokerage account then I might be more interested.

 

[gauss]

I started investing in the EE bonds at the end of last year. 10k for myself and 10k for DW. The tentative plan would be to construct a 20 year ladder that should yield ~ 3.5%.

-gauss

 

[GenXguy]

20 year horizon is too long for me.

For that amount of time, I'd sooner hold well-diversified equities.

Exactly what I was thinking.

 

[Ready]

I like buying bank CDs because they generally only have a 180 day early termination penalty and they mature anywhere from 2-5 years. So if interest rates go way up I just pay the penalty and reinvest at the higher rate. If they don’t I keep my money there until the CD matures.

With EE bonds the penalty for cashing out prior to 20 years is living with .10% interest, which is even below where online savings rates are. I just don’t see any upside.

 

[pb4uski]

There is no upside unless you stay the entire 20 years.

 

[Ready]

There is no upside unless you stay the entire 20 years.

I don’t see any upside in staying for 20 years either. If you are investing money that you don’t need for 20 years why would you buy these bonds? Either invest in equities, or invest in shorter term fixed income investments while we wait for interest rates to rise. I think the likelihood that a 3.5% rate of return is going to be a good deal for the next 20 years is virtually zero.

 

[pb4uski]

I dunno... the bond guarantees 3.5% over 20 years and IF you need the money sometime between now and then you are guaranteed to get your original investment back (plus a little).

While over 20 years is it likely that stocks will return more than 3.5%, if you need your money at any given point of time between you might not get 100% of your principal back.

 

[RunningBum]

The difference, of course, is a guaranteed value after the 20-year term.

If you use a CD ladder, as I do, then "term" becomes fairly meaningless. Eventually my 5-year CD's become 1-year CD's. Looking 20 years back, I've never had to break one.

I guess I don't see the purpose of a 20 year ladder. I set up a 5 year ladder a couple of years ago to have some cash coming in each year to supplement my dividends in my taxable account, as a way to finance my spending without having to take cap gains selling more taxable funds. As they mature, I'm spending the money. I don't see the point of reinvesting the money in another 5 year CD. Do some of you plan to keep the ladder going for the rest of your life?

In 20 years, I don't see that I need any money for a temporary bridge until something else. I'll have my SS, pension, and access to all accounts. Maybe it would've made sense to start this 20 years earlier.

 

[njhowie]

I don’t see any upside in staying for 20 years either. If you are investing money that you don’t need for 20 years why would you buy these bonds? Either invest in equities, or invest in shorter term fixed income investments while we wait for interest rates to rise. I think the likelihood that a 3.5% rate of return is going to be a good deal for the next 20 years is virtually zero.

I'd say the likelihood is quite a bit higher than virtually zero.

1. There is the real possibility that interest rates stay at zero or go negative for an extended period. The Fed has said this won't happen a number of times, however, if push comes to shove, they may have no choice. It's been my contention that if rates go negative, that's basically the end of the game - interest rates will never go above zero again. Point to any central bank that's adopted a negative interest rate policy and later returned to positive rates. If rates go negative, what do you think that will do to the price of all bonds with a coupon above zero? That may not apply in the situation with the EE bonds, but for sure, the risk free 3.5% yield will be better than anything else available with a zero or negative yield.

2. The amount that interest rates can rise is going to be severely limited going forward. The Fed is going to step in whenever needed to keep a lid on rates - across the entire yield curve if necessary. Increased interest rates means higher payments on the nations debt - which is still skyrocketing out of control. Where is all the money going to come from to pay the interest on the debt, redemption of maturing debt, etc.? Just print more? Borrow more? There are only so many potential outcomes, and just about every one of them is extremely bad.

So, 3.5% may very well be a great risk free interest rate to lock in to for 20 years at this time. As with everything when investing - investment objective and risk profile. No reason to knock anyone for their view.

 

[twaddle]

I guess I don't see the purpose of a 20 year ladder.

Fairly arbitrary term, but I view it as part of my fixed income portfolio. A portion that refills my checking account each year as a rung of the ladder matures.

My goal was to automate income. Make it a no-brainer.

And since the rung for year-20 becomes the rung for year-19 next year, and you generally get a term premium, it kind of makes sense to go long to maximize that premium.

But the downside of this automation is that I've been ignoring that ladder for too long, and it's currently in tatters. As I try to rebuild it, this EE is the only thing that looks even the slightest bit interesting.

That's what brought me back to this forum. Yield panic.

 

[RunningBum]

OK, so you're using the income from the fixed income investments to supplement other sources of income, right? That should have been obvious to me, that this is why people (try to) keep a ladder going. Thank you for explaining it to me.

I'm looking at a smaller investment for filling a specific time period need. The income it produces is a decent return for a safe investment, but mostly I use the guaranteed cash surge in my checking account when each CD matures. Maybe ladder isn't a good term for me to use.

But this 3.5% isn't the income rate you're getting, it's the end result of the EE bond maturing at double the value you bought it at. So it doesn't seem like a good ongoing income producer at all (at present rates), but rather a nice chunk to get in 20 years.

I don't have an answer for you on how to rebuild your ladder with a decent interest rate, but it doesn't seem to me this is it, unless I'm misunderstanding.

 

[plex]

As a replacement for other currently available low risk long term options, it looks alright at the moment, it supposedly will keep up with an average level of inflation.

As others have noted, locking into the equivalent of a 20-year CD right now does carry a certain amount of risk, the US has already had a decade of very low inflation, only somewhat higher than the deflation of the Great Depression, and this is basically a bet that there will not be above average inflation, and especially not well above average inflation during the rest of the 30-year period, when historically these sorts of decades are followed by high inflation.

That isn't to say the fiscal policy of maintaining low rates cannot possibly continue, but it is just a policy, and external market forces tend to make even the US eventually change its policies.

 

[twaddle]

But this 3.5% isn't the income rate you're getting, it's the end result of the EE bond maturing at double the value you bought it at. So it doesn't seem like a good ongoing income producer at all (at present rates), but rather a nice chunk to get in 20 years.

All the rungs of the ladder have income reinvested, so the interest itself is not annual "income," the matured rung of the ladder is what shows up in my checking account each year.

It's a bit of a contrivance, but I'm fine for now simply selling inflated assets as an alternative way to fill my checking account.

 

[twaddle]

this is basically a bet that there will not be above average inflation

If I had a nickel every time somebody predicted that inflation and/or interest rates would rise soon, I wouldn't need these savings bonds.