Comments on: Savings Bond Alert #031 http://www.savings-bond-advisor.com/savings-bond-alert-031/ Wed, 17 Mar 2010 22:09:49 +0000 http://wordpress.org/?v=2.0.4 by: Freda http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-13429 Tue, 06 Nov 2007 04:25:16 +0000 http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-13429 Mario, problem is: with a 5-year CD you know your total returns today (the rate is fixed for 5 years), but with a Savings Bond, the rate is not fixed, so you don't know how much you'll get in 5 years. I still think Savings Bonds should not be compared to 5-year CDs; they are more like renewable 6-month CDs (since rates change every 6 months), so the 3-month penalty is totally out of date now (especially in view of the presence of so many high-yield online savings accounts). Mario, problem is: with a 5-year CD you know your total returns today (the rate is fixed for 5 years), but with a Savings Bond, the rate is not fixed, so you don't know how much you'll get in 5 years. I still think Savings Bonds should not be compared to 5-year CDs; they are more like renewable 6-month CDs (since rates change every 6 months), so the 3-month penalty is totally out of date now (especially in view of the presence of so many high-yield online savings accounts).

]]> by: Mario http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12976 Sat, 27 Oct 2007 07:56:03 +0000 http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12976 Freda, I think the 3-month penalty is reasonable. Compare it to a 5-year CD, early withdrawal penalties are often around 6 months of interest. After 5 years it has the awesome advantage over most other investments that you can cash it in anytime penalty-free, or receive a guaranteed fixed rate for up to another 25 years. Freda, I think the 3-month penalty is reasonable. Compare it to a 5-year CD, early withdrawal penalties are often around 6 months of interest. After 5 years it has the awesome advantage over most other investments that you can cash it in anytime penalty-free, or receive a guaranteed fixed rate for up to another 25 years.

]]> by: Freda http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12865 Thu, 25 Oct 2007 08:17:10 +0000 http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12865 Thanks for your explanation. Now I get your point regarding 6-month CD rates. In this age, Treasury's idea of a 3-month penalty for 5 years truly seems to be so archaic... Thanks for your explanation. Now I get your point regarding 6-month CD rates. In this age, Treasury's idea of a 3-month penalty for 5 years truly seems to be so archaic…

]]> by: Tom Adams http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12707 Mon, 22 Oct 2007 14:46:07 +0000 http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12707 Hi Freda - Yes, that's a valid comparison if you think you're only going to invest for one year. But if that's your plan, you probably shouldn't be in Savings Bonds anyhow. I brought up the 6-month CD idea for people who are investing in Savings Bonds every month. My suggestion is that an investor will earn more in 6-month CDs for the next six months than either E or I Savings Bonds. At the end of 6 months, the investor can re-evaluate the situation. The problem with this suggestion, of course, is that CDs aren't as safe as Savings Bonds. When a bank goes bust, the FDIC sees that you get your investment back, but it takes months before you get the money and you lose all the interest. Savings Bonds should be thought of as a very conservative investment - the place to put the portion of your savings that you can't afford to lose - and the place where you're happy to earn just a bit more than the inflation rate. Tom Adams Hi Freda - Yes, that's a valid comparison if you think you're only going to invest for one year. But if that's your plan, you probably shouldn't be in Savings Bonds anyhow.

I brought up the 6-month CD idea for people who are investing in Savings Bonds every month. My suggestion is that an investor will earn more in 6-month CDs for the next six months than either E or I Savings Bonds. At the end of 6 months, the investor can re-evaluate the situation.

The problem with this suggestion, of course, is that CDs aren't as safe as Savings Bonds. When a bank goes bust, the FDIC sees that you get your investment back, but it takes months before you get the money and you lose all the interest.

Savings Bonds should be thought of as a very conservative investment - the place to put the portion of your savings that you can't afford to lose - and the place where you're happy to earn just a bit more than the inflation rate.

Tom Adams

]]> by: Freda http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12674 Mon, 22 Oct 2007 02:08:04 +0000 http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12674 Tom, don't you think it is not really suitable to compare rates between iBonds and 6-month CDs? Since the minimum holding period for iBonds is one year and if you redeem at the 1-year anniversary you lose 3 months' interest, shouldn't the right comparison be between the 4.67% average 1-year CD rate (bankrate.com) against an effective 3.29% for iBonds (4.38%x.75=3.285%) if one redeems the iBonds after holding them for one year? Thanks. Tom, don't you think it is not really suitable to compare rates between iBonds and 6-month CDs? Since the minimum holding period for iBonds is one year and if you redeem at the 1-year anniversary you lose 3 months' interest, shouldn't the right comparison be between the 4.67% average 1-year CD rate (bankrate.com) against an effective 3.29% for iBonds (4.38%x.75=3.285%) if one redeems the iBonds after holding them for one year? Thanks.

]]> by: Tom Adams http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12563 Fri, 19 Oct 2007 14:31:59 +0000 http://www.savings-bond-advisor.com/savings-bond-alert-031/#comment-12563 Richard and Susan - The markets are too volatile to predict what the Nov 1 I bond fixed rate will be. They're volatile because of a lack of trust, which is the essential requirement for capitalism to work (lot's of people think it's greed, but capitalism works just fine without greed; without trust, it collapses). The big players in the markets are having a crisis of trust because some assets (bundles of home mortgages) that have been put up as collateral for short-term loans (called asset-backed commercial paper) aren't worth the paper they're printed on. It's not really a <i>liquidity crisis</i>, it's an <i>insolvency crisis</i>. As new groups come to understand what's going on, there are repeated <i>flights to safety</i>, which means huge sums of money flood into the market for US Treasury securities, knocking the rates down and the prices up. Then foreign governments that hold tons of Treasury securities take profits on the increased prices and the money goes back out again. As the money leaves the Treasury market, prices fall and rates rise until another group comes to understand the nature of the current crisis, and more money floods back into Treasuries. Anyhow, probably more than you wanted to know, but that's why there's no way to predict what the next base rate will be. Things in the financial markets are a mess right now. Susan - in terms of your question about the impact of taxes - if you held the bonds for 20 years and they averaged 5%, you'd get the equivalent of an extra 0.5% on the interest rate from tax deferment. However, if we get more inflation over the 20 years, and the I bonds average 7%, then the bump you'll get from tax deferment will be closer to 2.0% (and after 30 years, 3.0%). Tom Adams Richard and Susan - The markets are too volatile to predict what the Nov 1 I bond fixed rate will be.

They're volatile because of a lack of trust, which is the essential requirement for capitalism to work (lot's of people think it's greed, but capitalism works just fine without greed; without trust, it collapses). The big players in the markets are having a crisis of trust because some assets (bundles of home mortgages) that have been put up as collateral for short-term loans (called asset-backed commercial paper) aren't worth the paper they're printed on. It's not really a liquidity crisis, it's an insolvency crisis.

As new groups come to understand what's going on, there are repeated flights to safety, which means huge sums of money flood into the market for US Treasury securities, knocking the rates down and the prices up. Then foreign governments that hold tons of Treasury securities take profits on the increased prices and the money goes back out again. As the money leaves the Treasury market, prices fall and rates rise until another group comes to understand the nature of the current crisis, and more money floods back into Treasuries.

Anyhow, probably more than you wanted to know, but that's why there's no way to predict what the next base rate will be. Things in the financial markets are a mess right now.

Susan - in terms of your question about the impact of taxes - if you held the bonds for 20 years and they averaged 5%, you'd get the equivalent of an extra 0.5% on the interest rate from tax deferment.

However, if we get more inflation over the 20 years, and the I bonds average 7%, then the bump you'll get from tax deferment will be closer to 2.0% (and after 30 years, 3.0%).

Tom Adams

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