Is Now The Time for 2 YR Treasury Bond Funds...for Cash?

[FD1000]

Dec 22, 2022 21:40:12 GMT xray said:

SmartAsset
Want 9.62% Yield Guaranteed? Try This Govt-Backed Asset
Mike Obel
Thu, December 22, 2022, 9:00 AM EST

SmartAsset: Investing in Series I Savings Bonds (iBonds)

There’s a bond that pays a 9.62% interest rate and is guaranteed by the U.S. Treasury. Investors should keep some limitations and conditions in mind before investing, but as inflation has topped 8% since March 2022, this could be an attractive option for the fixed-income portion of your portfolio. Consider working with a financial advisor as you seek capital appreciation or capital preservation in a high-inflation environment.

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What Are iBonds?

Known as the Series I Savings Bonds, or iBonds for short, the Treasury created them in 1998 as a way to help savers deal with inflation. They come in durations that range from one year to 30 years. This bond has two rates: a fixed rate, which is always zero, and an inflation rate, which is linked to the Consumer Price Index for all Urban Consumers (CPI-U). The interest earned every six months is added to the value of the bond’s principal. Also, in May and November, the Treasury adjusts this bond’s inflation rate in line with the latest CPI-U reading.

Together the interest rate and the inflation adjustment on the iBonds, which are sold at face value, are called the “composite rate.” The composite rate on a this kind of bond can never fall below zero, even in the rare event that deflation would otherwise drag a bond’s composite rate into negative numbers.

Pros of iBonds

There are several aspects of these bonds that make them attractive: 

They currently have one of the highest rates of interest available. From May 2022 through October 2022 these bonds pay 9.62% interest. That’s hard to ignore when the Bloomberg U.S. Aggregate bond index has paid a negative 9.4% rate so far in 2022. Series I Savings Bonds are not subject to state or local taxes. They have the security of a U.S. government guarantee.

Series I Savings Bonds are easy to buy. You can buy up to $10,000 worth of them online. You also can buy an additional $5,000 of paper bonds using your federal income tax refund.

Potential Drawbacks of iBonds

These bonds carry a few conditions and limitations that may dampen their appeal to some fixed-income investors. For one thing, their future returns can decline since they are pegged to the CPI-U. Only U.S. citizens, legal residents or civilian employees of the U.S. government (regardless of citizenship or residency) may buy iBonds. There’s no market for your iBond. Finally, iBonds also carry these deadlines:

Within one year of purchase: You cannot cash the bond. Within one year and five years of purchase: You can cash the bond, but you’ll forfeit the previous three months’ interest payments. This is known as early redemption. Five years or longer: If you want to avoid a penalty, you have to wait at least five years. 
After 30 years of purchase: The bond ceases to pay interest and so becomes vulnerable to inflation.Why Other High-Yielding Bonds Are Less Attractive (Right Now). A Series I Savings Bond is an exception to the caution currently being voiced by financial experts about other higher-yield bonds.

Charles Schwab, for example, says credit spreads, the difference in rates between corporate bonds and government bonds of similar duration, are small. Corporate bonds pay more than government bonds to reward investors for taking the risk of lending to a private enterprise that could default. But currently the difference in rates between the two is still too small to justify buying the higher-yielding corporate bonds. Schwab also notes that corporate profit growth is slowing, citing inflation, supply chain issues and borrowing costs. “Rising borrowing costs via higher interest payments can eat into corporate profits,” the firm said. “Meanwhile, wage gains are good for consumers, but can be a pain point for corporations, as it’s another input cost on the rise.”

Finally, the yield curve is not looking favorable for high-yield bonds – except iBonds. The yield curve is a curve on a graph that tracks the yield of bonds of various durations. Normally, shorter duration bonds yield less longer duration bonds, and high-yield bond total returns relative to Treasurys have been strongest when the yield curve is steep (long duration bonds paying more than short duration bonds). However, as of May 2022, the yield on 2-year and 10-year government bonds was very close, and in fact the previous month the 2-year actually exceeded the 10-year, which is called an inversion. That strains the profitability of high-yield bond issuers like banks.

Bottom Line

Series I Savings Bonds are a powerful anchor to windward, financially speaking. They are low-risk savings bonds issued by the U.S. government that pay a very high interest rate. Through October 2022 they were paying a lofty 9.62%. You may purchase these either electronically via TreasuryDirect (up to $10,000) or you can use your IRS tax refund to buy paper Series I bonds (up to $5,000). By combining electronic and paper purchases, you can buy up to $15,000 of Series I bonds each year. Keep in mind that there is no secondary market for them.

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Live Long and Prosper....

We discussed I bonds many times. The biggest problem, they are limited to very small amounts.  Where can I invest 100K-500K and more?

[Deleted]

FD1000 ,

You could easily be at 60K now in I-bonds. 80K next year. Or for some of our fellow posters who have been buying for years, much more. It's all in the time focus lookout. Step by step....

x-ray - rates changed to around 6.5% or thereabouts with a fixed component of around .5%.

[FD1000]

Dec 22, 2022 23:59:39 GMT @slooow said:

FD1000 ,

You could easily be at 60K now in I-bonds. 80K next year. Or for some of our fellow posters who have been buying for years, much more. It's all in the time focus lookout. Step by step....

x-ray - rates changed to around 6.5% or thereabouts with a fixed component of around .5%.

On the other hand, my 10 year bond performance made already a lot more. 20K is less than 1% of my portfolio, I never believed in using small % for anything.

BTW, what should someone do if in 5 years he doesn't like I bond? Sell and start over years later, or stay forever? I never liked inflexible investments.

[Deleted]

Dec 23, 2022 0:46:19 GMT FD1000 said:

Dec 22, 2022 23:59:39 GMT @slooow said:

FD1000 ,

You could easily be at 60K now in I-bonds. 80K next year. Or for some of our fellow posters who have been buying for years, much more. It's all in the time focus lookout. Step by step....

x-ray - rates changed to around 6.5% or thereabouts with a fixed component of around .5%.

On the other hand, my 10 year bond performance made already a lot more. 20K is less than 1% of my portfolio, I never believed in using small % for anything.

BTW, what should someone do if in 5 years he doesn't like I bond? Sell and start over years later, or stay forever? I never liked inflexible investments.

Everyone's 10 year performance in just about anything did better than i-bonds.  The issue raised and addressed was the limit to small amounts as an issue, with 100K being a bottom end.  Not really an issue if accumulating - and really doesn't take  that long. Some posters have had for years and they have paid off quite well. If they don't play a role in your portfolio, that's another matter.  Not right for you, right for others. 20K is less than 1% of a portfolio - probably for most here. That's a factor to you, not for others -  different strokes. I find it a great emergency fund, but if I find a better vehicle for an emergency fund (cash sub), I might take it.  But you bring up a good point, starting over. It's possible of course.  And you need to hold for 5 years to get the full benefit, although the benefit after 15 months is worthwhile as I recall. Like with all asset choices, that will be a decision based on data at the time. With it being over 6%, I will likely add in this environment. As long as the CPI overstates actual inflation, it seems a reasonable choice.  

[Deleted]

R48 - I think you are right that the 10 year at 4% was a keeper. Any thoughts on where we go now with the 2 year vice 10 year.

[retiredat48]

Dec 23, 2022 1:50:26 GMT @slooow said:

R48 - I think you are right that the 10 year at 4% was a keeper. Any thoughts on where we go now with the 2 year vice 10 year.

Well, hedge guru David Tepper just said he will "short bonds (and stocks), and thinks the 2 yr yield (now about 4.25%) will go up to match the fed 5.1+% terminal rate target.

If 2 yr yield goes a little lower, I may sell some and wait.  Ditto longer term treasuries I own.

One thing that keeps coming back to me, is no-one is talking about the value in ones portfolio!  Instead of trying to catch the ultimate lows to buy...or cyclic highs to sell, a useful mantra may be this:  "If the bond you are locking in will suit your portfolio well, then buy it."  At 1 to 2% yields few could say this.  At 4% as I discussed it becomes a good value proposition for many.

Easy to say the 10 year should go to above 4% and towards 5%...but how many billions and billions will flow in, buying same, and limiting the yield increase?  Next go-around, may be huge demand for 4+% LT yields.

I'm just navigating best I can, trying to lock in decent rates in treasuries.  

Then with recession likely next year, or bankruptcies, corporate bonds, at even higher rates, will selloff and be a good opportunity.  I will then switch some monies to them.

At least that's my gameplan.

R48

[anitya]

If one is comparing money market funds' yields against US Treasuries (as I see being done in this thread), given Treasury interest income is exempt from State income tax, one should compare Treasury MM fund yield. They could be about 10% lower than the yield on the corresponding prime money market fund.

[fishingrod]

retiredat48 , says
"One thing that keeps coming back to me, is no-one is talking about the value in ones portfolio! Instead of trying to catch the ultimate lows to buy...or cyclic highs to sell, a useful mantra may be this: "If the bond you are locking in will suit your portfolio well, then buy it." At 1 to 2% yields few could say this. At 4% as I discussed it becomes a good value proposition for many."


I completely agree. I have said before, with bonds, one has to be willing to compromise and accept what one can get when it is good enough!! And don't kick yourself to hard if something better comes along afterwards.

[Deleted]

fishingrod, retiredat48,

Thanks for your replies. My fixed income is currently in the US thrift savings plan in the G fund - It will return 3% this year with 0 risk. My other option is a fund that tracks AGG. It is about 5.5% off its low and has returned -12% or so this year through November. The G fund is probably good enough for what it is, so I appreciate the reminder. I might start building into the AGG tracker for the intermediate term.

[acksurf]

Dec 23, 2022 1:35:30 GMT @slooow said:

Dec 23, 2022 0:46:19 GMT FD1000 said:

On the other hand, my 10 year bond performance made already a lot more. 20K is less than 1% of my portfolio, I never believed in using small % for anything.

BTW, what should someone do if in 5 years he doesn't like I bond? Sell and start over years later, or stay forever? I never liked inflexible investments.

Everyone's 10 year performance in just about anything did better than i-bonds.  The issue raised and addressed was the limit to small amounts as an issue, with 100K being a bottom end.  Not really an issue if accumulating - and really doesn't take  that long. Some posters have had for years and they have paid off quite well. If they don't play a role in your portfolio, that's another matter.  Not right for you, right for others. 20K is less than 1% of a portfolio - probably for most here. That's a factor to you, not for others -  different strokes. I find it a great emergency fund, but if I find a better vehicle for an emergency fund (cash sub), I might take it.  But you bring up a good point, starting over. It's possible of course.  And you need to hold for 5 years to get the full benefit, although the benefit after 15 months is worthwhile as I recall. Like with all asset choices, that will be a decision based on data at the time. With it being over 6%, I will likely add in this environment. As long as the CPI overstates actual inflation, it seems a reasonable choice.  

Definitely a good emergency fund.  I am an advocate of keeping a portfolio simple but also don't feel compelled to have a minimum of $500k per investment either.  I bought most of my iBonds in 2000-2001 when there was a high fixed component and you could purchase up to $30K.  I kind of forgot about them because I had the actual certificates in a safe deposit box.  I converted them a few years ago to Treasury Direct.  Redeeming them is a snap - assuming you've held them for the minimum time period.  I see this money as a slush fund for vacations or maybe give to my nieces for educational purposes.

[FD1000]

Dec 23, 2022 1:35:30 GMT @slooow said:

Dec 23, 2022 0:46:19 GMT FD1000 said:

On the other hand, my 10 year bond performance made already a lot more. 20K is less than 1% of my portfolio, I never believed in using small % for anything.

BTW, what should someone do if in 5 years he doesn't like I bond? Sell and start over years later, or stay forever? I never liked inflexible investments.

Everyone's 10 year performance in just about anything did better than i-bonds.  The issue raised and addressed was the limit to small amounts as an issue, with 100K being a bottom end.  Not really an issue if accumulating - and really doesn't take  that long. Some posters have had for years and they have paid off quite well. If they don't play a role in your portfolio, that's another matter.  Not right for you, right for others. 20K is less than 1% of a portfolio - probably for most here. That's a factor to you, not for others -  different strokes. I find it a great emergency fund, but if I find a better vehicle for an emergency fund (cash sub), I might take it.  But you bring up a good point, starting over. It's possible of course.  And you need to hold for 5 years to get the full benefit, although the benefit after 15 months is worthwhile as I recall. Like with all asset choices, that will be a decision based on data at the time. With it being over 6%, I will likely add in this environment. As long as the CPI overstates actual inflation, it seems a reasonable choice.  

According to this (link) only 6.25% of all US Households have a net worth over 2 million.  Their investments are lower than that because they own a house + cars + other.
I hope you are right that most here have this, but I doubt it.
The last 10 years point makes sense because when you talk about LT hold, it must perform well for decades.
So, the next 10 years probably would be better, are i bond would be great?
As a flexible investor, I never own anything I must hold for years and can't buy opportunities, and I don't hold cash or cash sub as a principal LT. 

So, what other should do? if they have small portfolio, I bond isn't a good idea.  If they have a big portfolio, it doesn't matter.  If they are between, the yearly limits are are too low to make a dent.
I always think big picture and how to make the most with lower volatility. 

Let's look closer at 2023.  Do I want to be in I bonds? absolutely not, many bond OEFs would do much better with much higher risk/SD, but that's exactly what most should do, looking to make more when the time is right.

It's just an opinion.

[Deleted]

An emergency/slush fund should be in liquid assets. Years of accumulated federal income taxes are due when I-bonds mature or are sold. Not a great investment for short or long term use by retirees, in my opinion. 

[Deleted]

@haven,

They are liquid after a year. You pay taxes on any income, so not sure that matters. In fact the tax deferred aspect could be better for a retiree. No blanket applications here as with most individual investment choices.

[Deleted]

Dec 23, 2022 15:23:14 GMT @slooow said:

@haven ,

They are liquid after a year. You pay taxes on any income, so not sure that matters. In fact the tax deferred aspect could be better for a retiree. No blanket applications here as with most individual investment choices.

There have been posts on forums asking "What can I do?" about the I-bond tax accumulation problem. An answer is to use them for education or give them to relatives, etc. 

Added by edit: Don't you lose three months of earnings when selling them after the one year period?

[retiredat48]

Dec 23, 2022 15:13:25 GMT @haven said:

An emergency/slush fund should be in liquid assets. Years of accumulated federal income taxes are due when I-bonds mature or are sold. Not a great investment for short or long term use by retirees, in my opinion. 

Perhaps a good point...but is it not true that most who actually need an "emergency fund" are lower income, less tax paying, individuals?



R48

[Deleted]

Dec 23, 2022 15:40:22 GMT retiredat48 said:

Dec 23, 2022 15:13:25 GMT @haven said:

An emergency/slush fund should be in liquid assets. Years of accumulated federal income taxes are due when I-bonds mature or are sold. Not a great investment for short or long term use by retirees, in my opinion. 

Perhaps a good point...but is it not true that most who actually need an "emergency fund" are lower income, less tax paying, individuals?



R48

But why go that route when there are better alternatives?

[Deleted]

So I-Bonds - they either work for you or they don't. There are pros and cons based on the individual situation. @haven, yes - there are consequences if you cash out early. Lately, it has been a great way - regardless - to earn a decent amount of interest with a safe vehicle. If it doesn't suit an individual - that's fine. I think we all agree, the important thing is to make an informed decision based on one's circumstances. Are they a valid consideration for a portfolio - yes.

[retiredat48]

Dec 23, 2022 15:49:17 GMT @haven said:

Dec 23, 2022 15:40:22 GMT retiredat48 said:

Perhaps a good point...but is it not true that most who actually need an "emergency fund" are lower income, less tax paying, individuals?



R48

But why go that route when there are better alternatives?

OK...but "lower income, less tax paying individuals" might not know of these "alternatives."  i bonds, they may have heard about.  Lastly, in an emergency one still gets to choose what to liquidate.

For the more sophisticated investors, I maintain they need NO EMERGENCY FUND, for reasons posted elsewhere.

R48

[fishingrod]

There is no "perfect" investment or perfect investor until after the fact!!

[habsui]

Dec 23, 2022 18:01:31 GMT fishingrod said:

There is no "perfect" investment or perfect investor until after the fact!!

FD ?

[bb2]

I-bond limit is a no-starter. Too much work. 5 yr T's now.

[acksurf]

LOL - for a group of retirees, near retirees we're talking a very small percentage of the portfolio in iBonds. I could trade IOFIX daily or something instead. Yeah, I don't really need an emergency fund but 20+ years ago it made more sense. And I kind of like having a still meaningful amount of money outside of my investment accounts.

[Deleted]

Yes - earning 9%+ was a no brainer for me - on any amount. But I'm a penny saver (literally - still pick 'em up). Takes all kinds of investors to make a market!

[Deleted]

My current taxable dividend ETF portfolio came from cashing in savings bonds in early 2020. Part of next year's income needs will come from cashing in savings bonds this month, meaning I've had no need to sell equities in a down year. Planning I started decades ago feels like it's paid off, and even if there may have been better long term investments, having some investments that don't decline in value has helped me manage emotions, and IMO, become a better investor.

[chang]

A snippet from a recent Fido newsletter:

"The opportunities provided by higher rates could be short-lived. Getting inflation under control is the focus of Fed policy in the months ahead, but the central bank also wants to make sure it has room to cut rates if the economy goes into recession, potentially in 2023. Rate cuts are the most powerful tools the Fed has to stimulate economic growth and the central bank wants to be able to make impactful cuts when necessary. That could mean that the opportunity to add low-risk, high-yielding bonds to your income strategy may not be there if you wait too long."

www.fidelity.com/learning-center/trading-investing/bond-market-outlook?ccsource=email_weekly_AT

[FD1000]

Dec 26, 2022 5:55:52 GMT chang said:

A snippet from a recent Fido newsletter:

"The opportunities provided by higher rates could be short-lived. Getting inflation under control is the focus of Fed policy in the months ahead, but the central bank also wants to make sure it has room to cut rates if the economy goes into recession, potentially in 2023. Rate cuts are the most powerful tools the Fed has to stimulate economic growth and the central bank wants to be able to make impactful cuts when necessary. That could mean that the opportunity to add low-risk, high-yielding bonds to your income strategy may not be there if you wait too long."

www.fidelity.com/learning-center/trading-investing/bond-market-outlook?ccsource=email_weekly_AT

First, what does it mean "short-lived"? Is it a week, a month, 6 months?
Second, is the Fed going to cut rates in the next 3-6 months and/or meaningfully? I doubt it.

But, then the article says
quote" While 2023 may be a great time to buy, hold, and ladder bonds, the outlook is also bright for investors in funds that manage bonds with an eye to making money as prices rise. Moore says he has bought more bonds with longer maturities than he did in 2022. “I have bought 10-year Treasury bonds and 10-year bonds from good quality companies because they were yielding 5% to 7%. Even if you feel like there's a recession coming, these should be fine.”
Moore believes that market conditions as 2023 starts are similar to 2019 and 2020 when bond indexes returned almost 10% after a big drop in 2018."

mmm...almost 10%. So which is it short-lived or almost 10%?
But wait, if rates start to go down, bonds will make even more.

FD: bonds will do well in 2023, and selected bond OEFs will do even better.

[fishingrod]

Dec 26, 2022 14:11:59 GMT FD1000 said:

Dec 26, 2022 5:55:52 GMT chang said:

A snippet from a recent Fido newsletter:

"The opportunities provided by higher rates could be short-lived. Getting inflation under control is the focus of Fed policy in the months ahead, but the central bank also wants to make sure it has room to cut rates if the economy goes into recession, potentially in 2023. Rate cuts are the most powerful tools the Fed has to stimulate economic growth and the central bank wants to be able to make impactful cuts when necessary. That could mean that the opportunity to add low-risk, high-yielding bonds to your income strategy may not be there if you wait too long."

www.fidelity.com/learning-center/trading-investing/bond-market-outlook?ccsource=email_weekly_AT

First, what does it mean "short-lived"? Is it a week, a month, 6 months?
Second, is the Fed going to cut rates in the next 3-6 months and/or meaningfully? I doubt it.

But, then the article says
quote" While 2023 may be a great time to buy, hold, and ladder bonds, the outlook is also bright for investors in funds that manage bonds with an eye to making money as prices rise. Moore says he has bought more bonds with longer maturities than he did in 2022. “I have bought 10-year Treasury bonds and 10-year bonds from good quality companies because they were yielding 5% to 7%. Even if you feel like there's a recession coming, these should be fine.”
Moore believes that market conditions as 2023 starts are similar to 2019 and 2020 when bond indexes returned almost 10% after a big drop in 2018."

mmm...almost 10%. So which is it short-lived or almost 10%?
But wait, if rates start to go down, bonds will make even more.

FD: bonds will do well in 2023, and selected bond OEFs will do even better.

FD1000 , says

"So which is it short-lived or almost 10%?"

______________________________________________________________________________________________________________

It is both. Short lived, as in Fed funds rate will not stay up for a long time. And 10%, as in money to be made if/when Fed funds rate starts going down and existing bonds are priced higher to reflect their higher rate value. TLT has already made more than 11% off lows due to rates lowering.

[anitya]

Dec 26, 2022 5:55:52 GMT chang said:

A snippet from a recent Fido newsletter:

"The opportunities provided by higher rates could be short-lived. Getting inflation under control is the focus of Fed policy in the months ahead, but the central bank also wants to make sure it has room to cut rates if the economy goes into recession, potentially in 2023. Rate cuts are the most powerful tools the Fed has to stimulate economic growth and the central bank wants to be able to make impactful cuts when necessary. That could mean that the opportunity to add low-risk, high-yielding bonds to your income strategy may not be there if you wait too long."

www.fidelity.com/learning-center/trading-investing/bond-market-outlook?ccsource=email_weekly_AT

The article’s goal seems to be to keep us interested in investing at Fidelity brokerage rather than putting our money in an online savings account or bank CDs.

[chang]

Dec 26, 2022 16:27:21 GMT anitya said:

Dec 26, 2022 5:55:52 GMT chang said:

A snippet from a recent Fido newsletter:

"The opportunities provided by higher rates could be short-lived. Getting inflation under control is the focus of Fed policy in the months ahead, but the central bank also wants to make sure it has room to cut rates if the economy goes into recession, potentially in 2023. Rate cuts are the most powerful tools the Fed has to stimulate economic growth and the central bank wants to be able to make impactful cuts when necessary. That could mean that the opportunity to add low-risk, high-yielding bonds to your income strategy may not be there if you wait too long."

www.fidelity.com/learning-center/trading-investing/bond-market-outlook?ccsource=email_weekly_AT

The article’s goal seems to be to keep us interested in investing at Fidelity brokerage rather than putting our money in an online savings account or bank CDs.

That wasn't exactly the main takeaway that I perceived, but it would probably be good advice anyway. I see no advantage in bank accounts or CDs over what a brokerage can offer (which includes MMs, CDs, Treasuries, ... anyway!).

[FD1000]

Dec 26, 2022 16:27:21 GMT anitya said:

Dec 26, 2022 5:55:52 GMT chang said:

A snippet from a recent Fido newsletter:

"The opportunities provided by higher rates could be short-lived. Getting inflation under control is the focus of Fed policy in the months ahead, but the central bank also wants to make sure it has room to cut rates if the economy goes into recession, potentially in 2023. Rate cuts are the most powerful tools the Fed has to stimulate economic growth and the central bank wants to be able to make impactful cuts when necessary. That could mean that the opportunity to add low-risk, high-yielding bonds to your income strategy may not be there if you wait too long."

www.fidelity.com/learning-center/trading-investing/bond-market-outlook?ccsource=email_weekly_AT

The article’s goal seems to be to keep us interested in investing at Fidelity brokerage rather than putting our money in an online savings account or bank CDs.

The article articulate its goals pretty well.
I hardly ever used Fido funds, because I can find better ones.
Why would anyone use saving accounts or bank CD? Discount brokers MM+CD+tresuries are better.  Banks have hardly anything to offer for smart investors.
I never invested at my bank, except once.  Several weeks ago, Regions offered me $500 if I deposit $1500 for 6 months, it's a safe 33% return for 6 months.  I don't get out of bed for $200-300, especially when banks want me to deposit $10K-15K for 6 months.