I bonds, the sequel

I have some I-bonds that I bought in 2000, back when they were paying decent interest. Their current rate is 6.76%, which is not bad. But I bought a few I-bonds in 2003 and they are only earning 2.61% right now. I don't know what the current rate is, but it's not very good. I think it just went up from 1% over inflation to 1.5% over, but they adjusted the inflation rate way down.

The inflation hedge *seems* like a good idea, but the government fudges the inflation calculations to understate the actual rate of inflation. (they "cook the books") So you are probably better off with EE bonds, which I think pay 4%. (still not all that great) The one great thing about I and EE bonds is they can be used for educational expenses and the interest becomes tax free -- subject to restrictions of course. The other good thing about I and EE bonds is the interest is exempt from state taxes.

If you can handle the $1000 increments, T-bills are a better deal. The maturities are much shorter, and the interest rates are much higher -- currently about 5%. And the interest is still exempt from state taxes. You can buy them direct from the treasury and pay no commissions.

If you can't swing $1000 at a pop for T-bills, bank CD's are also paying about 5% for 6 to 12 month notes. Money market rates should be competitive also, but I don't know that for certain.

Best regards, Bob

Could someone explain what an EE bond is?

I-bonds are indexed to inflation (and issued by US government), correct? T-Bills are treasuries (issued by US government), correct? EE I have seen in fund prospectus, but have not seen an explanation, anyone which could comment, please feel free.

Why, or more importantly how, do they "cook the books"? Most reports I have read imply that they actually overstate inflation by about 1%. Technology, Quality, and substitution effects all drive the CPI unrealistically upward. The topic was first broached in 1996 when the famous "Boskin Report" was submitted to the Joint Economic Commitee. It explored these flaws and recommended solutions. It also estimated that CPI was overstated by 1.1% annually.

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But I like to think of the EE bond as a way for the cheap relatives to give a gift that says $100, but it only cost $50. The recipient then has to not lose the physical piece of paper for the next nearly two decades, at which point it will cost more in gas (to go cash it in) than half the interest on the bond.

For the individual, the 'nice' thing is the minimum purchase is $50 face value, so only $25 cost. JOE

I still have some $5000 HH bonds that pay $200/yr direct deposit.

they also have a software app for tracking your bonds.

A simplistic and perhaps inaccurate example: if beef prices go way up they say, "people will just buy less beef and more chicken", and factor that in as a /decrease/ in food prices (even if chicken was also up).

Best regards, Bob

I think savings bonds are a good alternative, keeping in mind that one-year window before you can cash them in. Either EEs or I-bonds, or perhaps a bit of both.

A big advantage of savings bonds (over T-bills or CDs) is that they are one of the few tax-deferred ways of earning interest. You pay tax only when you cash them in, unless you elect to pay it each year, which nobody does. And like other government bonds they're exempt from state income tax, so in a place like CA you may be avoiding 9.3% tax on your interest income.

These two features can really add up to a benefit over the years, especially considering that they typically pay rates comparable to short-term CDs. I've seen more than one small fortune built largely on savings bonds. The power of compound interest, and a lot of time!

-Tad