I bonds, the ugly

After reading _Worry Free Investing_, I took a serious look at I bonds. I didn't really like what I saw.

It seems that I bonds have a pathetic real return. After tax they have a .29% return for the 25% bracket, at least for now. The 1% fixed I bonds are just about 0% real after tax. For comparison, in the same tax bracket, money markets are at about .5% real after tax.

Bernstein suggested I bonds might have a negative real return, and for the higher tax brackets that does appear to be the case.

According to my simplistic calculations, if the inflation rate equals (fixedrate * taxbracket) / (1 - taxbracket) then return will be zero real. In inflation is more then you'll lose money in real terms. For the 25% bracket, the fixed break-even point for 3.1% inflation is just about 1%. If inflation is at 3.5% (the historical US average?) the fixed rate has to be about 1.17% to break even in real terms. Etc...

This all got me to thinking. Perhaps a better way to keep real returns would be to use 90 day t-bills? Theoretically, they won't sell unless the yield negates inflation and includes a positive return after tax. Perhaps this doesn't work in practice?

In any case, it doesn't seem like I bonds are the "better cash" I thought they might be.

Perhaps we just have to wait until the inverted yield curve corrects?

Reply to
johnrichardson_us
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Right now, 28-day T-bills are paying more than 90-day. My daughter purchased two T-bills last week, the 28-day got 5.2-something percent, and the 90 day was 5.1-something -- a difference of .14 (.14 is quite a lot)

Bob

Reply to
zxcvbob

My limited understanding is that they are best thought of as a form of near-cash, with correspondingly low return.

See below. Fed monetary policy gets in the way, for short maturities.

I don't know enough about I Bonds, but I think your logic is in general good.

As has been suggested here in another thread, 2 year US treasury bonds mostly free you from the effects of short term Federal Reserve policy. When the economy slumps, the Fed tends to drop interest rates to sub inflation levels, to try to restart the economy.

Also when you have a normal sloped yield curve, by buying 1-5 years out, you 'ride the curve' (getting a higher yield than T Bills).

Reply to
darkness39

That's a 1.36% nominal yield, which is why you have to compare it to inflation. If it didn't beat inflation (3.27%) before taking out taxes, it certainly didn't beat inflation after taxes!

He was speculating whether T-bills (with their non-inflation-adjusted rates) give positive real returns:

;; Theoretically, [90 day t-bills] won't sell unless the yield negates inflation ;; and includes a positive return after tax.

My point was that even without subtracting off taxes, it's easy to find periods in which T-bills don't match inflation, much less exceed it (so that their pre-tax, real return is negative). Therefore, any theory that postulates that T-bills' selling price must always give positive real returns is contradicted by experience.

Mark Freeland snipped-for-privacy@sbcglobal.net

Reply to
Mark Freeland

On Mar 12, 9:27 am, " snipped-for-privacy@yahoo.com"

Currently maybe. But what if you had bought i-bonds back around 2000, when the fixed rate was a whopping 3.6%

Reply to
Bucky

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