What's the point of EE savings bonds nowadays?

Isn't this so only for Series EE bonds issued from May 1997 through April 30, 2005? E.g. see

. Interest rates for EE bonds issued from May 1 2005 to the presentappear to have a different algorithm from the earlier bonds.

No, but the bonds aren't taxable until redeemed.

-- Ron

. Interest rates for EE bonds issued from May 1 2005 to the present> appear to have a different algorithm from the earlier bonds. Great catch, HL, the link also shows a 20 yr guarantee to double. This equates to 3.5% ann return if held that long.

The I bonds look more attractive right now - they are currently at

5.64%

Yeah. I (through no particular foresight) got in on those back in 2001. Probably been my best performing asset since then 1/2 :)/

Two notes, depending on what you think of the chance of deflation:

1) Series I savings bonds can never have a negative yield. If deflation is more than the fixed rate portion, the total rate bottoms out at zero. That's not true of TIPS, where deflation can reduce the principal value of the bond (but not below the face value at issuance).

2) Related to that, a relatively newly-issued TIPS will offer greater deflation protection than an old TIPS because it hasn't accumulated much inflation adjustment beyond the issuance face value backstop

Do you happen to know what the tax treatment is of a negative adjustment due to deflation? Negative OID? Capital loss? Basis adjustment?

-- Rich Carreiro snipped-for-privacy@rlcarr.com

Why would you need protection from deflation? Or is this protection only needed with inflation-protected securities?

-Will

william dot trice at ngc dot com

If there's deflation, TIPS principal is reduced at the rate of deflation, just as during inflation, the principal is adjusted upwards at the rate of inflation.

That would really stink if deflation hit - except that the Treasury puts a floor on the value of the TIPS at the original par. So if you buy a TIPS bond at par, the principal can never go down from there, even if there's deflation. But if you had such a bond for, say, 10 years and the principal had been adjusted upwards to, say, 140% - deflation would diminish the principal.

So, yes, TIPS are, potentially, hit by deflation in a way that traditional treasury bonds are not.

Why would that necessarily "stink".

If there truly is deflation, your purchasing power is still the same, even with the reduction. The idea being you're still in the same boat as if there was inflation.

It's not about the absolute dollars (more in inflation, less in deflation), but what those dollars can actually buy.

The only reason it "stinks" is the mental hang-up we've all got that we expect things to rise-rise-rise ... in particular inflation. In a deflationary environment, you could be losing dollars, but still come out waaaayyyy ahead if you're losing 'em at a slower/lesser rate than the rate of deflation.

Aside from the usual acknowledged problems with deflation spiraling out of control (negative self-feedback loop), I'd argue that a steady rate of deflation is better. The dollar you save today will buy twice as much tomorrow.

.

Compared to other non-inflation-adjusted fixed-income securities, it stinks.

No - again - my comment about it stinking is not relative to a mental hangup you appear to be diagnosing. It's compared to other investment vehicles, many of which we actively discuss as fulfilling similar roles in the fixed-income portion of an asset allocatin plan.

In general, a moderate but steady *inflation* is better for everyone. In a deflationary environment, people pull cash out and stick it into their mattresses and capital flows and investment slows down or stops. Moreover, wages are sticky - just because prices are going down doesn't mean that folks are willing to take wage cuts. A moderate but steady inflation manages both of those things vastly better - you can give folks raises, and people have substantial incentive to put capital to work so that it doesn't lose value.

We all know that the price of computers will come down or its performance will go up at the same price, yet, nobody postpones their purchase because they can be used now in productive activities whose income offset their future price or performance change. The same goes for cell-phones, TVs, oil, etc.

So, no inflation, thanks. Only those ridden with debt fear a deflationary or steady environment, i.e., almost all Americans and American companies.