Having just digested the WSJ piece referenced elsewhere on this board and observed the glowing praise bestowed on them ….
Proposition: If the Treasury Department tomorrow removed the $10,000 cap and allowed individuals to invest any amount they desired in I-Bonds at the present and anticipated rate of interest (roughly 7.5% & 9.5%) would you sell all your other investments and put all the money into I-Bonds? If not, what percentage of your current investment portfolio do you think would be the “right” amount for you to move into these?
What I’m trying to get at with the question is if there were no cap on the I-Bond amount, to what extent would people sell equities and other riskier investments in order to lock in that attractive I-Bond rate?"
Comments
I have not seen the WSJ article you mentioned but I do not need to.
However, I would do this with my fixed income investments (~30% of portfolio).
My current fixed income holdings are: stable value fund, ultra-short-term bond fund, and multi-sector bond fund.
If one would consider trading bond funds for savings bonds and those bond funds were primarily in tax-sheltered accounts, one would need to do a major reshuffling to make this work: sell bonds in the tax-sheltered account(s), buy equities in those accounts, sell equities in taxable accounts, and use the proceeds to buy savings bonds.
Manageable, but not quite as simple as the hypothetical first appears.
- One could invest all of their non tax sheltered money in I-Bonds.
- One could pay taxes early on tax-deferred money to buy I-Bonds were the cap removed.. They’ll owe taxes on that someday anyhow.
- One could move 100% of a Roth to I-Bonds without paying taxes.
That is a nonstarter. Treasury Direct doesn't allow IRAs, and electronic I-Bonds can be only held at Treasury Direct.
But I-Bonds are tax-deferred already (federal) for up to 30 years and exempt from state/local taxes. So, why wish for I-Bonds in IRAs? - a near impossibility. There are exceptions if one can find a willing IRA sponsor to buy and hold I-Bonds especially for you in custom IRA, but most won't bother.
I believe @hank is just suggesting that instead of rearranging allocations, one could get the cash from bonds in a Roth without tax consequences. I wouldn't do that, because it is swapping a tax-exempt investment (Roths) for a tax-deferred investment (savings bonds). In a sense, that's a Roth anti-conversion.
That’s correct. I’m not aware of anything yielding anywhere near 9.5% guaranteed that one would be able to put into an IRA, Roth or otherwise. So for those yearning for yield, cashing out a Roth might make sense. Remember, the hypothetical question assumes “no cap”. If one had several million dollars in a Roth, moving the total into I-Bonds would be allowed!
Neither Roth nor I-Bond is taxed at the federal level. There might, however, be some state tax on the I-Bond interest depending on residency, What I’m trying to get at with the question is if there were no cap on the I-Bond amount, to what extent would people sell equities and other riskier investments in order to lock in that attractive I-Bond rate?
To me, the one year lock is problematic. Cash is valued for its liquidity in making trades in and out of riskier assets. Also comes in handy in an emergency.
It would be useful to edit / add the above to the OP.
I will not sell equities to buy iBonds because equities already have some inflation adjustment built into them. Others that have zero iBonds may choose to sell some equities to buy iBonds.
"To me, the one year lock is problematic. Cash is valued for its liquidity in making trades in and out of riskier assets."
If equity risk on is back then I would just switch some low beta equities to high beta equities just the reverse of what one does when one wishes to take down equity risk.
This survey is likely an exercise in entertainment and so I should not really nit pick!
Other way around. Treasury (and related) securities are exempt from state taxes, but with some exceptions are federally taxable.
If we ever hit 1980s rates (which I doubt) I'd seriously consider shifting probably 70% of my holdings into them, though. I saw in my own family how *good* that set people up decades later.
Sorry if folks don’t like my post. I like to keep a pulse on what other investors are doing and thinking. Helps me better position. Admittedly, it’s likely of little use to others. (But they’re welcome to put up their own posts and questions.)
On a related note - I’m doing a lot of thinking about how the increasing money flows into this vehicle might eventually affect / weigh on other markets. While the inflation adjusted I-Bond has been around a fairly long time, it’s only very recently that inflation has risen enough to make the returns appealing. So, IMHO, we’re looking here at a relatively new investment phenomenon with potentially far reaching repercussions.
But inflation-linked bonds have longer history elsewhere. Many countries with weak finances and shaky currencies could only issue inflation-linked bonds. Examples include post-WW II France, Italy; also Chile (1956-), Brazil (1964- ), Argentina (1973-).
But then many stronger countries also started issuing them, Australia (1985-), Canada (1991-), Japan (2004-), Germany (2006-), etc.
In the US, TIPS are only 5-6% of the Government debt market, and Savings bonds (all types) only 0.5%.
https://www.treasurydirect.gov/indiv/research/indepth/frns/res_frn_rates.htm
P.S.: I am interested in buying and holding this instrument - it is not just an intellectual curiosity.
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
Just an FYI - The listing (disclosing market pricing) of secondary 2-yr FRNs is not available for retail customers to see at Fidelity. Probably the same at other main stream brokerages. We have to call the fixed income desk and then they check with the order desk to tell us what the current bid-ask is. Evidently, there is plenty of inventory (liquidity) in these FRNs but Fidelity does not list them on their website so customers are not confused between them and the regular 2-yr notes. I do not understand their reasoning, given TIPs are listed but I choose not to dispute their reasoning. In any case, they are currently trading at a premium to par.
FidoSchwabalsoasks to give them call (no online order entry). But it is OK to enter online order for TIPS at Auctions. May be the same to buy 2-yr FRNs (next FRN Auction on 4/27/22). https://home.treasury.gov/system/files/221/Tentative-Auction-Schedule.pdfI just checked my Fido a/c and it does allow me to enter TIPS order at Auction (but I didn't go through with that).
Note that orders for Treasury Auctions can only be placed AFTER their Treasury announcements, and that for 2-yr FRN will be on 4/21/22 morning (around 11am Eastern). Check your Fido account then to see what it allows for 4/27/22 Auction.
BTW, Fidelity allows online orders for TIPs in the secondary.
https://www.treasurydirect.gov/instit/annceresult/press/preanre/2022/A_20220421_5.pdf
Edit/Add: I don't see them listed yet at either place. I won't be at my PC for a while.
Edit/Add2: I see 2-yr FRN listed at Schwab. Can buy online. Fido not updated yet. Now I have to go now.
As we have discussed more than iBonds in this thread, those going to TreasuryDirect.gov are better off starting at the Research center sub tab within the Individual tab.
https://www.treasurydirect.gov/indiv/research/research.htm
It may not be easy to access information applicable to all products when one is already within a specific product subtab.
Thanks to all who shared their ideas re the original question.