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Last week’s column on I Bonds generated quite a buzz … so today I’d like to address some of the questions, comments, and other issues that are on people’s minds right now.
Let’s start with something that came from a reader named Marilyn. She says:
“On 10/31/11 I tried to take your advice regarding buying I Bonds by 10/31/11 in order to get the 6 months rate of 4.60 percent at my account on treasurydirect.gov, but unfortunately they move the transaction date to the following day (in this case to 11/1/11) so I was NOT able to get the higher 4.6 percent six month rate.”
Unfortunately, Marilyn is right. When using Treasury Direct (the official government website) to purchase these bonds, your effective purchase date becomes the following business day.
Why? I have no idea.
Still, habitual procrastinators please note this for future transactions you may conduct via Treasury Direct!
Of course, what’s really interesting is that you COULD HAVE still walked into a local financial institution that acts as a dealer for the Treasury (many do) on October 31 and bought paper I Bonds with an effective date of 10/31/11.
I did just that, in fact.
You don’t get the paper bonds right then and there … but you will get a receipt detailing your purchase date and the actual bonds will then arrive at your house later.
I was told by my local branch that it’s best to put in your order by 2:00 PM to ensure your effective date matches the date of purchase. It’s also worth noting that if you place an order on the weekend, you get the next business day as your effective date.
Now, why is it possible to get a more timely date through the old analog way when Treasury Direct is supposed to be the latest, greatest electronic way of doing business with Uncle Sam?
Again, I have no idea. I suppose this is just another of those mysterious governmental paradoxes.
Of course, the entire issue is soon going to be moot — because as I noted in last week’s column, paper bonds are going the way of the dodo at the end of this year anyway.
But that brings up another Treasury Direct twist you should be aware of …
It could take a couple weeks to establish your Treasury Direct account!
The government’s website says they’re overhauling the way you create an account — in fact, it was supposed to happen on November 4, but it still hadn’t as of yesterday.
Meanwhile, the current method requires you to submit your information electronically … wait for a card to arrive in the mail … and then use its information to confirm your account.
Secure? Maybe.
Convenient? Hardly.
Perhaps the new method will fix this issue. Or maybe it’s just in preparation for the U.S. Post Office going out of business. Who knows?
But that reminds me of another question that some of you are wondering …
Why Would I Recommend Any Type of Treasury Debt
Given Washington’s Financial Situation Right Now?
First, to be clear — I am still very negative on long-term U.S. Treasuries. I simply do not believe they are paying you enough … especially given the risk of a substantial decline in their value in the future.
At the same time, I do not believe the U.S. government is going to default on its debt anytime soon, either.
Moreover, as I mentioned last week, I Bonds are not marketable securities so they have no chance of losing you money.
In fact, even if inflation turns NEGATIVE — i.e. we experience deflation — the value of your I Bond’s principal will be protected!
Now, am I saying that I would hold today’s I Bonds — which carry zero fixed interest — for the next 30 years? Probably not.
I would, however, gladly accept a risk-free, tax-advantaged 3 percent or 4 percent annually to hold them for a year or two!
Speaking of tax advantages, you might also be wondering …
Does It Make Sense to Hold I Bonds in an IRA?
The answer: Yes, it makes sense because you could then avoid (in the case of a Roth) federal taxes altogether.
Unfortunately, I have yet to find a real-life way to make this happen. From my research, it seems theoretically possible … but I have yet to find an IRA custodian willing to facilitate the transaction. Nor does Treasury Direct offer the option.
Okay, and now one final question on the subject …
Since I Bonds Are Adjusted According to the CPI, Aren’t They Completely Flawed?
I have written many articles on the Consumer Price Index and the myriad reasons that it fails to accurately reflect the actual rates of inflation that regular people like us experience.
So, yes, it’s fair to say that the inflation component of the I Bond shares those flaws. Yet that doesn’t make these investments a bad deal … especially not if you’re using them over shorter periods of time.
Reason: You can pocket outsized returns during times when the CPI is swinging wildly … which is precisely what created the fat yields this year.
The longer you hold, the greater chance that the CPI’s inaccuracies will cause you to fall behind on-the-street inflation. Right now though, with other similarly conservative investments paying practically nothing, I still consider I Bonds a no-brainer.
That’s true even at the current six-month annualized rate of 3.06 percent. Just remember that there’s no telling what the next six-month rate will be yet and you DO have to hold them for at least a year.
So the smart strategy now might be waiting until it’s a little bit clearer what the next six-month period will pay before you load up on more I Bonds …
Just don’t wait until the VERY last day this time around!
Best wishes,
Nilus
P.S. Want to know what other income investments I’m recommending right now? Just click here to read my latest report. It will tell you about a whole bunch of other ways to get 3 percent, 4 percent or A LOT MORE right away!
{ 1 comment }
to: Nilus Mattive
from: Kapt Blasto of Facebook
Subj: Why must we need a National Debt, in the first place?
Look, Nilus:
I want a straight answer:
What LAW(s), (or regulation(s) enforced as LAW(s)), in the Federal Code, at this moment, governs the bond trade with the public (or the larger world community), to the extent, that PREVENTS or FORBIDS either…
…the Issuing Government Treasury from attempting to approach a bondholder, or…
…the Bondholder from attempting to approach the Issuing Government Treasury…
for the purposes of entering into a LOAN ARRANGEMENT where the Bond Issuer then becomes “Creditor,” and the Bondholder becomes “Debtor,” (in other words, “switch hats”) under the following conditions….
where the would-be-Bondholder-turn-Borrower, is Borrowing for a “private-side” financial Vehicle that gives that Bondholder a BETTER opportunity to recieve more in Interest, than, what the Bondholder would have gotten in the BOND YIELDS, (also TAX-FREE,)
…and where the Bondholder-turn-Borrower could also SELL SHARES of that Financial Vehicle, in the Marketplace, where the sale of that stock, could also promise a BETTER opportunity of recieving MORE the promised Maturity(ies) could give them…
…and where the Government issuer could allow the Bondholder to secure the loan with a 20% down payment, consisting of ALL the yet-to-be fulfilled promises upon the Bonds they hold, that, normally outside of this would-be arrangement, must be constrained by the time periods set forth in the language of said Bond…thereby, fashioning a voucher-of-sorts (that is FIVE TIMES BIGGER than what the yet-to-be fulfilled promises upon those Bonds, are ) to FILL the aforementioned “financial Vehicle”
…which is, let’s say, a Cerificate of Deposit held at the Federal Reserve, either on account with the Federal Reserve DIRECTLY (pursuant to whatever rules and regulations that govern the FED’s directly holding that CoD, on account,) or on account INDIRECTLY as “symbolic segments” among all the accounts held by the Members of the Federal Reserve, including Banks, Credit Card houses, and all other financial houses, that use the “uniform currency” of the Federal Reserve Note, and note-measure (aka “Dollar”)
The terms of this would-be loan are such that the Collateral to guarantee this loan is the COD itself…meaning that if Bondholder breaks the Agreement in any such way, or breaks the Law in any such way that would constitute a breach in the Agreement…the Collateral is collected (since it would-be Bondholder loaning from Treasury.)
Further, the terms that govern the principal payback, would be situated, so that as long as the Bondholder-turn-Borrowing-COD Holder (or any designate that is recognized as such by the Bond Issuer-turn-Creditor, in the Agreement) does not try drawing down from it DIRECTLY (as is allowed sometimes, by Banks underneath FED Membership, for their own COD holders, as those members own rules govern it) and instead allows either the FEDERAL RESERVE (or the Member Banks if in “symbolic segments”) to LEND to their borrowers and pay back with interest….then, Bond Issuer-turn-Creditor will consider Principal “PAID UP, and TO DATE,” meaning Bondholder-turn-COD Borrower will NEVER have to pay anything out of pocket to satisfy the principal of the Loan arrangement…However…
Any interest accrued that Bondholder-turn-COD borrower gets, 25% of it gets withheld, and sent back to Bond Issuer-turn-Creditor, to satisfy the Interest portion of the Agreement.
The rest of that interest the Bondholder-turn-COD holder recieves is TAX-FREE, where Bondholder-turn-CoDHolder can either recirculate whatever portion desired back into the COD (or, whatever segment desired), or, pocket it, without worrying about TAXES…
.
Now, Mr. Mattive, If there is such a law, (or regulation) that is preventing or forbidding either of these two parties from approaching the other for such an arrangement like this, then, I want you to find it for me.
Because, even if there is, it’s not going to be the end of this. Then we have to find out why that law was put into place, in the first place, and then, depending upon the reasoning given, find a way to have that prohibition removed, so that Bondholders won’t have to constantly wait upon the Government to tax the economy to oblivion to pay them….
Instead of everyone “paying their fair share” to Government, so that they can “pay down” the National debt, ad infinitum….
Bondholders can make a DOWNPAYMENT and help Government retire the debt (as well as the obligations upon future revenues) all the same, without everyone having to constantly “pay their fair share” in order to do it!
Well, Mr. Mattive, what do you say? Are you ready to help me? Or…do you want to see the band march on over the cliff, yet again?