Thoughts on iBonds

Been looking at those. I'm trying to figure out the catch....

Just bought 20k of them last week. Solid place to put part of an emergency fund or any cash you will need after 12-18 months. If you buy before month end you will lock in pretty close to a 8% 12 month return

The biggest catch is that if you have to hold them for at least a year (so no liquidity in that year), and if you withdraw before 5 years, you lose 3 months interest. So the sooner one withdraws then more impactful that will be.

In addition, while they should remain pretty high for a while, I think this semi-annual cycle will be the peak, so they will likely start coming down, and if they get back to the rates pre-pandemic, they’ll be really low (2% or even lower). And I think the fact that so many people have suddenly garnered interest in them (understandable), is a good sign they’re peaking.

Another thing to consider is that, while exempt for state and local taxes, they’re taxed at one’s ordinary income rates, even though they’re held for a year where other assets would be taxed at lower, long-term capital gains rates.

Another thing to consider is that there are alternatives that serve the same purpose, with advantages and disadvantages that might make the alternative better depending on one’s goals and circumstances.

For example, TIPS serve the same purpose, and it’s my understanding that they have advantages when rates are rising (not 100% sure the mechanism that gives them an advantage), and that’s what is happening and will happen in the near term. And since there are TIPS ETF’s and what not, there are some advantages with having more liquidity in the short term, and without a penalty for selling before 5 years.

Personally given the requirements to hold for a year, cap on how much can be bought, internet penalty for withdrawal, and less favorable tax treatment for gains, I would still rather be in equities personally, and might by some TIPS if I wanted to have a pure inflationary hedge.

Wonderful info

TIPS?

I can’t think of worse counsel than to tell someone to buy TIPS right now.

If FED lets inflation get out of control and tries to keep nominal rates low you are looking at negative returns. TIPs will be destroyed if the FED continues their taper and rates rise.

If you think you must play TIPS, at least do it in IVOL so you have a former Goldman trader monitoring it for you.

But in this climate, find a fund that gets you in a net put position against the 20 year. That is a much better hedge for your exposure than TIPS.

For someone looking to hide cash in a safe spot for a year or two I can't think of a better place.