Tuesday, November 1, 2011

New Savings Bond Rates Announced

November 1, 2011
Public Debt Announces New Savings Bonds Rates, Series I to Earn 3.06%, Series EE to Earn 0.60%

I-Bond Fixed Rate: 0.0%
I-Bond Composite Rate: 3.06%
EE-Bond Rate: 0.6%

I predicted 0.0% and 3.06% for the I-Bond. 0.0% was an easy prediction and the 3.06% part was just the math to go with that prediction.

I predicted 0.3% for the EE-Bond. This was the far more difficult of the two predictions because it required extrapolating noisy data into uncharted territory.

EE/E Bonds Rates & Terms

EE Bonds issued May 2005 and after earn a fixed rate of interest. The fixed rate is determined by adjusting the market yields of the 10-year Treasury Note by the value of components unique to savings bonds, including early redemption and tax deferral options.

The EE-Bond rate was set at 0.6% on November 1, 2011. The yield of the 10-year Treasury Note was 2.01% on that day (today).

The EE-Bond rate was also set at 0.6% on November 1, 2010. The yield of the 10-year Treasury Note was 2.63% on that day.

Note that the interest rate fell 0.62% on the 10-year Treasury Note but the EE-Bond rate is the same. They clearly have plenty of discretion when setting the rates. Also note the behavior change from pre-crisis to crisis in the following chart. That's clearly a huge discretion.

The 0.6% rate offered today has "twisted" the red trend line to more closely match the slope of the black trend line. It would therefore be hard to argue that this increase in the rate over what I expected is an indication that we are out of crisis mode. In my opinion, it is simply an indication that the data is/was a bit noisy (doesn't stick firmly to the trend lines).

In any event, this new data point should help me make more accurate predictions in the future. I'm even willing to make my first prediction right now. It is my opinion that we will still be in "crisis mode" 6 months from now. In other words, the EE-Bond rate set on May 1, 2012 will be much closer to the red line than the black line.

Why such a bearish mood? Here comes the sarcasm.

The more we borrow, the more we're saved!

Source Data:
U.S. Treasury: Interest Rates
Treasury Direct: I Savings Bonds Rates & Terms
Treasury Direct: EE/E Savings Bonds Rates & Terms


Mr Slippery said...

Nice predictions! You could be running the Treasury by yourself. Of course, that would put a lot of people out of work, so maybe it is best you stay retired.

I bought more i-bonds yesterday expecting the drop in rates today, and to pick up the full month of October interest. You schooled me on when to buy.

Stagflationary Mark said...

Mr Slippery,

Glad to be of service!

In other news, the 30-year TIPS bond that I bought in February against Jeremy Siegel's dangerous advice is now up 40% (counting the one interest payment made to me so far). I'm still holding it to maturity due to a lack of suitable alternative investment choices. I don't consider it a personal victory. It doesn't even help me since I'm holding to maturity anyway. What it does do is shaft the people who took Siegel's advice and waited on the sidelines hoping for higher real interest rates. They are @#$% out of luck now, at least so far.

I have a theory. Treasury Inflation Protected Securities tried to run over Jeremy Siegel's dog. What else could possibly explain his ongoing hatred of them? Well, other than the fact they've made him look like a fool for the past decade by outperforming his precious stocks.

Stagflationary Mark said...

You wouldn't want me running the treasury, lol.

I would have set the EE Bond rate at 0.3% and increased the time needed for the bond to double in price from 20 years to 23 years. That would have lowered the long-term yield from 3.53% to 3.06% (to more closely match the drop in long-term rates elsewhere).

Looks like I may be buying more EE bonds in 2012. That would make 3 years in a row. No hurry on the decision though. Let's see what happens between now and April 2012 first.

I'd be holding my nose while buying them, but what's new?

Mr Slippery said...

Funny, I hold my nose when I buy gold these days. Gold may be overpriced, but EEs are almost guaranteed loss of purchasing power. What can you do?

I shorted the Rubicon on Monday and that is working out well...for now. Nothing is safe. Your long term TIPS are looking pretty good right now, even discounting the 40% gain this year.

At least we can both poke fun at Siegel. What a maroon.

Stagflationary Mark said...

I think the book written about Long Term Capital Management should have been a two volume set.

Volume 1: When Genius Failed
Volume 2: When Growth Failed

I don't think it is set in stone that EE bonds bought today and held 20 years will lose purchasing power, but it certainly isn't looking good. (The bond maket thinks inflation will be below the 3.53% rate EE bonds will generate, not that the bond market has perfect vision.)