Saturday, April 14, 2012

EE Savings Bond Rate Prediction for May 1, 2012

I'm going to predict 0.5%.

This prediction assumes:

1. We're still in crisis mode (as seen in the chart below).
2. Today's 2.02% 10-year treasury yield doesn't change much over the next 2 weeks.

Click to enlarge.

I'm also going to predict that the government will change (or should change) the original maturity from 20 years to 25 years. That's the time it takes for the EE Savings Bond to be guaranteed to double in price.

At today's 20 year original maturity, the yield works out to be 3.53% per year (2^(1/20) = 1.0353) if held the full 20 years.

At an original maturity of 25 years, the yield would be 2.81% per year (2^(1/25) = 1.0281) if held the full 25 years.

The government doesn't generally set the EE Savings Bond's long-term yield above treasuries of a similar duration (like it is doing right now). See my Extreme EE Savings Bond Mispricing post for a chart that shows this.

That said, perhaps the government won't alter the maturity. It is kind of silly to have 25 year savings bonds for educational purposes. That means you'd have to buy the bond about 7 years before you have a child. I just don't think most people (at least in this economy) think that far ahead. Sigh.

This is not an endorsement to buy EE Savings Bonds. I have purchased them every year for the past three years (the guaranteed 3.53% yield keeps luring me in). Each year I think it will be my last. Never seems to turn out that way though. I made my EE Savings Bond purchase for this year back in January.

Why January? Why not wait to see what happens? I guess that shows you what I think of this economy. I didn't feel the need to wait.

I prefer I-Bonds (for the inflation protection). I've been buying them every year since 2000. So here's some trivia. In what years did I buy I-Bonds in January and not wait? Here's the list.


2001 was just before the recession began. I started bracing for the 2007 recession a bit early in hindsight. Should it really have taken that long for the housing bubble to pop? It's now 2012. Right or wrong, I'm bracing again. That brings me back to a recurring quote.

If one must panic, at least panic first.

Nobody ever protected a nest egg being the last to panic. Let's just put it that way.

Jeremy Siegel was just on Bloomberg predicting Dow 15,000 within the next 2 years. He then went on to say that the Euro would probably fall to parity with the dollar based on the ongoing crisis in Europe. He's just full of interesting predictions. And when I say interesting, I actually mean

I could believe that the Euro could fall to parity, but in that environment how does our stock market get to 15,000?

May 2, 2011
Wall Street Loves Weak Dollar and Weaker Fed

There is a bright side to this dismal series of Fed policies: The stock market has risen sharply, in a mirror image to the dollar's fall. In general, stocks have risen at about twice the rate that the dollar has fallen.

I see a market opportunity here. Someone needs to create an Ultra Short Jeremy Siegel fund, lol. Sigh.

Source Data:
Treasury Direct: EE/E Bonds Rates & Terms
US Treasury: Daily Yield Curve


Troy said...

"I started bracing for the 2007 recession a bit early in hindsight"

2001 was correct, but for the Intervention and Innovation in Lending that was accomplished 2002-2006.

Shows how they bought another 5 years before the collapse, enough to get past the 2004 election at least, which was their main goal apparently.

Stagflationary Mark said...

They couldn't make it to the 2008 election. Perhaps that was the plan too.

Here you go Obama. This economy still appears to be good. Enjoy!!

I'm also picturing McCain in secret meetings.

"I better not win this thing! Sarah Palin needs to go rogue!"

Gallows humor. ;)