I’d normally stuff an investment idea in Money Angle but this will be useful to anyone that has $10,000 in a savings account earning nothing.
The current government rate on I-bonds is 7.12%. A quick rundown:
What is an I-bond?
A US savings bond issued by the Treasury intended to protect the owner from inflation.
How is the rate determined?
The rate is called a composite rate. It is comprised of a fixed rate plus a variable rate that is indexed to inflation. The variable rate is set every May and November based on the prior 6 months’ CPI-U index.
You can find the formula for the composite rate here, but the most important point is this:
The fixed-rate, currently 0%, acts as a floor. Even if CPI goes negative (as it did in the aftermath of the high 1970s inflation), you cannot earn less than 0% on the bond.
Is it taxable?
Only at the Federal level (so if you live in NJ, NY, IL or CA you should be buying these). You can report the interest on your tax form every year or you may defer it until you redeem the bond. Most people defer, but if your child owns it, you may prefer to claim the interest in the year it accrues. Details here.
If you use the proceeds for education, even the Federal tax can be avoided but there are many exceptions to this including income exclusions for high earners. Details here.
Are they liquid?
Unlike TIPs, these are not traded in the open market. When you buy them, they are associated with your social security number. If you want your cash back, you must redeem the bonds.
When can I redeem the bonds?
The bond matures in 30 years, but you cannot redeem them in the first year.
If you redeem a bond before it is 5 years old, you forgo the recent 3 months’ interest.
After 5 years, you may redeem with no penalty. Full details here.
Notice that if you bought these today at 7.12% interest, redeemed them in 1 year, and paid the 3-month interest penalty, you’d still be way better off than a CD or savings account, even in the worst-case.
To demonstrate that I’ll walk you through the math of buying $10,000 worth of bonds.
Nov 1: Buy $10,000 I-bonds
Nov 1- May 1, 2022: Accrue 3.56% interest. Accrued redemption value is $10,356.
Let’s also assume CPI-U magically drops to 0% for that time, resetting the I-bond variable rate to zero.
Nov 1, 2022: The bond has accrued no additional interest. You decide to redeem these stupid bonds, and forgo your last 3 months’ interest. Alas, there was no interest in the past 3-months, so there’s no penalty.
Net result: You earned 3.56% interest for 1-year and only pay Federal taxes on it. Still much better than a savings/CD account and no extra risk except liquidity.
Just for thoroughness, if the variable rate reset in May kept the rate the same at 3.56%, you’d get a compound result. You’d earn 3.56% on $10,356 of principal.
So what’s the catch?
There are a few.
- You need a social security number.
- You may only purchase up to $10,000 of them in a given year. (You can actually buy an additional $5,000 if you have a tax refund).
- You need to spend 10 minutes creating a treasurydirect.gov account and remember that you have an asset there.
The upshot of all this
If the “catches” don’t bother you, this is free money.
There are other details such as how to buy them as gifts or for your children. You can explore that on your own here.
Money Angle
I have been catching up on all the web reading I didn’t do while traveling this summer. As I work through them, I usually read and discard. If it’s interesting, I might tweet about it. Sometimes the post applies to an idea I already plan to write about it, so I file it, and it makes its way into something I publish later. Here are a few that stood out that don’t necessarily fit into something I’m working on but are worth sharing broadly.
- Radical Complexity (21 min read)
Jean-Philippe BouchaudThis is a non-technical paper by one of Wall Street’s most widely regarded quants, addressing 6 topics. Thanks to @VolQuant for pointing it out.
Abstract:
This is an informal and sketchy review of six topical, somewhat unrelated subjects in quantitative finance: rough volatility models; random covariance matrix theory; copulas; crowded trades; high-frequency trading & market stability; and “radical complexity” & scenario-based (macro)economics. Some open questions and research directions are briefly discussed.
The next few posts tie together beautifully and work well in order. If read in the prescribed order, the vibe goes from theoretical to applied (and also less cynical which is a better way to end Moontower according to the shit sandwich method.)
- Bubble Wealth (3 min read)
Prof. Bradford Cornell (h/t @choffstein)I like simple. The author uses a 3-person toy model to show how accounting works to link the snapshot of wealth in a system to the flows. There are 2 ideas I’d point your attention to.
- The potential to construct a psychology compassThis is an idea I had while reading the post. One can study periods of major flows to handicap the distribution of realized vs unrealized p/l amongst an asset’s holders. This can hint at a system’s bias towards fear or greed.
If that intrigues you, check out the first half of Lyn Alden’s How Market Capitalization Works And A Look At Rolling Bubbles (19 min read).
For professionals, you will recognize that this reasoning is similar to the difference between money-weighted and time-weighted returns.My friend Aneet Chachra recently wrote a post that uses creation/redemption data for ETFs to infer money-weighted returns.
See ETFs Are The New Stocks — Mind The Creation/Redemption Gap (4 min read)
- An asset’s “convenience yield” (a term borrowed from backwardated futures markets)From the paper:
In the example, Coin provides absolutely no services, but in reality, Coin could be a substitute means of exchange providing a convenience yield.
Whatever the reason that trading starts, if the price begins to rise then in a world of incomplete information and heterogeneous beliefs, the price increase could become self-fulling in a manner such as that originally described by Harrison and Kreps (1978). Although a pure example of Coin might not exist in the real world, some actual securities such as cryptocurrencies like Bitcoin or stocks such as Nikola, AMC, and GameStop can be thought of as portfolios consisting of a combination of a security that has rights to future consumption and Coin. The Coin part of the portfolio would function just like pure Coin did in the example and have all the same effects.
If that intrigues you, check out Lily Francus’ On Memes, Dreams, and Currencies (15 min read).
- The potential to construct a psychology compassThis is an idea I had while reading the post. One can study periods of major flows to handicap the distribution of realized vs unrealized p/l amongst an asset’s holders. This can hint at a system’s bias towards fear or greed.
- Why the Bezzle Matters to the Economy (15 min read)
Michael PettisTry to count how many times you nod while you read just the intro:
In a famous passage from his book The Great Crash 1929, John Kenneth Galbraith introduced the term bezzle, an important concept that should be far better known among economists than it is. The word is derived from embezzlement, which Galbraith called “the most interesting of crimes.” As he observed:Alone among the various forms of larceny [embezzlement] has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country’s business and banks.
Certain periods, Galbraith further noted, are conducive to the creation of bezzle, and at particular times this inflated sense of value is more likely to be unleashed, giving it a systematic quality…
- Apes, Rocks & the Future of Finance (14 min read)
Dave NadigExcerpt from the conclusion:
I’m actually super bullish non-Crypto and NFTs and particularly, the kind of tokenized asset management being done in the DeFi space…But here’s the thing: it’s also OK to miss it. I believe the Crypto sandbox is going to revolutionize how we move value around the global economy in countless ways, the same way the internet revolutionized how we move information around the global brain. But big, big global change happens much more slowly than technology itself.
I welcome Dave’s unique voice in the crypto conversation. With a strong understanding of traditional finance and an open mind bordering on “techno-optimism” (a term often used pessimistically), Dave is critical without being dismissive.
This is a smart, balanced post. Especially if you are weary of how polarizing crypto and DeFi can feel.
And as a former floor trader, the expression “exchange seat capitalism” could not convey a dynamic any more succinctly. Wish I would have thought of that myself.