Saving Bond secret is out!
 

Hi,

As some of us know, we can buy bonds with our FF miles earning credit cards and then redeem the bonds 6 months later to churn the money again in more bonds.

Well, WSJ's Personal Journal (secion D) just published today an article about "How to Juice the Return on a Savings Bond", front page of section D. Subtitle is .

I'm guessing in a short while, this will be cracked down by credit card or US Treasury once a lot more folks start taking advantage of this after reading the article. http://www.flyertalk.com/forum/frown.gif

I don't see why the Treasury would "crack down" as they're the ones who set the whole thing up this way, so they are well aware of the economics. Somewhere on this board I read that their costs may actually be lower this way because they formerly paid a commission or service fee to financial institutions for selling them.

Any crackdown might come as an extention to the time to hold without redemption or a bigger early redemption penalty.

Alternatively they may take the position that we would pay for cc transactions as the IRS does, or reduce the fees it will pay the cc companies, which will certainly make a number of them not accept for points these transactions.

All these possibilities (probabilities) are too bad for us. Personally, I buy for investment balance and enjoy the bonus of points. From the article it is obvious too many people are abusing the buy and sell option. These "smart" people again will precipitate the loss of a good service to the rest of us. Both cc policies and Treasury policies are probable for changes.

My credit card company, Farm Bureau Bank, has already clamped down on me. (Keep in mind that FBB used to give up to a 2% cash rebate for all card purchases, this good deal was recently changed and we have only up to this Oct 31 to get our rebates at this rate.) Anyway just last week they sent me bad news saying, among other things, that Savings Bond purchases would be ineligible for reward points, click here to view the full text: http://www.boomspeed.com/yanxfann/fbb.jpg

Hosers.

Adios FBB.


[This message has been edited by yanxfann (edited 10-02-2002).]

It will be a shame - for investors like me who have not yet ever cashed in a bond - so I am not churning, but certainly the incentive for this investment are the FF miles I get from the transaction. I would only cash them in when I need them - otherwise it is a savings vehicle. So far, a better one has not come along. Compared to the stock market, I have not lost 1 penny of principle and it is paying better than my money market and cd's.

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Ms.DtG

early word is that the story idea came from FlyerTalk - which wasn't credited. Oh well, you all know the most excellent adivce that has been posted up here regarding that topic. Wonderful job gang - great advice.

Sorry, but that's not true. the writer heard about it from an MBA friend of his, who happened to read the thread at the finance board on www.fatwallet.com.

UA_Eagle: is it possible for you to cut and paste the WSJ article so we can read it here?

Anyone have the link to the WSJ story that they can share?

I doubt this. There have been threads about getting miles for bonds for well over a year on FT. It's well established that WSJ reporters canvas FT for story ideas, so why would there be an article about this NOW all of a sudden?

One of the longest, but not the earliest, threads on this topic is at

http://www.flyertalk.com/pasttalk/ft...ML/005395.html

In fact it seems to be the other way around: FTers started hardcore bond-buying as a result of an earlier WSJ article!

I bellieve today's article mentioned that some $560 million of bonds were bought via credit cards in 2001. Assuming a 2% merchant fee, that would mean the Feds are eating about $11 million a year (slightly higher for 2002, undoubtedly). Not that the federal government does too many things for free to help you, but how big a deal is $11 million, really?

As soon as the stock market turns around (whenever that may be) and stock market returns are greater than the return on these bonds, people will start pulling their money out of savings bonds.

When the return on the bonds plus the value of the FF miles becomes less than the return on some other investment vehicle such as CD's, stocks, etc., then the US Treasury will probably start advertising the ability to earn FF miles on bonds purchases as an incentive for investors to purchase bonds.

avdav

I double the motion. I don't subscribe to the WSJ, so I can't access their online archives.

But I kind of doubt (I hope) the Treasury will change the rules just because of this article. Maybe 1% of the transactions that pass through their website are people just buying bonds for whatever purpose they discussed. There is nothing illegal or immoral doing that. In fact, I have done the same to the tune of $18,000 in EE and I bonds this year. Money that I would probably not have invested in savings bonds otherwise, so it's more money for the Treasury than if I couldn't buy bonds via credit cards.

The timing of purchasing of bonds with a credit card at the end of the month to earn interest from the first, they (the Treasury) fully point out on their website, plus posting their transaction limits.

Also, if one is "churning" bonds, there is a cost involved. That is you lose three months interest. If you cash the bonds six months after holding them, you have lost half your interest, which the Treasury gets to keep. So I don't see how churning can be compared to "plundering the Treasury."

I kind of doubt the Treasury will change the program which would effect ordinary investors who might be buying small amounts or as gifts, just to stop some churning of savings bonds.

The whole Government securities market is huge (in the trillions) with people buying and selling billions and billions of dollars of Government securities daily. This savings bond thing is just a drop in the bucket in comparison.




[This message has been edited by burgerwars (edited 10-02-2002).]

Really, how many people in the US can put their money out there for 6 months to earn miles http://www.flyertalk.com/forum/confused.gif

I guess there are some, most of them belong to FlyerTalk anyway.

I really doubt that there will be a crackdown on this.

Now, if Bill Gates gets a hold of this http://www.flyertalk.com/forum/eek.gif

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Another evil plot for world domination through the use of points and miles.

Sure, but I don't want glue and paper on my screen. http://www.flyertalk.com/forum/biggrin.gif I read about it in the newspaper this morning. I would guess that there is an online version of it, but I don't subscribe to WSJ.com.

BTW, I just went over to their site anyway (at least the public and free parts), went to the Personal Journal and tried to find the article, but I didn't see it. http://www.flyertalk.com/forum/frown.gif Although I did see just now that the code sharing between UA and US has been approved, but you have to subscribe to WSJ.com to read the actual article. Oh well.

[This message has been edited by UA_Eagle (edited 10-02-2002).]

Agreed. Get 'em while they're hot! I hate it when a great deal gets too popular...

Here's a link to a copy of the WSJ story:

http://www.fatwallet.com./forums/mes...hreadid=113316

I predict the US Treasury Dep't will do absolutely nothing to change the system. In fact, they'll be tickled pink if the article gets more people to sign up to buy savings bonds.

Consider that even with the CC fee, the gov't pays less interest on the savings bonds than the bonds which are transferrable and sold at auction.

Also consider how much it used to cost the treasury dep't to sell savings bond via banks as resellers. Ouch. Even paying the credit card processing fee, it's almost certainly cheaper than the old way.

Remember the whole purpose of savings bonds is to reduce the governments reliance on high-interest bond sales to finance its debt. It takes money out of state government pockets because the interest isn't taxable by states, and then transfers the effective savings to the federal gov't.

Good deal for everyone except the CC issuers giving out the rebates (or miles) and the state gov't treasury departments.

Right now, that's not true. The EE bond rate is significantly higher than the 10-year T-bond yield, even without considering CC fees. This is admittedly an unusual situation, due to the fact that savings bond rates lag and market rates have declined so steeply this summer. People tend to pile into savings bonds under precisely these conditions. The CC fee only pays for itself if the buyer holds the savings bond for several years. I plan to hold until a significantly better rate appears elsewhere, which might be several years or might not.

And don't forget, the Feds need all the money they can get their hands on since 9/11. The war in Afghanistan will cost a pittance compared to what they (we!) are getting ready for in Iraq. As long as it's cheaper overall for the govt to get the money this way, we'll be getting our miles/points.

Plundering...ok...

I'd like to know what the percentage is for those of us crafty folks who are buying bonds and selling versus buying and holding. I've purchased over $60k in bonds and plan to keep them for my retirement.

I'm sure that most of us don't intend to go through the hassle of "flipping" our savings bonds. However, their liquidity (our ability to cash them any time after six months in case we need the money with only a 1% penalty) is crucial in our purchase decision.

actually, depending on your calculation and especially if you hit a double or triple promotion (miles and points) right, i'd argue you're return is often greater for flipping. keep in mind that with a statement date close near the end (but not at the end) of the month, you can essentially float 2 1/2 months (credit card and gov combined) before your payment is due, thus negating the 3 month penalty somewhat (which is only a 2 month penalty if you buy bonds at the very end of the month, regardless of your c card's closing date). your points or $$$ earned from your affinity credit card for the purchases is almost always "tax free", thereby increasing the overall APY for flipping a couple of times a year.

the gov does get screwed though. if they are in fact paying 2-3% each time, then this is 4-6%/year they're paying to the c card company BEFORE your measly interest. where the article is contradictory, however, is when it makes it sound that credit card companies are finding it necessary to scale down affinity programs for bond purchases. if i'm Citibank, and providing 1% cash back after taking in 2-3% from the gov, i'm better off than preventing you from buying them.

i also don't see this as raiding the Treasury. in theory, i think the gov would see more demand, thus causing lower bond rates and the ability to renegotiate the fees paid to credit card companies. some credit card companies refuse bond purchases as a result, and some investors find the total return not as attractive, and therefore don't buy bonds like this anymore, thus allowing the non-flipping, long-term holding, traditional buying (non-credit card) bond holders to keep buying them while eventually freezing out the flippers.

I doubt that the govt is paying 2-3%. Companies far smaller than the US govt get rates for less than 2%. I'm sure they got AMEX to reduce their % to be equal with visa/mc for the potential volume of purchases.

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Ms.DtG

With whatever rate the Government is paying it still has to be lower than what they were paying the financial institutions to sell and cash bonds.

Over a year ago, Money Magazine or the Washington Post (possibly both) had an article about purchasing savings bonds online and obtaining either miles or a cash rebate for purchase. Unfortunately, I do not have a link to the article.

Well, that's great! If that article didn't shut down the program, maybe the WSJ article won't, either



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The Personal Travel Experience of Gary Steiger - including how to get free frequent flyer miles on the web.

I don't think that this is any new news to the govt and I don't think it will shut this down. If they changed the minimum redemtion time to 1 year instead of 6 months if purchased with a credit card, but then they would have to keep track of who purchased bonds with a credit card. I think the "churners" are in the minority. I started buying bonds when I saw an article in the local paper and was one of the first to list it here. I haven't cashed in a bond yet, and I sure am glad I bought I bonds when they were paying 7.5% with a fixed rate of 3.5. Once bought, I forget I have them and will only cash the most recent ones if the interest rates begin to rise above what they are paying or I really need the money. After 6 months they are liquid, so anyone not needing the money could leave them. Remember the 3 months loss averages less of a loss the longer you leave them.

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Ms.DtG

I went on a buying spree with my Starwood AmEx card back in the spring with the intent of flipping the bonds over in six months to earn more miles. However, I've re-thought this strategy since then given the lower interest rates and bond rates.

I think we're safe for the time being. Still, as mentioned, the Government probably pays much less in a commission to M/C and Visa than a regular merchant. Reasons for the best rate are all transactions are electronic, the average purchase is larger than most merchants, very little credit card fraud (I couldn't imagine a criminal using a stolen credit card to buy bonds in their own name) and all sales are final (no refunds). High return rates are probably the biggest reasons why M/C, Visa and American Express will charge merchants more. Discover Card is known as the card that is most likely to drop a merchant for high return rates.

I also can't see the Government issuing different types of EE and I bonds, based how someone paid for the purchase, with credit card purchases having a one-year holding period instead of six months. Something like that might require an act of Congress to change the rules. And is the Government going to penalize an average purchaser who is buying a bond on a credit card as a gift, or for themself, just because some bond buyers might churn them? Unlikely. The Government already enjoys lower costs in issuing them directly via their automated web site using credit cards, than having a local bank manually help complete a purchase. Plus there is also the built in three month interest penalty for cashing bonds before five years.

That said, there is nothing to stop a credit card issuer from treating certain classes of purchases (like savings bonds) not eligible for bonus points, rebates or miles.

What probably irritated the Farm Bureau Bank was they had a high rebate offer, and the percent they got to keep from bond purchases might not have been enough to offset the rebates they were paying. If a customer was buying $35,000 worth of stuff at WalMart with their card to earn rebates, instead of $35,000 in U.S. Savings Bonds, FBB would be smiling all the way to the "bank." But I hope FBB behavior is an abberation. So far, I haven't heard anything about Amex or Citibank treating these purchases different from others.

As far as this being a "secret." Hardly. Not widely known, but far from any secret. I read in the WSJ article that Savings Bond purchases via credit cards are up something like 68% in one year to $600 million. I doubt the Treasury looks at this as a bunch of churning. Maybe a small percent is, but the lion's share of this increase is probably a shift from people buying bonds at the bank to buying them online. Such a shift saves the Treasury money. If there is some churning there too, it's probably not anywhere near enough to offset the savings the Treasury enjoys issuing more bonds via their web site.

Wow, the secret IS out.

I had two guys behind me at starbucks explain the savings bond thing (w/ a cash back card) to a friend today...

I don't know, I think the secret will really be out when the guy behind the Starbucks counter explains the savings bond "scheme." http://www.flyertalk.com/forum/wink.gif


On a buying note, if I want to spend $1,000 on saving bonds. Is there a difference between buying 10 $100 bonds or 1 $1000 bond other than the extra paper involved? I guess you have freedom to cash pieces of your investment if you break it into smaller denominations, but will anything else come into play?

No difference. But obviously if you plan on buying $5,000 in EE bonds ($10,000 face value) for yourself at once, it wouldn't make much sense to buy them as 200 $50 bonds. Just buy them in whatever demonination mixture you think is best for you.

It is more work to buy several bonds rather that one on the internet, otherwise go for it.

Seems silly to me. The limit is 45k worth of bonds a year. 30k Series I, 15k Series EE. So I get 1.8 roundtrips locking up 45K of cash at rates under 2% between 4-6 months (assuming you use the credit card grace period to the max)? It is a nice perk, but if I had 45K in cash lying around I wouldn't be concerned with 1.8 roundtrips. I'd be more worried about that analyst who figured AA would be short of cash by the end of 2003. Assuming worst case, what would happen to all those people who have cash in the AA Money Market Fund???

thumper666 - then don't do it.

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Ms.DtG

"what would happen to all those people with money in the AA money market fund"
Nothing. You aren't lending them the money nor do they manage the fund. You get miles there just like with any other partner.

Not completely accurate! Check out this amrcorp website.

http://www.amrcorp.com/facts/sheets/investment.htm

bump, for those new to the board and not knowing about savings bonds.

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Ms.DtG

These savings bonds are a great deal. But why did you have to simultaneously bump three messages on the same subject?

Full info on this "secret" can be found on my web site below, near the top of the Finance page.

Perhaps 'nuff said?

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