I Savings Bonds: Nearly 10% Yield + 10X More Popular!

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Nothing like a 10% yield with no principal risk to attract more attention to a quiet little investment option. The WSJ has a new article What Are I Bonds? Everything You Need to Know to Earn Nearly 10% Interest as a follow-up to The Safe Investment That Will Soon Yield Almost 10% (paywall?). No groundbreaking discoveries, but you might find something useful as they are admittedly more complicated than a traditional bank savings account. Here’s an interesting stat of how TreasuryDirect is selling several billions of dollars more than in previous years:

Americans snatched up nearly $11 billion in I Bonds, which are inflation-adjusted U.S. savings bonds, over the past six months, compared with around $1.2 billion during the same period in 2020 and 2021, according to Treasury Department records. That figure will likely rise even higher on an expected jump in rates next month.

Another common question is to buy this week in April or wait until May. Here is another perspective:

I Bonds will be subject to at least one rate change in a 12-month period. Elliot Pepper, a financial planner in Baltimore, doesn’t know what the next rate after 9.6% will be. So, he’ll try to mitigate the risk that it will be lower than 7.12% by taking half of his annual limit and “locking in” the combined 7.12% and 9.6% and then buying the remaining $5,000 in late October, when he has more visibility about the next rate.

If the rate then is lower than 7.12%, Mr. Pepper said he would have been better off investing his $10,000 maximum before May. If the rate is higher than 7.12%, he would have been better off buying the bonds after May, he said.

My view remains that historically, a 7.12% inflation rate is much higher than average. So if you take a step back, your options are:

7.12% for 6 months + 9.62% for 6 months + ??? for 6 months

Or:

9.62% for 6 months + ??? for 6 months + ???? for 6 months

I’d rather lock in the 7.12% over an unknown number. However, if the new rate in October does end up being even higher, I will still eventually get that future ??? rate as a long-term holder of I bonds (it’ll just be shifted six months later). Finally, you get to start earning the interest a month earlier if bought in April. As I had the cash available in other low-interest vehicles, I saw no reason to wait. I’ve already maxed out for 2022 and 2021 (and 2020 and 2019…)

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Comments

  1. I purchased (and hold) I Bonds in April 2005 when they had a fixed rate of 1%, so I will be enjoying rates of 8.12% and 10.62% for the next 12 months starting May 1st. People should be aware you cannot redeem them for the first 12 months. They also need to keep in mind that if you redeem them before 60 months old you will be penalized and lose the last 3 months interest. On the upside I Bonds held through Treasury Direct can be redeemed in incremental amounts rather than the face value of the Bond. This allows you to control the amount of taxable interest received in any tax year. I live in NH and I Bond interest is not subject to the NH Dividend and Interest Tax of 5% which is nice plus.

  2. What’s the advantage of waiting another 6 months to purchase iBonds? Don’t you lose 6 months of interest by waiting?

    Isn’t the choice really…
    7.12% for 6 months + 9.62% for 6 months + ??? for 6 months, or
    0.0% for 6 months + 9.62% for 6 months + ??? for 6 months

    • russellmz says

      it’s a crapshoot because your postponed money could be sitting anywhere else: empty mayo jars, banks, stocks, casino table, etc.

    • The fixed rate is 0 today, so one reason to wait April out will be to see if the fixed rate changes as the fixed rate you get is for the life of the bond.

    • John Endicott says

      ” Don’t you lose 6 months of interest by waiting?”

      You lose the opportunity of six months at that high (7.12%) interest rate. But your money can be deployed elsewhere earning something (1% interest at t-mobile money, 10% dividends in a high yeild/high risk stock, etc) so you really would have to determine how much your money could have made elsewhere vs how much it’ll make at the 7.12% in order to determine if/how much you “loose” by waiting.

      The choice however is still
      7.12% for 6 months + 9.62% for 6 months + ??? for 6 months, etc or
      9.62% for 6 months + ??? for 6 months + ??? for 6 months, etc

      because it’s the interest generated during the life of the bonds that’s being compared. the top option just has one less ??? period during it’s 30 years (or however long you choose to hold them) of life. In short it’s a choice between having 2 known 6 month interest rates vs having just 1 known 6 month interest rate.

  3. I’m in the same position as Pete, I’ve been buying since 2000 and have some base rates of 1%. Cha-Ching

    I use Ibonds as a major piece of my fixed portion of my portfolio. All bonds held after 5 years are exactly like cash except you aren’t paying taxes until you redeem them. When i have redeemed bonds, they are in my bank account within 24 hours.

  4. Paul, the wait period mentioned is approx 1 week, not another 6 months.

    Pete, thanks for the reminder “can be redeemed in incremental amounts”.

    • Thanks Dan. I read this as waiting until “late October”, or 6 months from now.

      “So, he’ll try to mitigate the risk that it will be lower than 7.12% by taking half of his annual limit and “locking in” the combined 7.12% and 9.6% and then buying the remaining $5,000 in late October, when he has more visibility about the next rate.”

  5. Started buying them for me and 3 family members, but discovered, after submitting two txns, that I had already bought in January. Was able to cancel since I’d just submitted and they were pending, but am wondering what happens if I didn’t realize this until a week later, after the txns had completed? Is there something that would prevent it from completing and I’d get a “sorry, you’re over the limit for this year, the txn has been canceled” email? Just curious.

  6. What would the tax be that you pay after five years when you cash them?

  7. Does the yearly purchase limit reset on Jan 1?

  8. FRED GAMBINO says

    CAN A CASH IRA HELD IN YOUR BASIC NO INTEREST REGULAR BANK ACCOUNT IRA OR IN SHORT TERM CD’S BE USED TO BUY I BONDS STILL HELD AS AN IRA OR DO GOVERNMENT REGULATIONS PRECLUDE SUCH INVESTING IN I BONDS AS A VALID IRA INSTRUMENT/VEHICLE (NOT SURE IF I AM USING THE CORRECT TERMINOLOGY). OR IS IT MORE AKIN TO CONVERTING YOUR IRA TO A ROTH WHERE THERE IS A TAXABLE EVENT AT TIME OF CONVERSION. IS IT FAIR TO SAY THAT HAVING AN IRA IN THE FORM OF I BONDS (IF POSSIBLE) DOES NOT CREATE ANY SPECIAL OR MORE COMPLICATED ISSUE WHEN DETERMINING REQUIRED RMD’S WHICH IS BASED ON MARKET VALUE AT THE END OF THE PREVIOUS YEAR?

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