Savings I Bonds November 2021 Interest Rate Prediction: 7.12% Inflation Rate!

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(As previewed back in September, inflation has been ticking up and the new annualized rate on Series I bonds will be over 7%. Inflation-linked bonds do well when inflation is higher than expected, which is currently the case. Every single I bond will earn this rate eventually for 6 months, depending on the initial purchase month. The usual full semi-annual update is below.)

Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. With a holding period from 12 months to 30 years, you could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the November 2021 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a October 2021 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a November 2021 purchase.

New inflation rate prediction. March 2021 CPI-U was 264.877. September 2021 CPI-U was 274.310, for a semi-annual increase of 3.56%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 7.12%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be up to 3.60%.

Tips on purchase and redemption. You can’t redeem until after 12 months of ownership, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A simple “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month – same as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in October 2021. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 3.54 = 3.54% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 7.12 = 7.12%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on October 31st, 2021 and sell on October 1st, 2022, you’ll earn a ~3.87% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on October 31st, 2021 and sell on January 1, 2023, you’ll earn a ~4.57% annualized return for an 14-month holding period. Comparing with the best interest rates as of October 2021, you can see that this is much higher than a current top savings account rate or 12-month CD.

Buying in November 2021. If you buy in November 2021, you will get 7.12% plus a newly-set fixed rate for the first 6 months. The new fixed rate is officially unknown, but is loosely linked to the real yield of short-term TIPS, and is thus very, very, very likely to be 0%. Every six months after your purchase, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (total bond rate has a minimum floor of 0%). So if your fixed rate was 1%, you’ll be earning a 1.00 + 7.12 = 8.12% rate for six months.

Buy now or wait? Given that the current I bond rate is already much higher than the equivalent alternatives, I would personally buy in October to lock in the high rate for the longest possible time. Who knows what will happen on the next reset? Either way, it seems worthwhile to use up the purchase limit for 2021 either in October or November. You are also getting a much better “deal” than with TIPS, as the fixed rate is currently negative with short-term TIPS.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. You can only buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

Note: Opening a TreasuryDirect account can sometimes be a hassle as they may ask for a medallion signature guarantee which requires a visit to a physical bank or credit union and snail mail. Don’t expect to be able to open an account in 5 minutes on your phone.

Bottom line. Savings I bonds are a unique, low-risk investment that are linked to inflation and only available to individual investors. Right now, they promise to pay out a higher fixed rate above inflation than TIPS. You can only purchase them online at TreasuryDirect.gov, with the exception of paper bonds via tax refund. For more background, see the rest of my posts on savings bonds.

[Image: 1950 Savings Bond poster from US Treasury – source]

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Comments

  1. What could one expect to make in interest on a $10,000 purchase, if made by Oct 31 and held for one year?

    I’m completely confused on deciding when to buy.

    If you buy Nov 1st, that you earn 7+% for ONLY 6 months and then 0% for the next 6 months ????

    Whereas if you buy Oct 31st, you earn 3.54% for the first 6 months and then 7.12 % for the next 6 months??

    So, in other words…since I’m completely confused…currently, do these I-Bonds ONLY earn a decent interest in their 1st 6 months and crap afterwards? Or is the crap interest rate afterwards due to a 3 month penalty for selling in less than 5 years of being held??

    What if inflation continues to stay high – do these I-Bonds keep earning above par interest every 6 months?

    It seems (to me anyway), that inflation is here for a good long while… I’m feeling Jimmy Carter era inflation for a long, long, time to come…

    • If you buy in November, you’ll get the 7.12% for 6 months and then the rate for the 6 months after that will be determined based on future CPI. It is simply unknown, not zero. The rate will adjust semi-annually to track the CPI-U.

      • “It is simply unknown, not zero. The rate will adjust semi-annually to track the CPI-U.”

        Thanks – do you have any guestimate on what you “think” it might be?

        I’ve got money sitting in different accounts – some earning 3% @ $25k (~$50 a month) and other money earning less than 1%. It’s too bad there’s a $10k limit but at this point…what the heck – I’ve just got money sitting there doing nothing else for the foreseeable future. I just opened up a Treasury account!

        • I believe that humans have a recency bias. If inflation has been low for a long time, then the “expected inflation” will likely be lower than it probably should be. This is why I like owning TIPS and I bonds for part of my bond exposure, as if the inflation is as expected, then I just break even, but if the inflation ends up higher than expected, then I’m ahead. The volatility is higher due to fluctuations in real rates, but to me the risk is actually lower given that they are also fully backed by the US government.

  2. Thanks for your post Jonathan. Just to confirm, if I buy in November, I assume the 7.12% rate is an annualized rate, and the actual interest rate I will receive for 6 months will be 3.56% (7.12 / 2), then plus an addition x.x% rate (unknown) for 6 months. In other words, after 6 months, I will have earned 3.56% interest on my i-bond investment? (I realize I cannot redeem them until 1 year at the earliest).

  3. Do I get it right that I can buy $10K in October for 3.54+7.12 rate and then buy another $10K in January for 7.12+unknown rate?

  4. how can you buy I bonds with your IRA money?

    • I don’t believe there is any direct way to buy I Bonds in an IRA. There is an older article online that says if you have a self-directed IRA AND had paper bonds AND somehow change the ownership title to a willing IRA custodian, you could pull it off, but it just sounds like way too much work to be worth it for individual paper bonds.

      https://pocketsense.com/buy-paper-savings-bonds-4915139.html

      Besides, savings bonds already offer tax-deferral, so it’s already half-way there, similar to a non-deductible IRA. You buy with after-tax money, but it can compound tax-free for 30 years, and you pay ordinary income tax upon withdrawal. I would simply buy something else in your IRA like real estate/REIT/stocks, and then buy savings bonds on their own separately.

      • Aren’t REIT real estate funds/ETFs tax inneficient for a taxable brokerage account?

        • Exactly, I would rather use my IRA funds to buy those types of assets instead of a savings bond, which is already relatively tax-efficient.

          • I know this is unrelated but I think in your Portfolio updates post you don’t mention which holdings you have in taxable brokerage accounts vs tax deferred accounts. It will be helpful to know. Thank you.

  5. Hi Jonathan,
    Is this piece of the article accurate? “buy on April 30th, 2021 and sell on January 1, 2023, you’ll earn a ~4.26% annualized return for an 15-month holding period”

    • No, it should be buy on October 31st, 2021 and sell on January 1, 2023. In this scenario, you would get credited for 15 months of holding time for October to January (minus the 3 months early withdrawal penalty for 12 months of paid interest), but have an actual holding time very close to 14 months. Fixed, thanks!

  6. Gosh, TreasuryDirect is one of the worst websites I’ve ever used. My account was locked years ago because I tried my password too many times, so you have to call an 800 number and wait 10 minutes for a guy to type in your own security questions to unlock it (why can’t I just do that?) Then the process to add a bank account is printing and filling out a 6-page form, having someone at an actual bank sign it (whyyyy), and mailing it in. So archaic! I don’t remember doing all this in 2012 when I first bought one.

    • Yup, getting set up is the hardest part. I don’t know when they last updated the software behind that site. I’d definitely link a bank account you plan on keeping for a long time, as it is a big hassle to switch linked bank accounts.

    • That’s odd about the bank account piece – I didn’t have to print any forms or anything. Just added the routing and account number. Guess I got lucky (somehow).

      • I didn’t have to do it either when I set up my Treasury Direct account a while ago.

        However, looks like things changed. Something to keep in mind. I’ll have to move the funds into the account that TD currently has to avoid dealing with this extra hassle.

        This is the message I’m getting when trying to add a bank account online.

        As part of our efforts to provide additional security for your investments, you must complete and mail a Bank Change Request Form FS 5512 E to add a new bank or edit an existing bank.

        You must sign the form in the presence of an authorized certifying official available at a bank, trust company, or credit union and mail it to us for processing. Certification by a Notary Public is not acceptable.

        Your request will not be processed until we receive and approve your form with any necessary supporting documentation. We will notify you by e-mail when your transaction has been completed.

  7. Agree the site is terrible to navigate as well.
    I have an old I Bond purchased back in Nov 2012, How do I know the fix rate of it (didn’t make note of it at time of purchase)? Spent more than 30min. on site and still couldn’t figure it out.
    It only says I have 3.54% interest rate: is it fixed or variable rate? I’m clueless.

    Thanks

  8. How about buying half in October and half in November? I don’t want to guess =)

  9. There are differences of opinion on how late in October you can safely make a purchase and have the bond issue date in that same month.
    Example: October 31st falls on a Sunday. Some are suggesting you make the purchase on Wednesday, October 27th because the order want be processed until the following business day (Thursday) and the bond issue date will be one business day following that (Friday, October 29th)
    Any thoughts?

    • In my experience, if you enter the purchase order on a business day daytime (I do it early but definitely before 4pm Eastern), the money gets pulled out the next business day AND is technically issued that same next business day. The main thing is to account for weekends and holidays, as you have.

      As long as you get it in October, it will be marked as an October 2021 I bond and earn interest from the 1st. So the question is how much interest are you earning now from the cash source? If you’re earning 0.50% APY, then each day is earning somewhere on the order of 14 cents per $10,000. I think Wednesday is a good safe day since it gives an extra day of “who knows, something might happen, website might crash”, but even Monday might be fine if your money is already sitting in an account not earning much interest. The most likely case is probably an emergency comes up and you forget to enter the order completely.

  10. Instead of dealing with the hassle of the bad web site, would purchasing funds in Vanguards tips find achieve the same thing? Or is the share you purchase spread out over a basket of tips bonds and likely not to get you the return you are hoping for?

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