U.S. Government Treasury is offering
6.89% Interest Rate (Annualized for 6 Months) in combined Fixed + Inflation Rate Earnings valid on newly issued Series I Savings Bonds purchased from
November 2022 through April 2023. Limit of $10,000/year per person (with caveats, see prior thread for details in the discussion).
In layman's terms: These are U.S. treasury securities which adjust their interest rate every 6 months based on the current inflation rate. The calculation is more complex than that but using the CPI-U (Core CPI) from October of 6.6% YoY, an inflation interest rate of 6.47% can be derived based on the previous 6 months of inflation data, and when combined with a fixed interest rate component over which the Fed has discretion and was announced November 1, we now have the finalized rate of 6.89%.
For further details on how I-bonds work, see the previous
Front Page deal when the 9.62% rate was announced. There is plenty of discussion and information there on how I-bonds work.
About this offer:
What is a Series I bond? (
source)
- "A savings bond that earns interest based on combining a fixed rate and an inflation rate."
- You may use Series I bonds to:
- Click here for more information about Series I Bonds
What interest does a Series I bond earn? (source)- A combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year.
- An I bond earns interest monthly from the first day of the month in the issue date. The interest accrues (is added to the bond) until the bond reaches 30 years or you cash the bond, whichever comes first.
- The interest is compounded semiannually. Every six months from the bond's issue date, interest the bond earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal.
- The composite rate for I bonds issued from May 2022 through October 2022 is 9.62 percent. This rate applies for the first six months you own the bond.
When can I cash my I bonds?- After they are 12 months old.
- If you cash an I bond before it is five years old, you will lose the last three months of interest.
- I bonds earn interest for 30 years if you don't cash the bonds before they mature.
- If you've been affected by a disaster, special provisions may apply.
https://www.treasurydirect.gov/in...s_ibuy.htm
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Housing, food, transportation, utilities, and clothing are where people spend the most money.
Those are all up 15-30% since start of 2021. I-Bonds have made a little over 7% total over that 2.5 yr span. They lagged inflation in rising, and they lead inflation in falling.
And that's only if you were investing when they paid 1 or 2% so you're past the 5yr mark, or you're willing to lose 1.7 points out of your 7% gain now, or hang on another 6 months for another 2%, of which you'll lose half if you cash out. Of course you can continue to hold while the rate drops further out of parity with other Treasuries.
Or you can get 5% in T-Bills for the next year, or 4%/yr in T-Notes for the next 5 yrs, for securities you can sell without penalty any day of the week. Depending how rates move, you might make an even better return over a shorter period, that is taxed at only capital gains rates.
That's why it's disappointing.
Housing, food, transportation, utilities, and clothing are where people spend the most money.
Those are all up 15-30% since start of 2021. I-Bonds have made a little over 7% total over that 2.5 yr span. They lagged inflation in rising, and they lead inflation in falling.
And that's only if you were investing when they paid 1 or 2% so you're past the 5yr mark, or you're willing to lose 1.7 points out of your 7% gain now, or hang on another 6 months for another 2%, of which you'll lose half if you cash out. Of course you can continue to hold while the rate drops further out of parity with other Treasuries.
Or you can get 5% in T-Bills for the next year, or 4%/yr in T-Notes for the next 5 yrs, for securities you can sell without penalty any day of the week. Depending how rates move, you might make an even better return over a shorter period, that is taxed at only capital gains rates.
That's why it's disappointing.
I'm not sure what you mean by "I-Bonds have made a little over 7% total over that 2.5 yr span". While that may make sense annualized, which I think is actually a little too high but would negate your entire argument, if you are trying to say that the total return on a $100 investment 2.5 years ago would be $7, I'm afraid your math is completely wrong.
2.5 years ago today would be November 2020. Since that point, the semi-annual rates were 1.68%, 3.54%, 7.12%, 9.62% and 3.48% (not including the fixed rate which was 0% at inception). That, not including compounding (since I'm too lazy to do it), would equate to over 15% total return. That's an annual return for the past 2.5 years of about 6%. If someone was to cash out today, or in 3 months from the new rate, it would drop that down a little bit, but 6% per year in interest on one of the safest investment options out there with as to close to zero risk as possible, especially during the low bank interest rate period we were in, is still a very good deal.
So it seems that you have two issues. First, your math is off. Either you completely underestimate the amount of return these have brought over the last 2.5 years, or you don't see how a +15% total return over that time period actually lines up with the bottom end of your guesstimate on how much prices have increased during that time period. Also, keep in mind that the CPI-U is across the nation as a whole. While some areas had greater increase in costs (e.g. Florida housing prices have almost doubled in places), other areas didn't have as much of an increase.
Secondly, you are trying to compare the current ibond rate to other current options. That's great, but it doesn't apply retroactively. Does it make sense for someone, today, to buy an ibond at 4.3% when treasury bills, or even HYSAs, are giving out more and pushing 5%? Not really. Though the difference for most people is pretty negligible unless you are looking at investing tens or hundreds of thousands of dollars (or more). But since interest rates will likely continue to rise, and inflation hopefully continue to fall, the divergence between the two will likely increase in the short term, making ibonds and even less attractive option. For NEW purchases or people currently in them. If someone waits 3 months into the 3.4% current rate, and then cashes out, they may lose that 1.7%, but they don't lose the +15% they already made, so I'm not sure why you think that would be the case. And they could more than make up for it by switching to a better (now) investment option.
But that doesn't change the fact that it was THE BEST option for the past 2.5 years. Your treasury bills were paying, what, maybe 2% for most of the time ibonds were paying 3-5x that amount.
I'm not sure what you mean by "I-Bonds have made a little over 7% total over that 2.5 yr span". While that may make sense annualized, which I think is actually a little too high but would negate your entire argument, if you are trying to say that the total return on a $100 investment 2.5 years ago would be $7, I'm afraid your math is completely wrong.
2.5 years ago today would be November 2020. Since that point, the semi-annual rates were 1.68%, 3.54%, 7.12%, 9.62% and 3.48% (not including the fixed rate which was 0% at inception). That, not including compounding (since I'm too lazy to do it), would equate to over 15% total return. That's an annual return for the past 2.5 years of about 6%. If someone was to cash out today, or in 3 months from the new rate, it would drop that down a little bit, but 6% per year in interest on one of the safest investment options out there with as to close to zero risk as possible, especially during the low bank interest rate period we were in, is still a very good deal.
So it seems that you have two issues. First, your math is off. Either you completely underestimate the amount of return these have brought over the last 2.5 years, or you don't see how a +15% total return over that time period actually lines up with the bottom end of your guesstimate on how much prices have increased during that time period. Also, keep in mind that the CPI-U is across the nation as a whole. While some areas had greater increase in costs (e.g. Florida housing prices have almost doubled in places), other areas didn't have as much of an increase.
Secondly, you are trying to compare the current ibond rate to other current options. That's great, but it doesn't apply retroactively. Does it make sense for someone, today, to buy an ibond at 4.3% when treasury bills, or even HYSAs, are giving out more and pushing 5%? Not really. Though the difference for most people is pretty negligible unless you are looking at investing tens or hundreds of thousands of dollars (or more). But since interest rates will likely continue to rise, and inflation hopefully continue to fall, the divergence between the two will likely increase in the short term, making ibonds and even less attractive option. For NEW purchases or people currently in them. If someone waits 3 months into the 3.4% current rate, and then cashes out, they may lose that 1.7%, but they don't lose the +15% they already made, so I'm not sure why you think that would be the case. And they could more than make up for it by switching to a better (now) investment option.
But that doesn't change the fact that it was THE BEST option for the past 2.5 years. Your treasury bills were paying, what, maybe 2% for most of the time ibonds were paying 3-5x that amount.
I never said the i-bonds weren't a good deal back when - that's why I bought into the 9.62 and 6.89 issues, and wish I'd known about I-Bonds before that - I said they were a disappointment now, and an inadequate offset to inflation.
In recent times I-Bonds seem like a good deal when inflation is low, because the Fed will be keeping short term rates near zero, at least since the Great Financial Crisis, and certainly a good deal when inflation first rises, because the Fed will at first be hesitant to raise rates, lest Wall Street and DC throw a fit. So there are scenarios where you're likely to beat other Treasuries, by a considerable amount. But with "inflation" falling and an election year coming, if you bought the 6.89% issue, you're faced with holding another 6 months and netting 4.3% for your year, then having to reinvest at likely much lower rates, when you can lock in nearly 4% now (or recently, or soon) for several years. There's even a good chance you can pull some of those gains forward and turn them into capital gains at a lower tax rate, though you'll also then face the reinvestment dilemma. So, who would have looked at 6.89% a few months ago, compared to 4% alternatives, and thought "this might be a losing play looking out a year or two?"
A month ago you could have locked in 22%+ total return over the next 5 years in a T-Note, with no holding period or penalty issues. I doubt I-Bond buyers from last period or this period will do as well. There are clearly those who can do things, who want higher inflation - that's been true for decades - but I have faith that the more massive power of the money in business and finance will not allow that.
But my understanding is that interest is paid out quarterly... so that does mean I should wait until a certain date since I'm in the middle of a quarter?
But my understanding is that interest is paid out quarterly... so that does mean I should wait until a certain date since I'm in the middle of a quarter?
If I got any of this wrong, someone will be along shortly to correct it.
If I got any of this wrong, someone will be along shortly to correct it.
Thanks! This is super helpful. The one thing I'm not clear on... I recall hearing that there is a penalty of one quarter's worth of interest if you withdraw at the 1 year mark? So if I recall correctly, the aim was to hold for 1 year and 3 months, to get the full 1 year of interest?
Sorry I have tried to keep up with all of this but it's now been over a year and I can't remember the details.
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Also, how much interest will be swiped by treasury?
Please advise. I have some liquid cash 10k and not sure what to do....
Thank you in advance
Please advise. I have some liquid cash 10k and not sure what to do....
Thank you in advance
https://www.investopedi
You will want to keep it for at least 15 months to get the most out of it, so you have another 3/4 months before maximizing your $ (i could be wrong).
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https://www.investopedi
You will want to keep it for at least 15 months to get the most out of it, so you have another 3/4 months before maximizing your $ (i could be wrong).
I get that part of 15 months to get optimal returns.
I guess since I bonds are not too attractive compared to savings I may check that. Thank you