Treasury Inflation-Protected Securities

Let’s weigh in on the I Bonds vs. T-bills debate

Posted on April 21, 2024 by Tipswatch

By David Enna, Tipswatch.com

Last week I was being interviewed by CNBC’s Kate Dore about I Bond investment strategies, and I found myself asking her a question: “Do you think the Federal Reserve has learned a lesson?”

In other words, after a decade of manipulating the U.S. Treasury market and money supply, has the Fed really learned its actions can have dire consequences? We got a 40-year-high surge in inflation. Is the Fed done with all that?

We can’t know, of course. I asked this question because I have been getting a lot of feedback from readers and seeing heated discussions on the Bogleheads forum about this issue: Should I dump I Bonds to buy T-bills? It is a reasonable question because I Bonds with a 0.0% fixed rate will soon be earning 2.96% for six months. Even for new I Bonds, the May-to-October composite rate will fall to about 4.27% at a time when 4-week T-bills are paying 5.49%.

T-bills are going to have a 100-basis-point advantage over new I Bonds, and that is hard to ignore. For example, here are two perfectly logical comments from readers:

When interest rates were still very low, there was a 7.12%, 9.62% and then a 6.48% APR staring you right in the face. You’d be ignorant to not pounce on it. Add on the compounding interest and the money being safe, and you’re all set. However, the tide has turned and now I-bonds are still “okay” at 5.27% and 4.27% APR (average of 4.77%), but I can get a 4-week bond for 5.33% APR with no penalty and my money is available within 4 weeks.

And this:

Hard pass. This only makes sense if (1) fixed rate doesn’t go higher and (2) very long term. My savings accounts pay 5%+ and easy to lock 1-2 year CDs at 5-6%. Combine the 3 month penalty plus subpar 4.27% for 6 months and this is a loser.

These readers are thinking logically, because they are committed to investing for the short term, and as I noted in my recent article on the I Bond buying equation, I Bonds are no longer the most attractive investment for the short term.

But for the long term?

Over the last 13 years, even I Bonds with 0.0% fixed rates have greatly out-performed 4-week T-bills. Why? Because the Fed controls short-term interest rates, but has no actual direct control over U.S. inflation, which sets the I Bond’s variable rate. The results:

This gets back to my question: Has the Fed truly learned its lesson about manipulating the U.S. bond market? Will it now be unwilling to force nominal yields to close to zero and real yields below zero? I think it has, for the time being, and we won’t see ultra-low interest rates in the near future.

But what happens if the economy begins spiraling downward, or the banking system faces another crisis? Can the Fed resist the temptation to send interest rates tumbling and begin another phase of quantitative easing? Take a look at the Federal Reserve’s balance sheet of U.S. Treasurys since 2009:

From August 2019 to June 2022, the Federal Reserve’s balance sheet of Treasury holdings increased 175%. And this was the effect on the U.S. money supply, combined with very generous direct payments to U.S. taxpayers during the Covid crisis:

And finally, the effect of the Fed’s actions on U.S. inflation over the same period:

These charts are relevant because the Federal Reserve is now considering paring back quantitative tightening, meaning it will slow down reduction of its balance sheet, even though it remains double the size of the 2020 level. This is from a recent Reuters report:

The Fed is currently allowing up to $60 billion per month in Treasury bonds and up to $35 billion per month in mortgage bonds to mature and not be replaced as part of a process called quantitative tightening, or QT.

“Participants generally favored reducing the monthly pace of runoff by roughly half from the recent overall pace,” the minutes said.

Most Americans will have no idea of this change, which eventually should help bring longer-term interest rates a bit lower. And in due course, the Fed will begin gradually lowering short-term interest rates, which will get noticed. The process should be slow and careful, as long as the U.S. economy remains healthy.

For the near-term, T-bills are going to offer better yields than I Bonds. Short-term investors should favor T-bills if their investing horizon is 2 years or less.

Some readers have suggested: “Well, if the T-bill yield falls I will just jump back into I Bonds.” The problem, though, is the $10,000 per person limit on purchases. It takes a long time to build a sizable holding in I Bonds, unless you use complicated strategies like tax-refund paper I Bonds and purchases through gift-box, trusts, or business-owner strategies.

And to be clear, I love T-bills and have been using staggered rollovers of 13- and 26-week T-bills as an emergency cash holding for nearly two years.

But for the longer-term, I Bond still make sense. They protect against unexpected future inflation and unexpected future Federal Reserve manipulation. If we see ultra-low interest rates again, even 0.0% fixed-rate I Bonds are going to offer a return matching inflation and well above T-bills. Today, I Bonds are selling with a permanent fixed rate of 1.3%, the highest in more than 16 years.

Another viewpoint …

Here is a new video from Jim of the “I Was Retired” YouTube channel, addressing 5-year potential investments in Treasury notes, TIPS and/or I Bonds. The video is well organized and an accurate look at the three investments. (Another thing I really appreciate is that Jim has his liquor cabinet directly behind his filming stage. Yes, and I totally understand!):

• I Bond dilemma: Buy in April, in May, or not at all?

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

Posted in Cash alternatives, Federal Reserve, I Bond, Inflation, Treasury Bills, TreasuryDirect | 36 Comments

New 5-year TIPS gets a real yield of 2.242%, 2nd highest in 15 years

Posted on April 18, 2024 by Tipswatch

By David Enna, Tipswatch.com

The Treasury’s auction of $23 billion in a new 5-year Treasury Inflation-Protected Security — CUSIP 91282CKL4 — resulted a real yield to maturity of 2.242%, the 2nd highest result for this term since October 2008.

The coupon rate was set at 2.125%, the 2nd highest for this term since April 2006.

Earlier in the day, the most recent 5-year TIPS was trading on the secondary market with a real yield to maturity of 2.18%. This auction got a result 6 basis points higher, but it came in below the “when-issued” prediction of 2.27%, so demand was strong. The bid-to-cover ratio was 2.58, also indicating decent demand.

The April 5-year TIPS auction tends to get a real yield higher than the market established by the October version from the year earlier. That is because of the typical swoon in end-of-year non-seasonal inflation, which will hit right before this TIPS matures in 2029. More on that for nerds.

All those details aside, this is a good result for investors in today’s auction, with the real yield holding well above 2.0%. Here is the trend in the 5-year real yield over the last 3 years, showing the dramatic increase since spring 2022:

Pricing

Because the coupon rate for this new TIPS was set slightly below the real yield to maturity, investors got it at a discount.

Here is how the pricing would work out for an investor purchasing $10,000 par value of this TIPS:

Par value: $10,000
Inflation index on settlement date of April 30: 1.00309
Total principal purchased: $10,000 x 1.00309 = $10,030.90
Unadjusted price: 99.452867
Cost of investment: $10,030.90 x 0.99452867 = $9,976.02
+ accrued interest of about $8.74

In summary, the investor paid $9,976.02 for $10,030.90 of principal and will receive inflation accruals through the maturity date of April 15, 2029, plus twice-a-year coupon payments totaling 2.125%.

Inflation breakeven rate

With the nominal 5-year Treasury note yielding 4.68% at the auction’s close, this TIPS gets an inflation breakeven rate of 2.44%, about in the midrange of recent auctions of this term. This means it will outperform the nominal Treasury if inflation averages more than 2.44% over the next five years.

This chart shows the inflation breakeven trend over the last five years. Even though 2.44% is a high breakeven rate by historical standards, it is on the low end of more-recent trends as inflation has ramped higher.

Reaction to the auction

This one appears to have gone off as expected, with CUSIP 91282CKL4 getting the expected “April boost” in yield. Demand appears to have been solid. I was a buyer, adding to my 2029 holdings. This is from the Reuters report:

The results of the U.S. Treasury’s $23 billion auction of U.S. five-year Treasury Inflation-Protected Securities on Thursday were stronger-than-expected across almost all metrics. The note’s high yield stopped at 2.242%, lower than the expected rate at the bid deadline, which suggested that investors were willing to settle for a lower yield to take the security.

The bid-to-cover ratio, another measure of demand, was 2.58, slightly above the 2.55 seen in December, but much higher than October’s 2.38. The note’s bid-to-cover ratio was the highest since June 2022.

Here is a history of recent auctions of this term:

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• Upcoming schedule of TIPS auctions

* * *

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Inflation, Investing in TIPS, TreasuryDirect | Tagged bonds, finance, inflation, interest-rates, investing | 40 Comments

I Bond dilemma: Buy in April, in May, or not at all?

Posted on April 14, 2024 by Tipswatch

By David Enna, Tipswatch.com

With Wednesday’s release of the March inflation report, the buying equation for U.S. Series I Savings Bonds became a bit clearer. We now know the I Bond’s variable rate will fall from the current 3.94% to 2.96% at the May 1 reset.

That’s a big drop. Does it make I Bonds unattractive? I don’t think so, and the reason is the I Bond’s current fixed rate of 1.3%, the highest in more than 16 years. But the fixed rate will also reset on May 1. So there is the key question: Where will the Treasury reset the fixed rate?

Confused? This is fairly simple. An I Bond is a Treasury security that earns interest based on combining a fixed rate and an inflation rate.

The fixed rate will never change. So if you bought an I Bond in 2014 with a fixed rate of 0.2%, it will continue to have a 0.2% fixed rate for the life of the bond. Purchases through April 29, 2024, have a permanent fixed rate of 1.3%.
The inflation-adjusted rate (often called the variable rate) changes each six months to reflect the running rate of inflation. That rate is currently set at 3.94% annualized and will drop to 2.96% after May 1. All I Bonds will eventually get the 2.96% variable rate, with the start date depending on the original month of purchase.
The composite rate is a combination of these two rates, currently 5.27%, annualized, for a full six months for any bond purchased through April 2024.

Projecting the fixed rate

The following projection results from an inexact science, and in fact is simply a guess based on a decade of observations. The Treasury has never revealed an exact formula for setting the fixed rate, but it has noted that current trends in real yields are a factor. TreasuryDirect provides this cryptic information:

The Secretary of the Treasury, or the Secretary’s designee, determines the fixed rate. The rate is based on market rates that have been adjusted to account for the value of components unique to savings bonds. These include the early redemption put option, tax deferral feature, deferred purchase feature, and Treasury’s administrative costs.

Based partly on feedback from Boglehead geniuses, I have settled on looking at the half-year average of the real yields of 5- and 10-year Treasury Inflation-Protected Securities as the best indicator of the next fixed rate. I then apply a ratio of 0.65 to the average. In recent years, this has been pretty accurate, as shown in this table:

The fixed-rate numbers shown in red are projections and have not been rounded.

In most cases, the 0.65 ratio has been on target, especially when applied to 5-year TIPS real yields. The May to October 2017 period is interesting, because the 5-year average was much lower than the 10 year, and the Treasury set the rate lower to match the 5-year average.

The Treasury always sets the fixed rate to a tenth decimal point, and my May 2024 projections are currently at 1.25% and 1.26%, with two weeks of data still to come. My conclusion (OK, guess) is that the Treasury will set the I Bond’s new fixed rate at either 1.2% or 1.3%.

But, as I always say, “The Treasury sometimes does weird things.”

What does this mean?

I Bond purchases are limited to $10,000 per person per year unless you use your tax return to get paper I Bonds (a bit late for that strategy) or add to your holdings through gift-box, trusts, or business-owner strategies.

In my opinion — and I know some readers disagree — April’s higher variable rate (3.94% vs. 2.96%) and the locked-in 1.3% fixed rate make purchasing I Bonds to the limit in April the wiser choice. For that reason, I already purchased to the limit in March and have scheduled a gift-box set for purchase on April 25.

In this chart I have included some potential fixed rate changes, ranging from 1.10% to 1.50%. The most likely results are 1.20% or 1.30%, but anything can happen. By buying in April, you guarantee that your investment will earn 5.27% for six months and 4.27% for six months, or around 4.8% for the year.

Buying in May drops the likely return to 4.17% or 4.27% for the first six months, and then an unknown return for the next six months, depending on inflation from April to September 2024.

If the fixed rate is set at 1.50%, the buyer in May will be the winner in the long run. I personally like the certainty of the April purchase.

If you want to purchase in April, you can go into TreasuryDirect at any time and schedule the transaction. I recommend setting the date at April 25 or 26 to give Treasury time to complete the transaction in April. If you wait until April 30, your I Bond will be issued in May.

The rollover strategy. With the variable rate dropping to 2.96%, I Bonds with a fixed rate of 0.0% will be paying 2.96% for six months. That’s below market, and some investors may want to redeem any I Bonds with 0.0% fixed rates and roll that money over into the 1.3% April version, either through new purchases or the gift-box strategy. I discussed that strategy in a March 31 post.

Or, just hold? I’ve always stressed that the best I Bond strategy is to continue building your stockpile, until you have an amount that would work as a “large” emergency spending resource in retirement, all tax-deferred and inflation protected. If you are in the accumulation phase, just keep the 0.0% I Bonds and add the 1.3% version. And then, someday, use this as a spending account when needed.

Wait until October or November? Some readers have speculated that real yields could continue rising through 2024, making a higher fixed rate likely later in the year. That could happen. It’s iffy. But one advantage of a higher rate reset in November is that the fixed rate would carry over to January 2025, when the purchase limit resets.

Are I Bonds that attractive?

With short-term T-bill and money market rates topping 5%, many investors are shunning I Bonds because of the potentially lower nominal return plus the three-month interest penalty for redemptions within five years. Some thoughts:

We just went through a phase of inflation hitting 40-year highs, and higher prices seem to be stubbornly hanging on nearly two years later. Inflation protection, for part of your portfolio, looks like a wise choice.
Eventually, the Federal Reserve would like to start cutting short-term interest rates and then the T-bill and money market returns will begin falling. Some banks have already started lowering rates on high-yield savings accounts.
I Bonds, if held for 5 years, create an inflation-protected store of cash you can use for future needs, with no penalty for redemption except for federal taxes on the interest.

Is this a short-term investment? I Bonds aren’t a good choice for money you will need in the next one or two years. You can get a 2-year Treasury note paying about 4.9%. That nominal return is likely to beat the return of an I Bond after the three-month interest penalty is applied.

Aren’t TIPS the better choice? There is an auction of a new 5-year TIPS this week and the real yield to maturity looks likely to be close to, or top, 2.0%. It could have a 70- to 80-basis-point advantage over the I Bond with a fixed rate of 1.3%. So yes, I think TIPS with real yields in the 2.0% range are more attractive. But many investors shun TIPS because of the complexity, and I Bonds have advantages of tax-deferred interest, a flexible maturity, and rock-solid deflation protection. I continue to invest in both.

Is inflation really a problem? The risk is there. Investments in TIPS and I Bonds provide insurance against unexpectedly high inflation, such as we saw in June 2022 when annual inflation rose to 9.1%. If inflation suddenly drops off, inflation-protection may slightly under-perform, but investors are still winners because no one wants high inflation.

I welcome your thoughts.

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

* * *

Posted in Cash alternatives, I Bond, Inflation, Savings Bond, TreasuryDirect | 66 Comments

Next week’s 5-year TIPS auction has solid appeal

Posted on April 12, 2024 by Tipswatch

By David Enna, Tipswatch.com

Note: I am posting this auction preview early because my I Bond buying guide will be going up Sunday morning. Keep in mind that real yields are currently highly volatile and will change by Thursday’s auction.

The U.S. Treasury on Thursday will offer $22 billion in a new 5-year Treasury Inflation-Protected Security, CUSIP 91282CKL4. The real yield to maturity and coupon rate will be set by the auction results.

Definition: A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So, the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation each year until maturity.

As the market stands one week out, it looks like this TIPS will get an attractive result: Potentially both a real yield and coupon rate higher than 2.0%. The Treasury’s 5-year real yield estimate as of the market close Thursday was 2.13%, which would result in a coupon rate at or above 2.0%.

But this market is volatile. Wednesday’s March inflation report reminded everyone that inflationary trends are continuing, and set off a rout in both the stock and bond markets. The 5-year real yield has increased 20 basis points since April 1. That is a huge move higher.

It appears that things are cooling today, with the 5-year TIPS trading at about 2.05%. So a lot can change before Thursday’s auction close at 1 p.m. EDT.

More auction details:

The Treasury offering of $23 billion is the highest ever for an TIPS auction of this term, up from $21 billion at last April’s auction. The increased supply, however, shouldn’t have much effect on demand.
The 5-year auction in October 2023 resulted in a real yield to maturity of 2.440% and a coupon rate of 2.375%, both 15-year highs. This auction looks unlikely, at this point, to break those marks.
If the coupon rate remains above 2.0%, it will be only the 2nd 5-year TIPS in 17 years to reach that mark.

Here is the trend in 5-year real yields over the last nine years:

So there is a lot to like about this TIPS, even in comparison with the U.S. Series I Savings Bond, currently with a real yield of 1.3%. The TIPS will probably have a 70+ basis-point advantage. At that spread, I would prefer the TIPS (but I continue to invest in both.)

Pricing

Because it is a new TIPS, CUSIP 91282CKL4 should auction with a price close to par value. The coupon rate will be set at the 1/8th-percentage-point marker below the auctioned real yield, so the unadjusted price will be below 100. However, this TIPS will have an inflation index of 1.00309 on the settlement date of April 30. Because of that, the price should be close to par, or even slightly above.

Inflation breakeven rate

With the nominal 5-year Treasury note currently trading at 4.54%, this TIPS at this moment would have an inflation breakeven rate of about 2.49%, fairly high by historical standards. A higher breakeven rate indicates that a TIPS is more expensive versus a nominal Treasury.

Is the 5-year note attractive at 4.54%? I’d say it is and it is likely to provide a return above inflation over the next 5 years. But with the TIPS, you get a guaranteed return of about 2.0% above inflation. I’d go with the guarantee.

Here is the trend in the 5-year inflation breakeven rate over the last 9 years, showing that the current level is high-ish, but well under the peak we saw in 2022.

Final thoughts

I just took a look at my 2029 TIPS holdings and I am decently allocated for that year. However … I may take a look at adding a bit at this auction if the real yield is likely to hold above 2.0% (a desirable target by historical standards.)

Things could get crazy in the next week, however, with a potential attack by Iran against Israel looming, oil prices rising, inflation fears growing. In times of fear, Treasury yields generally fall as demand rises. If you want to invest in this TIPS, keep an eye on the Treasury’s Real Yields Curve page (which updates at the close of the market each day) and Bloomberg’s U.S. Yields page (updates secondary-market trends in real time).

This TIPS auction closes Thursday at 1 p.m. EDT. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.

I will be posting the auction results soon after the close on Thursday. Here is a history of auction results for this term over the last 9 years:

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• Upcoming schedule of TIPS auctions

* * *

Posted in I Bond, Inflation, Investing in TIPS, TreasuryDirect | Tagged bonds, inflation, interest-rates, investing | 36 Comments

March inflation sets I Bond’s new variable rate at 2.96%

Posted on April 10, 2024 by Tipswatch

Inflation again rose higher than expected in March, probably putting Fed rate cuts on hold.

By David Enna, Tipswatch.com

Updated analysis … I Bond dilemma: Buy in April, in May, or not at all?

Non-seasonally adjusted inflation rose 0.65% in March, the Bureau of Labor Statistics reported this morning, which sets the inflation-adjusted variable rate for U.S. Series I Savings Bonds at 2.96% for the May 1 reset.

I Bond purchases through the end of April carry a permanent fixed rate of 1.3% and a variable rate of 3.94%, resulting in an annualized composite rate of 5.27% for a full six months. At the May 1 reset, that variable rate will fall to 2.96% for I Bonds purchased in May to October, and then eventually for all I Bonds after six months of the 5.27% rate.

The I Bond’s fixed rate, which is permanent through its potential 30-year term, will also be reset on May 1. It appears likely, at this point, that the new fixed rate could fall into the 1.2% to 1.3% range.

Here are the inflation data used to determine the variable rates:

View historical data on my Inflation and I Bonds page.

What does this mean?

I will be writing more about this later this week, but today’s inflation report makes an I Bond investment in April preferable to a purchase in May. The April purchase will get a composite rate of 5.27% for a full six months, and then a rate of 4.27% for six months.

We won’t know what the composite rate will be for a purchase in May until the May 1 fixed-rate reset, but it is likely to be in the range of 4.17% to 4.27%.

Is a variable rate of 2.96% attractive? Not really in our current market, but that isn’t the important factor. The fixed rate of 1.3% is much more important than the variable rate.

Of course, if you are holding older I Bonds with fixed rates of 0.0%, you are going to earn 2.96% for six months after the current composite rate of 3.94% runs a full six months. This shows the value of the 1.3% fixed rate.

What about TIPS?

For March, the BLS set the non-seasonally adjusted inflation index at 312.332, which I noted was a 0.65% increase over the February number. This means that principal balances for all TIPS will increase 0.65% in May, after rising 0.62% in April.

These one-month numbers might look gaudy, but this is partially due to the way non-seasonal inflation works. The numbers tend to run higher than adjusted inflation from January to June, and then lower from July to December. Recall that in the October to December period we had three consecutive months of negative non-seasonally adjusted inflation.

Here are the new May Inflation Indexes for all TIPS.

The inflation report

While the stock and bond markets seemed to react to February’s higher-than-expected inflation with a yawn, this March report will be harder to ignore. Seasonally-adjusted all-items inflation came in at 0.4%, higher than the expectation of 0.3%. The annual inflation rate rose from 3.2% in February to 3.5% in March.

Core inflation, which removes food and energy, also exceeded expectations, rising 0.4% for the month and 3.8% year over year.

The BLS pointed to several factors that contributed to higher inflation. Costs of shelter increased 0.4% and are now up 5.7% year over year. Gasoline prices increased 1.7% in March after rising 3.8% in February and are now up 1.3% year over year.

Food prices, however, continued rising at a moderate pace, up 0.1% for the month and 2.2% over 12 months. The costs of food at home were unchanged. More items from the report:

Electricity costs rose 0.9% for the month and 5.0% year over year.
Costs of motor vehicle insurance rose 2.7% for the month and a ridiculous 22.2% year over year.
Medical care costs rose 0.6% and are up 2.1% year over year.
Airline fares rose 3.6% for the month but were down 0.4% for the year.
Apparel costs rose 0.7% but are up only 0.4% year over year.
Costs of used cars and trucks fell 1.1% and are down 2.2% over the year.
New vehicle prices also fell 0.2% and are down 0.1% year over year.

Here is the trend in all-items and core inflation over the last 12 months, showing the troubling rise in annual all-items inflation, even as core inflation inches lower. A lot of this was caused by rising gas prices:

What this means for future interest rates

We can conclude that the Fed is on “hold” for now and short-term interest rates will continue (for months) in the range of about 5.3% until we see some evidence that inflation is actually abating. I am noticing that today’s inflation report has had an immediate effect on real yields, with the yield on a 5-year TIPS popping to 2.03%, up about 10 basis points from yesterday’s close. The 10-year is up about 7 basis points to 2.07%.

From this morning’s Bloomberg report:

Excluding housing and energy, services prices accelerated to 4.8% from a year ago, the most since April 2023, according to Bloomberg calculations. “(I)t is another reason for delaying any rate cuts and/or reducing the number expected this year,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “If service sector inflation is sticky, then it doesn’t leave much room to ease.” …

“The sound you heard there was the door slamming on a June rate cut. That’s gone,” David Kelly, JP Morgan Asset Management’s chief global strategist, said. (Video follows …)

Nevertheless, I believe the Federal Reserve would like to get a couple 25-basis-point cuts in sometime this year, which it has strongly signaled. But both the U.S. economy and labor market remain strong. Are rate cuts truly needed?

Inflation analyst Michael Ashton had this to say this morning:

I can’t see any rational argument for cutting rates in June. Actually, on the data we have in hand I can’t see an argument for cutting rates in 2024. … To cut the overnight rate, the Fed would have to rely on forecasts that inflation is going to get better. And to do that now, when forecasts have been persistently wrong (and not by just a little bit but about the whole trajectory) since 2020, would be incredibly cavalier.

What’s next?

In a few days (probably Sunday morning) I will be posting a deeper analysis of the I Bond buying equation: In April, in May or not at all? As I noted, the data appear to make an April purchase more attractive than May, to lock in the 5.27% composite rate for six months.

We won’t know the I Bond’s new fixed rate until May 1, or more probably the morning of April 30. But at this point, I would guess, the fixed rate will remain in the range of 1.2% to 1.3%. More on that later.

In the meantime, TIPS investments are looking attractive again as real yields rise above 2.0%.

More on I Bonds:

• Confused by I Bonds? Read my Q&A on I Bonds

• Let’s ‘try’ to clarify how an I Bond’s interest is calculated

• Inflation and I Bonds: Track the variable rate changes

• I Bonds: Here’s a simple way to track current value

• I Bond Manifesto: How this investment can work as an emergency fund

More on TIPS:

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider