I Bond dilemma: Buy in October? Or wait until November?

My opinion: Long-term investors should buy in October. Short-term term investors could wait until November. But whatever … buy I Bonds in 2021.

By David Enna, Tipswatch.com

With the release of the September inflation report on Wednesday, we got rather stunning news: All U.S. Series I Savings Bonds will have an inflation-adjusted interest rate of 7.12%, annualized, for six months. That rate will launch immediately for I Bonds purchased in November, or in six months for I Bonds purchased in October.

The key thing is: All I Bond investors will get that 7.12% eventually. But if you purchase an I Bond before the end of October, you will get an annualized return of 3.54% for six months, and then the 7.12% for six months. That adds up to a total return of about 5.33% for the year, a stellar number in our dreary world of ultra-low interest rates.

But the obvious question is: Should you buy in October to lock in that 3.54% rate, or wait until November to start off with a bang at 7.12% for six months? Let’s take a look at the pluses and minuses.

Is this a long-term investment?

Do you plan on holding this I Bond for at least five years, when it can be redeemed without the three-month interest penalty? If so, I think buying in October makes more sense than waiting for November’s higher rate. The reason: We don’t know what the next inflation-adjusted rate will be, the one that will follow 7.12%. It will be based on inflation from September 2021 to March 2022. It could be higher, yes, or it could be lower.

But I can assure you that in the next five years, it is highly likely that you will see an inflation-adjusted rate lower than 3.54%. That rate, based on official U.S. inflation from September 2020 to March 2021, was the I Bond’s highest variable rate in 10 years (dating back to the 4.6% variable rate set in May 2011). Because that 3.54% annualized rate is so attractive in today’s market, I encourage long-term I Bond investors to purchase up to the $10,000 per person cap in October, locking in the 3.54% rate for six months, and then 7.12% for six months.

Conclusion: Long-term I Bond investors should make the purchase in October.

Is this a short-term investment?

A lot of investors are looking at dabbling in I Bonds for the first time as a short-term investment, possibly for a period as short as 11 months. You can purchase an I Bond near the end of a month and get full interest credit for that month. Then, in the same month a year later, you can redeem it, near the beginning of the month. That cuts the required holding period to 11 months and a couple days.

This short-term investment makes a lot of sense in our current market, getting way-above-market returns on an extremely safe investment. And if this is the strategy you are considering, I think buying in November makes a bit more sense than buying in October. If you buy in October and redeem after a year, you will lose three months of interest at the 7.12% level, cutting your total return on a $10,000 investment down to $355. By waiting three months longer, you can boost that return to $533, because the three-month penalty will apply to a potentially lower variable rate.

If you buy in November, your worst case scenario is a return of $356 after 12 months, even if the next variable rate drops to 0.0%. (A three-month penalty on zero interest is zero.) So buying in November, and then redeeming in one year, makes more sense than buying in October.

But let’s take a look at potential inflation scenarios for that next rate reset on May 1, determined by inflation from September 2021 to March 2022. That will give us a more accurate picture of the likely effects of redeeming in either 12 or 15 months. Sorry, but here comes a whole bunch of numbers, with the only changes coming in column 2 for “Buy in November.” If you buy in October, you will know your outcomes for 12 and 15 months, because those rates have been set:

In lower-inflation scenarios, buying in October and holding for 15 months will pay off versus the buy-in-November strategy. But that’s not true after 12 months, because of the high-rate three-month interest penalty imposed on the October purchase. In all scenarios, the November strategy wins for a redemption after 12 months.

I have no idea where inflation will be heading from September to March, but I’d guess it will result in a rate reset of 2.5% to 3.5% in May. The higher the variable rate, the higher the advantage for the November purchase strategy.

Conclusion: If you are planning to buy an I Bond and redeem it in 12 months, then the buy-in-November strategy is the winner. If you might hold for 15 months, though, the advantage only comes with higher inflation in the September to March period.

Do you think the Treasury will increase the I Bond’s fixed rate in November?

I think this is highly unlikely, but anything is possible. The Treasury does weird things, sometimes. What if it suddenly decides to give I Bonds a big boost for small-scale savers? Don’t think that will happen. It’s not at all likely.

Here is a chart showing the real yields of 5- and 10-year Treasury Inflation-Protected Securities at the time of every recent I Bond rate reset where the rate was above 0.0%.

Note that in no case was the yield of a 10-year TIPS below zero when the I Bond fixed rate was set above 0.0%. The current 10-year real yield is -0.96%. The Treasury really doesn’t need to do anything to give I Bonds a boost. They already have a 96-basis-point advantage over a 10-year TIPS.

Conclusion: There’s not much hope the Treasury will raise the I Bond’s fixed rate above 0.0% for the November 1 reset. But if you believe there is a chance, go ahead and wait for the reset and buy in November.

Don’t overthink this …

I actually believe that buying I Bonds in October, and/or buying in November, are both good moves. (I bought my 2021 allocation in January, by the way.) For a long-term investor, buy in October to lock down that 3.54% rate for six months. For a short-term investor, especially one looking to redeem in the shortest time possible, buy in November.

But, whatever you decide: Buy I Bonds in 2021. Can’t go wrong with that decision.

* * *

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.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in I Bond, Inflation, Savings Bond. Bookmark the permalink.

7 Responses to I Bond dilemma: Buy in October? Or wait until November?

  1. Alan in N.J. says:

    As indicated above, an I Bond may be redeemed at any time after 12 months from its issue date which is the first of the month during which you pay for it. So it’s true that the minimum holding period is 11 months and a couple of days. However, that minimum holding period results in a minimum 13 months of interest (before deduction of the penalty), not 12. For example, if you buy at the end of October 2021, your issue date is October 1, 2021 and that’s your first month of interest. You can redeem, at the earliest, on October 2, 2022. September 2022 is your twelfth month of interest and on October 1, 2022 you become entitled to your thirteenth month of interest. I think the tables above reflect a net 9 months of interest after the 3-month penalty, rather than 10 months.

    • Tipswatch says:

      Good logic, Alan. But I did some research (thank you Bogleheads!) and found this:

      Tips for buying I Bonds …. Since I Bonds earn the full month’s interest if you own them on the last day of that month, it is generally a good idea to buy I Bonds at the end of a month after also earning interest on that same money in a bank account during most of that same month. Conversely, you would want to redeem your I Bonds at the beginning of any month, since holding them until later in the month will not earn any additional interest, unless you own them on the last day of the month.

      The month’s interest for an I Bond is accrued on the last day of the month, so you have to hold them for the entire month to get credit for that month’s interest. When you buy an I Bond late in the month, you own it on the accrual date. But if you sell early in the month, that month gets no interest and so it would not apply to the 3-month penalty.

  2. Don says:

    Treasury Direct is a nightmare for Estate Purposes. Your not talking about buying a fund, right? Coverted some bonds to electronic,TIPs, and amazed on how cryptic TD is! Looks like a Trust they even have a specific naming convention!

    • Mike says:

      My experience with Treasury Direct has been very good. I started buying paper EE bonds in the 1970’s. I’ve carried them around with me in shoes boxes and bank safety boxes for decades. I setup a TD account and recently went through a complete conversion of the paper bonds to electronic format. Very happy with the results — website is easy to use, registration is easy, changes are easy, allows linkage to my bank, get the alerts for redemption status. Very easy to rollover the EE bonds into I bonds or into cash in one of my linked bank accounts. Much easier than manually tracking redemption and going to the bank with $2K – $3K of paper bonds every month to cash out.

  3. Doug Cox says:

    My plan, buy now and again in January to cover both options.

    • Tipswatch says:

      I like this strategy. As for the 2022 purchase, it will be almost impossible to pass up that 7.12% variable rate, which will be available for purchases through April 30. Even if you thought the fixed rate was rising to 0.2% in May, that 7.12% rate would cover 17 years of a fixed rate at 0.2%.

  4. tjbrad says:

    Hi Ron,

    Here’s the argument for buying ibonds in October. What I thought was that if I bought in October that I would get 1 month of 3.5 then six months of 7.12 but it’s actually a full six months of 3.5. I agree with the analysis in the article below and I will be buying before the end of October.

    https://tipswatch.com/2021/10/14/i-bond-dilemma-buy-in-october-or-wait-until-november/
    [https://tipswatch.files.wordpress.com/2021/10/scenarios-1.jpg]
    I Bond dilemma: Buy in October? Or wait until November?
    My opinion: Long-term investors should buy in October. Short-term term investors could wait until November. But whatever … buy I Bonds in 2021. By David Enna, Tipswatch.com With the release o…
    tipswatch.com

    Tom Brady, Instructor
    Business Technology Division
    Trident Technical College
    Charleston, SC 29406

    ________________________________

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