See this as a short-term investment? Buy late in the month of January. Long-term investment? Buy anytime from January to April.
By David Enna, Tipswatch.com
My usual beginning-of-the-year buying guide for U.S. Series I Savings Bonds has a lot of qualifications and “what ifs,” making this a complicated and much-debated decision. Is the I Bond’s fixed rate likely to rise during the year? Should I space my purchases out over the year? Will the inflation-adjusted variable rate rise dramatically at the resets in May and November?
I’m telling you: All of that really doesn’t matter in 2022. It looks like the wise course will be to buy I Bonds anytime from January to April, but before the May 1 rate reset. Before we get into why, here’s a quick primer for investors who are new to I Bonds:
An I Bond is a U.S. government security that earns interest based on combining a fixed rate and an inflation-adjusted rate.
- The fixed rate will never change. Purchases through April 30, 2022, will have a fixed rate of 0.0%, which means they will simply track official U.S. inflation over time.
- The inflation-adjusted rate (often called the I Bond’s variable rate) changes each six months to reflect the running rate of inflation. That rate is currently set at 7.12%, annualized, for six months. It will adjust again on May 1, 2022, for all I Bonds, no matter when they were purchased. (However, the effective start date of the new interest rate will vary depending on the month you bought the I Bond.)
Investments are limited to $10,000 per person per calendar year for electronic I Bonds held at TreasuryDirect. There is also the option to get $5,000 a year in paper I Bonds in lieu of a federal tax refund. The purchase limit is the reason people ponder timing their I Bond purchases; once you hit $10,000 per person per year, you can’t purchase more, at least in the traditional way.
The value of building and holding a stockpile of I Bonds was demonstrated in 2021, with inflation surging to an annual rate of 6.8% in November. As U.S. inflation rises, the return on I Bonds increases, and the money compounds tax deferred until you redeem the I Bonds. For more detailed information, read my Q&A on I Bonds and the I Bond Manifesto.
The case for buying in January
I Bonds purchased through April 2022 will earn 7.12% interest, annualized, for a full six months. That is an exceptionally high return, and blows away other safe alternatives. With a $10,000 investment:
- I Bond: You will earn $356 in 6 months.
- 1 year Treasury: You will earn $40 in 1 year.
- 1 year bank CD: You will earn $65 in 1 year.
- 2 year Treasury: You will earn $156 in 2 years.
- 3 year Treasury: You will earn $312 in 3 years.
A lot of people are looking at that 7.12% six-month return and deciding to invest in I Bonds for the short-term, planning to redeem after the one-year holding period. (I recommend hanging on to I Bonds for the long term, but I understand the strategy in this low-interest-rate environment.)
Short-term investment? One quirk of U.S. Savings Bonds is that if you purchase near the end of a month, you get credit for a full month of interest and ownership. So for a person viewing I Bonds as a short-term investment, placing an order at TreasuryDirect to buy on Jan. 26 or 27 makes sense. That starts the clock ticking on the one-year holding period. You will be able to redeem in early January 2023, but you will lose the last three months of interest. Still, you will earn at least $356 interest (probably more) even with the three-month interest penalty. A couple could double up on that purchase.
Long-term investment? Long-term holders of I Bonds are my favorite people, and my recommendation for them is to buy up to the full purchase cap anytime between January and April. Got the money available now? Do it in January. Need time to raise the money? Get it done before April. Any purchase of I Bonds through April will earn the 7.12% annualized rate for a full six months.
So … Buy before May. It is that simple. But you didn’t think I’d leave it at that did you?
What if the I Bond’s fixed rate increases in 2022?
A wrote an article recently speculating on the slight possibility that the I Bond’s fixed rate could rise in 2022. My conclusion was that it could happen, but it would require a massive increase in real interest rates. For example, the 10-year TIPS now has a real yield of -0.97%. That yield would need to rise 125 basis points, or more, for the Treasury to even consider raising the I Bond’s fixed rate, especially when the variable rate is already so attractive.
So, would it make sense to hold off on purchases in 2022 to see if the fixed rate rises? Nope.
Yes, I know, a higher fixed rate is always preferable. That’s the first rule of I Bond investing, since the fixed rate stays with that I Bond for the entire 30-year term, while the variable component changes every six months. But in this case, waiting beyond May 1 means missing out on a massively attractive 7.12% annualized rate for six months. That’s $356 interest in six months, equivalent to more than a decade of interest from a fixed rate of 0.2%. And that $356 initial interest will give your investment a nice boost to future returns, because it will grow with future inflation.
Sorry, but here comes a huge 30-year chart, showing how semi-annual interest earned on an I Bond purchased before May 1 will compare to a purchase after May 1 with a fixed rate of 0.2% (very unlikely), and also after May 1 with a fixed rate of 0.0% (very likely). This chart assumes that the inflation-adjusted variable rate will remain high at the May 1 reset, and then gradually begin tapering down to an annual inflation rate of 2.2%.
The key takeaway from this monster chart is that buying I Bonds before May 1 gives your investment a $356 head start, and that head start will continue to grow with inflation over 30 years. It would take 13 years for the 0.2% fixed rate (which is highly unlikely, remember) to catch up to the I Bond purchased before May. And if the fixed rate stays at 0.0% in May, the investment would trail the return of the pre-May I Bond through the entire 30 years.
Is it reasonable to wait until April to see if the fixed rate is likely to rise in May? Sure, and it does no harm to your investment. But it’s still highly likely that investors will want to buy before May. Even if the fixed rate does rise in May, the investment return will lag the before-May purchase for 13 years, and then would be only $709 more after 30 years, based on the inflation assumptions used in that chart.
But one final point, which I often say: “The Treasury does weird things.” We’ll see.
Key dates for the curious
Both the I Bond’s inflation-adjusted variable rate and the fixed rate will be reset on May 1 (actually May 2 since the 1st is a Sunday) and November 1. Investors will know the new variable rate a couple of weeks before the official reset, because it is based on six-month inflation rates.
At 8:30 a.m. EDT on April 12, 2022, the Bureau of Labor Statistics will release the March inflation report, which will set in stone the I Bond’s new inflation-adjusted variable rate, based on non-seasonally adjusted inflation from September 2021 to March 2022.
So an investor who opts to wait will have from April 12 to April 28 (a Thursday) to decide on buying before May 1, or after. But remember, the only way the I Bond’s fixed rate will rise above zero is if 10-year real yields rise about 125 basis points in the next four months.
At 8:30 a.m. EDT on Oct. 13, 2022, the BLS will release the September inflation report, which will set the I Bond’s next inflation-adjusted interest rate, based on inflation from March to September 2022.
At about 10 am. EDT on May 2 and November 1, the Treasury will announce the new fixed rate for I Bonds, which seems very likely to remain at 0.0% on May 1 but is more of an open question for November 1. However, if the fixed rate rises in November, investors who capped out purchases earlier in 2022 will have a chance to get the higher fixed rate in January 2023.
People looking at I Bonds as a short-term investment should purchase near the end of January to get the clock started on the one-year holding period. By purchasing near the end of the month, and redeeming near the beginning of January 2023, the holding period can be cut to 11 months and a few days. This strategy is guaranteed to return at least $356 on a $10,000 investment, even with the three-month interest penalty.
Once the year is up, investors would have to look at then-current inflation-adjusted variable rate. If it is high — anywhere above 4% — they will probably want to hold off on redeeming in January to avoid a three-month penalty on an attractive interest rate.
People looking at I Bonds as a long-term investment should plan on completing their purchases — up the full cap of $10,000 per person per year — anytime before May 1. Investors who like to be strategic can wait until mid-April to make the purchase, but most likely, they will want to buy before May 1.
My personal decision: I have placed an order to buy my full allocation on Jan. 26.
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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.