Confusing? Aggravating? Of course, but also correct.
By David Enna, Tipswatch.com
I’ve had several communications recently from readers who are new to U.S. Series I Savings Bonds and freaking out by the apparently low interest payments reported so far on the TreasuryDirect website. Here’s an example from this week:
After fourteen months, the value of my (March) 2021 bond has increased only 3.84%, or by $384. If the bonds truly tracked inflation, they would have increased by at least $850 – one year at 8.5% plus another two months’ interest. … I suspect the 6-month calculation period is the clever “trick” by which the government sees offering these bonds as worthwhile. It is what gives the house the advantage. … I feel swindled.
First of all, and most importantly, the Treasury is not swindling anyone. I Bonds do accurately track official U.S. inflation, but investors need to keep in mind that the I Bond’s current variable rate is set by inflation six months in the past. Eventually, if you hold them, all I Bonds catch up to current U.S. inflation (either up or down).
This particular reader purchased $10,000 in I Bonds in March 2021 and then $10,000 again in March 2022. In my opinion, those were excellent investments. But the reader has looked at the TreasuryDirect website and sees his two I Bonds have earned only $500 in interest so far, when current U.S. inflation is running at 9.1%. He asks: “Why?” (And he is not alone. I get this sort of question several times a week.)
Note: I wrote an updated article on the Treasury’s interest rate calculations. View it here.
What is happening here?
The key issue is that I Bonds cannot be redeemed for one year, and I Bonds redeemed from year one until year five will lose the last three months of interest. When you look at your I Bond earnings on TreasuryDirect — if you haven’t yet held them 5 years — the interest that TreasuryDirect reports WILL NOT include the latest three months of interest.
A second issue is that when I Bonds are issued, they earn the current variable rate for a full six months before transitioning to the next variable rate, and so on, every six months. Eventually, all I Bond holders get exactly the same variable rates, but the trigger dates are staggered by the month of issue.
In the case of this reader, the I Bonds were purchased in March, which means that the variable rate will update each September and March. This is crucial for understanding the interest calculation.
Example one: I Bond issued in March 2021
I used TreasuryDirect’s Savings Bond Calculator to get the current value of a $10,000 I Bond issued in March 2021. Because the calculator is supposedly “only” for paper I Bonds, I had to enter $5,000 twice into the calculator. Here is the result:
The reader was correct in noting that this I Bond had only earned $384 in reported interest since March 2021. Why is that? One factor is that in March 2021, the I Bond’s composite rate was 1.68% (fixed rate of 0.0% + variable rate of 1.68%) for a full six months. And now I will let my chart take over:
Well, look! … This March 2021 I Bond has not yet started earning the current 9.62% composite interest rate because it is still in the six-month period earning 7.12% interest, though this month. In September, the I Bond will begin earning 9.62%, earning at least $482 over the September to February period.
My total of $380 differs from TreasuryDirect’s $384 because of compounding, but close enough.
The I Bond so far has earned $558 in interest (actually a little more with compounding), but TreasuryDirect will only report $384 because it will always eliminate the last three months of interest for an I Bond that hasn’t yet hit the 5-year mark.
A bit of advice: Before redeeming any I Bond before 5 years, make sure to check the term of the current composite rate. In this March 2021 example, you wouldn’t want to sell the I Bond until three months after the 9.62% rate runs its course. That would be June 2023, at the earliest, but the next variable rate could be nearly as high.
Example two: I Bond issued March 2022
Here is TreasuryDirect’s calculation:
This one is a lot simpler. TreasuryDirect says that this I Bond has earned $116 interest so far. Again, the composite rate is 7.12% through August, and then will transition to 9.62% from September to February.
Here’s my calculation of how this interest was determined:
In this case, my calculation matches the TreasuryDirect number because no compounding has yet taken place for this I Bond. The first accrual will be in September, so the principal balance will climb a bit just as the 9.62% interest rate kicks in.
I may be weird, but I actually trust the way the Treasury reports my I Bond interest, but I know all about the quirks of the three-month penalty and staggered variable rates. I recently redeemed EE Bonds we purchased in 1992 and the Savings Bond Calculator nailed our proceeds to the penny. The Treasury is not looking to cheat Savings Bond investors, I am certain of that.
Not everything in life is a conspiracy to cheat you. Savings Bonds are a trustworthy investment.
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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 be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.