Ignore the fixed-rate drama; buy I Bonds in October

The 9.62% annualized rate for six months is a huge advantage.

By David Enna, Tipswatch.com

Here we are, in the U.S. Series I Savings Bond’s “limbo fortnight,” a period when we know the current composite rate (9.62% annualized, good for six months for purchases through the end of October) and also the upcoming variable rate (6.48% annualized, good for purchases in November through April 2023).

What we don’t know: Will the Treasury raise the I Bond’s fixed rate on November 1? And does holding out for a higher fixed rate makes sense? Let’s try to figure this out. But first, some details about the I Bond, a security that earns interest based on combining a fixed rate and an inflation rate.

  • The fixed rate will never change. Purchases through October 31, 2022, will have a fixed rate of 0.0%. The fixed rate is essentially the “real yield” of an I Bond, the amount its return will exceed future inflation.
  • 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 9.62% annualized. It will adjust to 6.48% annualized on November 1, 2022, for all I Bonds, no matter when they were purchased. The starting month of the new rate depends on the month you purchased an I Bond.

Will the fixed rate rise?

I have been arguing that the I Bond’s fixed rate should rise, since real yields of 5-year and 10-year Treasury Inflation Protected Securities are now highly positive, 1.83% for the 5 year and 1.63% for the 10 year. In fact, the 5-year real yield is now higher than at any point since the financial crisis of 2008. That’s a 14-year high. The I Bond’s fixed rate should be reset higher. I’ve suggested a range of 0.3% to 0.5% … not unusual. The I Bond’s fixed rate was 0.5% during the Fed’s last tightening cycle from November 2018 to November 2019, when TIPS yields were much lower.

However, most people in the I Bond community believe the Treasury will hold the fixed rate at 0.0% because of the unprecedented demand for I Bonds in 2022. Investors will keep buying I Bonds into 2023, drawn by that variable rate of 6.48% for six months. The Treasury doesn’t need to sweeten the pot.

So, it could go either way. I am still saying there’s a 50/50 chance we will see a higher fixed rate at the Nov. 1 reset.

Should you hold off buying I Bonds on the chance of a higher fixed rate?

If we knew for certain that the fixed rate was going to rise, I’d say “sure, this decision is a tossup.” But we don’t know anything for certain. People intending to hold the I Bond for 20 to 30 years would find a higher fixed rate very appealing, if they get it. But people intending to use the I Bond as a short-term cash holding — 2 or 3 years, for example — would clearly be better off buying in October.

And for most other people, too, I’d suggest buying in October.

Why? Buying in October gives you six months of 9.62%, the highest composite rate in the I Bond’s history. After that, you’d get 6.48% for six months. The combination of rates, when compounded, will give you an annual return of about 8.2%. If you buy in November, you are certain to get 6.48% for six months, and then a new variable rate beginning in May. You might, or might not, get the addition of a higher fixed rate.

Starting off with a rate of 9.62% gives the October buyer a huge head start over the buyer in November, especially if the fixed rate stays at 0.0%. That’s interest of $481 in the first six months, which will continue to compound higher as long as you hold the I Bond. Keep in mind that a fixed rate of 0.5% equates to $50 a year on a $10,000 investment, before compounding. It will take 8 years to catch up with the October buyer, even if the fixed rate rises to 0.5%. If the fixed rate stays at 0.0%, the buyer in October is the eternal winner, because the November buyer can never catch up.

Here are the numbers I am using, based on gradually declining inflation rates over the next 12 years. I addition, I am using a simpler form of compounding than the I Bond’s actual “pseudo-compounding,” so these numbers are a bit lower than reality.

This chart has been updated and corrected based on feedback from readers.

The key takeaway from this chart is that after 5 years, when you can sell the I Bond with zero penalty, the October buyer would have built up $12,370 versus $12,277 for the buyer in November with a 0.5% fixed rate, and $11,979 for the buyer in November with a 0.0% fixed rate.

Even after 7 years, the buyer in October is slightly ahead of the buyer with the 0.5% fixed rate. In year 8, however, the buyer with the 0.5% fixed rate moves ahead, and would stay ahead for the remainder of the I Bond’s 30-year term. So that’s why I say if we knew for certain that the I Bond’s fixed rate was rising to 0.5%, this decision would be a tossup. But since we don’t know, I recommend buying in October.

Update: #Cruncher, a Bogleheads numbers whiz, did a more exacting analysis of this breakeven equation, and found the November purchase with a 0.5% fixed rate would overtake an October purchase in 7.5 years, not 8. Here is his explanation.

As Columbo says: “One more thing

If the fixed rate rises in November, all I Bond investors will be able to nab it after January 1, when the purchase cap of $10,000 per person per year resets. So if the fixed rate does rise, we all win.

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

* * *

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 be 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 Cash alternatives, I Bond, Inflation, Savings Bond. Bookmark the permalink.

49 Responses to Ignore the fixed-rate drama; buy I Bonds in October

  1. csloan26 says:

    Any chance you could update or make a new post with the 0.4% fixed rate? Just curious, no particular urgency; I know TIPS are going hang buster right now so that’s where your focus is

    • Tipswatch says:

      I will be writing a buyers guide to I Bonds in early January. But if you haven’t bought your full 2022 allocation yet, that’s a good move, short-term or long-term.

      • csloan26 says:

        Much appreciated, we were debating when the break-even would be for the 0.4% fixed rate (wish that was known before it rolled over to the next purchasing period, like the variable rate).
        This Yahoo Finance post claimed a 4 year break even point so was seeing some mis-info out on the web: https://www.yahoo.com/video/pays-procrastinate-6-89-bonds-175401666.html
        Absolutely love the site and appreciate the time you put into making it so “high yield”!

        • Tipswatch says:

          I said in the article that if that fixed rate did indeed rise, this decision would be a “toss up.” The nice thing is that the higher fixed rate is now available for buyers in 2023. I bought my January allocation in January 2022, but I might hold off until mid April for the 2023 decision.

  2. Glenn says:

    It should be better than 50/50 that the fixed rate will increase. Demand for Series I bonds is truncated – you can only purchase $10,000 in a year. You should not see an increase in demand until after the first of the year. Politically, it is not desirable for Treasury to have an “unfair” fixed rate right before the midterm election.

  3. MISS says:

    I invested the full amount for 2022 back in January. The question is, what do I do for 2023? Wait to see if the fixed rate go even higher in May–is that a likely scenario? Or maybe it’s best to start locking in CD rates with my cash…thoughts?

    • Tipswatch says:

      In 2023 you have an entire year to make that decision. If you have the money ready in January, you may want to buy then. You could also wait until mid April, when you will know the next variable rate and also have a good idea of the potential for a higher fixed rate. I will be writing a buying guide early in January.

  4. Don says:

    I heard that the FED is shopping another QE. Wouldn’t this be good for TIPS?

    • Tipswatch says:

      Got a source for that?

      If the Fed actually launched another QE now, it would be a disgrace. But it would also be great for the stock market, bitcoin, NTFs, and all the TIPS you own (and plan to trade) and also for TIPS mutual funds. It would be a disaster for inflation (which potentially would soar) and anyone looking to add to TIPS holdings at these attractive yields.

    • Tipswatch says:

      This article talks about actions by the Treasury, not the Fed. But this hints of trouble in the Fed keeping up actions to fight inflation.

      • Julian says:

        I read the article and it does not appear to describe another QE proposal to me. Rather, it appears that Treasury is exploring tweaking the maturity structure of its portfolio so there might be greater issuance of in-demand maturities (e.g., 10 year notes) for liquidity purposes:


        [Treasury] is further asking about the costs and benefits of funding repurchases of older debt with increased issuance of so-called on-the-run securities, which are the most liquid and current issue.

        …buying back off-the-run Treasuries could potentially increase liquidity of outstanding issues and buyback mechanisms could help contain price swings for Treasury bills, which are short-term securities.

      • Don says:

        What is ironic about these securities, we are really rooting for inflation to stay high! Who is gonna admit I want 1.xx% tips return or 0% ibond return return. Not me. I already spending the money!

        • Tipswatch says:

          Nah, it’s just a real return. Reasonable inflation would be much better. Never cheer for inflation.

          • Don says:

            Last time I looked inflation to these secuities is like the VIX to options. Retirees need a chance to lock in some long term fixed rates, on easy products guarenteed securities like CDs etc. Go inflation get em Fed!

          • Jimbo says:

            I frequent another website that tracks bank rates. There’s a group of posters on that site that are genuinely excited about the rise in the interest rates this year. When I point-out that even at 4% the real yield is still -4%, it is not well received. I’d much prefer 3% interest rates with an inflation rate at 2%. A guaranteed gain of 1% is a lot better than -4%!

            On the other hand, if inflation hadn’t risen the FED would have never raised interest rates. TIPS yields would have remained negative instead of being over 1.5%. This does provide one with the opportunity to load-up on TIPS with yields that haven’t been available for over a decade. Of course, the price of that opportunity has been at the very least -4% on nominal Treasuries (and, CD’s).

            At this point in time, it looks like TIPS have a genuine advantage over fixed rate securities. As of yesterday, 5 year nominal Treasuries were 4.27% and 5 year TIPS were at 1.83%. That’s a break-even rate of only 2.44%. Put another way, if inflation eventually lowers to 2.5%, the total yield on that TIPS is around 4.33%. That 1.83% real yield is guaranteed. Until inflation drops below 4.27% nominals are losers.

            When I was working, I kept most of my retirement funds in a 5 year CD ladder. Back then, 5 year CD’s always beat inflation. I probably only had about 15% in TIPS and iBonds at any one period in time. With the exception of the 70′ and early 80’s, inflation was not much of an issue. Part of that was because I didn’t have that much money at the time anyway.

            Now that I’m retired inflation has become a real issue. When you have a large nest egg losing 5% in purchasing power on an annual basis is a real problem. To avoid this in the future, I’m transitioning away from fixed income instruments and moving into TIPS in a major way. The worst case scenario of this approach is that if the government ever defaults on it’s debt, I’ll be dead meat.

            • Don says:

              Its all about what one can do with cash. My cash income went from peanuts for about 6 yrs to about $24k annualy. Fed can give me a few more %, then I will actually allocate bond money back into bonds. Portfolios back to normal!

          • Tipswatch says:

            Jimbo, thank you for your wise observations. You are getting to be a sage. Appreciate your contributions.

  5. Max says:

    With the fixed rate of 0.5%, the composite rate is calculated as
    F + V*2 + F*V.

    I was able to replicate the above table with the fixed rate of 0.0% before and after the Nov. purchase at 11.5 and 12.0 years period ($14,437 and $13,926). But with the fixed rate of 0.5%, I got $14,711 in year 12 compared to the above table of $14,378 which is a lot lower.

    Would appreciate it if someone can comment on my numbers above.
    Thank you.

    • Tipswatch says:

      Yes, thank you. Although I didn’t use your exact formula, I discovered an error I made halfway through the 0.5% listing (copied from an older table). I am updating this, with the result of $14,700 in year 12, pretty close to your formula. It’s been a crazy week.

  6. Ladder up says:

    David, Buying or redeeming I bonds might be a lot easier if one could log in. I don’t know if you’ve seen the ongoing latest thread over on the bogleheads forum. What is happening is many of us are logging in, which is working, and then a screen comes up to verify our account details showing our telephone numbers and email, and then when we click verify to proceed, we get a treasury direct is unavailable message. This has been going on for days.

    For those of us with multiple accounts, it is often just one of them. Another alert boglehead, found a Facebook post (from a person on the phone with treasury direct), that found that a spurious question mark character had entered her account name, leading to the failure to verify event, which generated the treasury direct is unavailable message.

    This looks to be a very widely spread problem, if the Bogle heads thread is any indication. I also posted this error on twitter, and got fellow commiserators. This thread is posted under my username hebell.

    • Tipswatch says:

      I just logged in successfully to our 2nd account, which I rarely use, and I did get past the verify page. I noticed they are bringing the site down Sunday morning, we can all hope to make the necessary fixes.

      • Ladder Up says:

        Yes, the maintenance message just came up. I am holding off on testing four other accounts until after Sunday. I first detected mine was down on October 11th. Somehow, some portion of user accounts had their account name corrupted by non-alphanumeric characters, which causes verify to fail.

    • Steven H Roberts says:

      I seen similar issues with the Social Security site using Chrome and Edge browser. I fixed my issue by using Firefox.
      Just a thought, but I have not seen the same issue with the treasury direct site, everything working fine.

      • Ladder Up says:

        Yeah, apparently only some small subset of accounts are affected, and it is now confirmed it’s related to spurious non-alphanumeric characters that have corrupted the username or account profile. Probably why they are shutting the site down for 2 hours on Sunday, but that’s speculation on my part. Happens whatever browser you want, even if you wipe the cookies or go incognito. Purely a problem on the treasury side of things.

  7. Mikhail Furman says:

    Sir, it is my understanding that if I already bought the 10K of I savings bonds in 2022, my next purchase should be after January 1st, 2023

  8. Patrick says:

    Because Treasury does not tell us how they calculate the fixed rate, and because it has been erratic in the past, with seemingly the only trend, if any, leading to zero, it is not statistically possible to predict the fixed rate with any confidence. In any case, the fixed rate will likely be small enough to ignore in the decision-making process as to whether to buy I-bonds or not, especially for short-term buyers. I would be pleasantly surprised if I am wrong.

  9. Mary says:

    Sir, Assuming one has purchased their limit, is there any option other than waiting until 2022? Thank you.

    • Tipswatch says:

      You’ll need to wait until 2023 for your personal account. If you have a trust or trusts, it’s possible you can buy I Bonds for those, but you’d have to open new accounts. The other option is the “gift box,” in which you assign a purchase to someone else: https://thefinancebuff.com/buy-i-bonds-as-gift.html …. However, I have heard from readers that this method is currently glitching on the TreasuryDirect site.

      • Patrick says:

        It is my understanding that you can buy a maximum $10,000 per social security number per year. If you have a living trust identified by your social security number, which I have, you will probably be still restricted to the $10,000 maximum per social security number. I would be grateful if you have information that would suggest otherwise. It would be interesting if I could buy in one year $10,000 under my name, and another $10,000 in the name of the trust, both having the same social security number.

        • mingyesun says:

          Patrick, I hunted around the TreasuryDirect website and here is the official wording:

          How much can I spend each year on savings bonds?
          We count the limits by the Social Security Number of the first person named on the bond or, in the case of an entity, by the Employer Identification Number or Social Security Number.

          A given Social Security Number or Employer Identification Number can buy up to these amounts in savings bonds each calendar year:

          $10,000 in electronic EE bonds
          $10,000 in electronic I bonds
          $5,000 in paper I bonds that you can buy when you file federal tax forms
          *** Notes:

          Gift bonds count toward the limit of the recipient, not the giver.
          *** If you have an individual account and an entity account in TreasuryDirect that use the same Social Security Number, you can purchase up to the limits in each of the 2 accounts. ***

          • Patrick says:

            Ming, if that is true, that is an interesting workaround to exceed the $10,000 annual limit on electronic I-bonds. It isn’t too much trouble to create a living trust. Conceivably, everybody’s annual maximum could go to $20,000, which would make I-bonds more interesting to more people. I wonder of Dave could dig up the exact wording in the Federal Register.

            • Tipswatch says:

              Federal Register is no help on this one.

              • Patrick says:

                Thanks for looking. I looked too and found nothing. Well, I wonder where this “rule” came from. I could phone TD, but I am likely to get someone who has no clue after being on hold for a couple of hours. I don’t have a lot of confidence in TD website to provide correct info, not anymore. Seems like it could be a pretty important issue since a lot of people complain about the $10,000 annual maximum. It is hardly worth the trouble buying an I-bond for interest on only $10,000. It might be worth the trouble at $20,000.

              • MW says:

                I am wondering if Harry Sit article below will help answer the question. Also comment 36 was posted by one of his readers.

                https://thefinancebuff.com/buy-more-i-bonds-treasury-direct-trust.html

                Comment 36:
                Jacquie Traub says

                DECEMBER 24, 2021 AT 2:43 PM

                My husband sent this question to Treasury.Direct via their email address.
                From: J Traub
                Sent: Saturday, December 18, 2021 9:35 AM
                To: Treasury.Direct@fiscal.treasury.gov
                Subject: Trust Accounts
                “I have two different trusts with the same TIN which is my social security number, but with different Trust names and purposes. Can I have Treasury.Direct accounts for both trusts, each with their own $10,000 purchase limitation? Thanks for your help.”

                This is the response I received.
                “From: Treasury.Direct@fiscal.treasury.gov
                Sent: Wednesday, December 22, 2021 5:07 AM
                Subject: RE: Trust Accounts

                Yes, John. You should be able to.

                Barry

                Securities Agent”

                Note that it takes a few days for a response.

          • Marc says:

            Don’t forget the very important caveat indicated by the asterisks (my emphasis):

            What about bonds . . .

            I give as gifts?

            This is just like the situation with your children. The gift belongs to the person to whom you give the bond. Therefore, the amount counts in that person’s limit, not in your limit.

            ** The gift counts for that person’s limit in the year in which they get the bond. **

            While the gift is sitting in your TreasuryDirect account waiting to be delivered, it is in a special “gift box.” So, even then, it is not yours and does not count in your limit.

            https://www.treasurydirect.gov/savings-bonds/how-much-can-i-spend-own/

  10. jvalente says:

    In your spreadsheet, the text reads “I Bonds after May 1.” Was that supposed to be “I Bonds after Nov 1?”

  11. Max says:

    Should it be 9.62% instead of 9.68%? Great post as always. Thanks for all your hard work.

  12. mingyesun says:

    David, in your first paragraph, you wrote >>>(9.62%, good for six months for purchases through Oct. 31)<<< If I purchase the I-Bond on Oct 31st, it would settle on Nov 1st, so I would then get Nov's lower rate. Anyone would need to purchase by Oct 28 to get the higher rate. I know you know this, but if a newbee read it they would be misguided.

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