By David Enna, Tipswatch.com
Just a heads up to readers: Right after 10 a.m. EDT Tuesday, the Treasury will announce the new composite rate for I Bonds issued between November 2022 and April 2023. Will the I Bond’s fixed rate go higher? We will find out … tomorrow.
Unfortunately, at that hour, I will be in a car heading down an interstate to a family-reunion vacation on Hilton Head Island, S.C. This reunion was rescheduled twice and unfortunately got moved to begin on November 1, the rate announcement day. Oh well …
I will post what I can from the car (I won’t be driving) as soon as I can tomorrow, then I will update that posting with more analysis later in the day.
Also tomorrow, we will get confirmation that the I Bond’s new variable rate will be an annualized 6.48% for six months for all I Bonds, no matter when they were issued. The fixed rate decision, however, is a great unknown. I have been saying the fixed rate should be boosted from 0.0% to 0.5%, but it could very well stay at 0.0% or go even higher than 0.5%.
In addition, we will learn if the Treasury will raise the fixed rate on Series EE Savings Bond from an embarrassingly low 0.1%, where it has been stuck since Nov. 1, 2015. The EE Bonds double in value if held for 20 years, creating an effective return of 3.53% a year. I doubt the Treasury will change the 20-year doubling term. Seems highly unlikely.
Wildly unlikely would be a Treasury decision to allow a higher purchase limit on Savings Bonds, currently $10,000 each for I Bonds and EE Bonds per person, per year. That would be huge news, but there is no indication this is coming.
See you tomorrow.
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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.
Treasury Inflation-Protected Securities 
And the EE rate skyrockets to 2.1%. Still 20 years to double, but now it’s not an insulting amount of interest if you cash in before then.
0.4% fixed. I am happy.
0.40%
Fixed rate is 0.4%
May you have a wonderful time together!
David, please ignore if this is bothersome, but I wonder if you could help me figure out the secondary market on tips/bonds. For example, in looking at 912810QV3, the information I am shown on vanguard is that it matures 2/15/2042, there are different sales lots, with differing minimum purchases and differing yield to worst(which makes perfect sense). taking the middle buy line as an example, it says the price is $82.076, and has a yield to worst of 1.798. To my uninformed eye, it looks like that is saying I can buy a tips protected bond for $82 instead of $100 and that it will pay 1.798 over inflation for 20 more years. What am I misunderstanding…this can’t really be true..? Oh and there is a top line that says it has a maturity coupon of 0.75. I have no idea what that means. If I click on the link, it has the data in another form and additionally says it has a “factor” of 1.31081, and down in the bid/ask details, it says it has a “current yield ” of 0.904, a “modified duration” of 17.633, and a “convexity” of 3.368.
What on earth does all that mean and how do I calculate all those different numbers?
That particular TIPS has a coupon rate of 0.750%, which is well below the current market rate of a 20-year TIPS, about 1.64%. So it is selling at a deep discount, meaning you will get somewhere around 1.8% above inflation based on the current ask price of $82.25 for $100 of par value. However, that inflation index of 1.310 means you will be buying about 31% of additional principal, also at the discounted price. So, if you were buying $10,000 of par value you would be buying $13,100 of principal, at about $82.25 for $100 of value, so you would be investing about $10,775 for $13,100 of principal, and then you will collect a below-market coupon of 0.75% for the next 9+ years. That’s a rough estimate and your prices may differ.
Thank you David. Your explanation is helpful. I am also looking up all these terms. It made good sense right up until the inflation index got tossed into the mix. I will keep studying (and I don’t want to further interrupt your packing). One site tells me par value is the same as face value – or what the government will hand back at maturity. So to get your numbers, first I multiply the par value (your 10k example) by the inflation index, resulting in $13,100. Next I divide that into $100 lots (because the price is $82.25 for $100) and multiply the number of lots (131 in this case) by the price to get the $10,775 you mentioned.
What I see right away, is that I need to look first for the coupon rate and after that, figure out the rest of the calculations. 0.75 over inflation for 20 years does not sound wonderful. I am so grateful for you patience and kindness in explaining…thank you!
It’s important to realize that par value is not the same as the accrued value that will be paid at maturity, which is par value + accrued inflation. Only the “par value” is guaranteed to be returned at maturity. If we hit a huge span of deflation, that accrued inflation could wilt away, but you can’t lose the par value. (This is highly unlikely, however, and not worth a lot of worry.)
Wait, where do you find a 20 year tips with a coupon of 1.64%? I don’t seem to be looking in the right places. And the treasury doesn’t seem to be selling those anymore. And maybe I shouldn’t be too quick to declare 0.75% over inflation disappointing…you mentioned in September that you were “in” for the 10 year auction that had a coupon of 0.625% ???
The Treasury doesn’t auction 20-year TIPS. I wish they did. So the secondary market is your only option. (That September auction actually got a real yield of 1.248%, very attractive at the time.)
Safe travels, waive as you head South on I-77 near the Ft Mill exit. Can you explain why the 5 Year Tips, 91282CEJ6 is trading on the secondary market with a YTM 1.652 and the new 5 Year Tips, 91282CFR7 is at 1.537?
Thanks
Hey – Have a vacation!! Surely most of your faithful readers will have their own look at Treasury Direct quite soon anyway. I look forward to your remarks, but that can wait. Hope you have beautiful weather and a happy break.
Fixed rate 0.0% is my guess. David already calculated the variable rate, which is accurate. Everything else remains the same is my other guess.
It might seem like Treasury should increase the fixed rate given this year’s rampant inflation, but they never state how they calculate the fixed rate. Remember it is for 30 years potentially, so they will likely be very conservative.
If they jack it up to something like 3.o%, like they did in 2001, we can always buy another $10,000 with start-date January 2023, which is just two months away. But remember if you buy, to buy around January 25, no later. We have seen how Treasury Direct is a mess.
Good point about the fixed rate for 30 years. What were the economic conditions that allowed 2% and 3% fixed ? !
I bought some of my I-bonds in Aug, Sep, Oct 2001 and got a 3.00% fixed rate. You could buy $30,000 in one year back then and you could buy them at a bank.
The average CPI of United States in 1999: 2.19 %.
The average CPI of United States in 2000: 3.38 %.
The average CPI of United States in 2001: 2.83 %.
Pretty bizarre, compared to nowadays. Looks like the fixed rate was just about the same as the CPI back then. Using this very limited and very old data, the fixed rate starting in Nov 2022 should be about 9 (yes, nine) percent!
Thanks, Patrick! Wow. I, too, have some ibonds with that beautiful 3% fixed rate. Was just luck, but Keepers for sure. Wouldn’t a big fat fixed rate be nice.
However , If recent purchasers and would-be-purchasers were enough to take the website down, I certainly doubt that they would sweeten the deal any further with a fixed rate.
Sometimes it feels like forever to get past one year of ownership and such a long stretch to get beyond the 5 year penalty phase. But I have really enjoyed looking at the savings bond calculator from time to time – like a nice visit with an old dear friend.
We own some from 2001, too, with a fixed rate of 3.4% and 3.0%. Since then, the highest fixed rate we have is 0.5%. Why were those fixed rates so high around 2000? The stock market was raging higher and no one saw any need for TIPS or I Bonds, plus these were new investments and it was unclear how to value them. Gradually, the market decided on much lower real yields for TIPS, and I Bonds followed along.
Many THANKS David.
PLEASE drive SAFELY. Your valuable and complete analysis are always greatly appreciated, timely or otherwise.
-With gratitude + utmost respect 🙏
What concerns do you have with liquidity issues on Treasuries?
Are you worried about Congress failing to approve a funding resolution and a possible government shutdown in mid-December? This can cause a blip in very short-term interest rates, but I really haven’t thought much about it.
How should we be dealing with Short Term Inflation Bonds like VTIP??
I suppose it depends on what you are trying to achieve. I own VTIP in a tax-deferred account and I am continuing to hold it. The fund’s real yield has risen to about 1.9%, pretty attractive. I like this fund, even though it has had a rough year with short-term real yields rising more than 350 basis points.
As always a pleasure. Thank you