As a short-term investment? Yes. But for the long term? I Bonds are still attractive.
By David Enna, Tipswatch.com
Just one year ago, U.S. Series I Savings Bonds were still paying 9.62% annualized for a full six months, followed by an almost-as-attractive 6.48%. Demand was so strong from small-scale investors that the TreasuryDirect website crashed under the flood of orders and new-account creations.
A lot has changed. Back in October 2022, annual inflation was running at 7.7% and a 1-year Treasury bill was yielding about 4.5%. At that time, the I Bond’s yield of 9.62% was irresistibly attractive. Today, annual inflation has slipped to 3.7% and the current I Bond has a composite interest rate of 4.30%, much lower than the yield on a 1-year T-bill at 5.41%.
As a short-term investment — meaning a holding period of about 1 year — the I Bond is no longer the shining star. However, as a longer-term investment, I Bonds are actually more attractive than a year ago, because the permanent fixed rate has increased from 0.0% in 2022 to 0.9% currently and probably higher than 1% at the Treasury’s next rate reset on November 1.
The short-term
The Treasury limits conventional purchases of I Bonds to $10,000 per person per calendar year, plus allows an option for $5,000 in paper I Bonds in lieu of a federal tax refund. I am assuming most I Bond investors have already bought their full 2023 allocation — either before May 1 at the 0.4% fixed rate, or after May 1 at 0.9% — but I have been hearing from people still waiting to make a decision: In October or after?
As I noted in an Oct. 8 article, I believe the I Bond’s fixed rate will be rising at the November 1 reset, probably to something around 1.2%, but even higher is possible. If that’s true, then both the permanent fixed rate and the six-month variable rate will be rising at the reset. So waiting until November or December to purchase makes the most sense, in my opinion.
Investors who have purchased their full allocation in 2023 also have the option to use the “gift-box” strategy, if they have a trusted partner to make the swaps. I have noted that the gift-box strategy is most effective when the fixed rate is high, since that rate is permanent.
If the fixed rate rises to 1.2% at the November 1 reset, here is how the new six-month composite rate will be calculated:
- Fixed rate: 1.2%
- Semiannual inflation rate: 1.97%
- Composite rate formula: [0.012 + (2 x 0.0197) + (0.012 x 0.0197)]
- Composite rate: 0.012 + 0.0394 + 0.0002364
- Adding the parts: 0.051636
- Rounding gives: 0.0516
- Composite rate = 5.16%
So we could be looking at an annualized composite rate of 5.16% for six months for I Bonds purchased from November 2023 to April 2024. The rate would be higher if the fixed rate is set higher, of course. At a fixed rate of 1.4%, the composite rate would be 5.37%.
While 5.16% or 5.37% are attractive, these annualized yields will only last for six months, and the next variable rate is uncertain. The I Bond’s yield might be able to get close to the 5.41% yield of a 1-year T-bill, but there is a problem: Redeeming an I Bond after 1 year would incur a penalty of three months of interest. That’s not a problem with the T-bill.
Conclusion: As a short-term investment, a 1-year Treasury bill is the superior investment.
The long-term
On my “Q&A on I Bonds” page I have a list of all I Bond fixed rates going back to September 1998. The current fixed rate of 0.90% is the highest for any I Bond going back to November 2007. Before that, fixed rates of 1.0% or higher were the norm, occurring at each reset from September 1998 to November 2007. Here is that information:
So, if my analysis is correct, and the I Bond’s fixed rate rises to 1.2% or above at the November 1 reset, we will be entering a new era for I Bonds. The higher the fixed rate the better, because the fixed rate remains with an I Bond for 30 years or until it is redeemed. The variable rate is important for a short-term investor, but less important in the long term.
Any long-term investor in I Bonds has accumulated a collection of issues with 0.0% fixed rates. Those 0.0% I Bonds will be paying 3.94% after the November reset, rising from the current 3.38%. (The starting month depends on the month you originally purchased the I Bond.) That is well below current nominal yields on short-term Treasurys, bank CDs, even good money market funds.
A fixed rate of 1.2% or 1.4% is much more desirable than a fixed rate of 0.0%.
So, if you are committed to investing in I Bonds as a tax-deferred, inflation-protected savings strategy, the next I Bond is going to be desirable — either as an addition to your current holdings, or as a replacement for a set of 0.0% fixed rate I Bonds. Redeem the 0.0% bonds, buy the new I Bonds with a higher rate.
Should you immediately trash all your 0.0% I Bonds? I don’t think so. But I can see rolling over some issues — year by year — to either fund needed spending or to buy more attractive investments, such as an I Bond with a fixed rate of 1.2% or above.
Conclusion: An I Bond with a historically high fixed rate remains an attractive investment. Why? It creates a super-safe, tax-deferred, compounded-interest savings account with a flexible maturity date. I Bonds have rock-solid deflation protection and can’t ever lose a cent of accumulated value. I Bonds expand your tax-deferred investments and as a bonus the interest you earn is exempt from state income taxes.
But what about TIPS?
Any numbers-savvy financial nerd knows that Treasury Inflation-Protected Securities — right now — offer returns superior to I Bonds. There is a new 5-year TIPS being auctioned Thursday that should get a real yield to maturity of around 2.40%, possibly 100+ basis points over the I Bond’s new fixed rate.
So … 100 basis points? That is a big deal. TIPS are a strongly attractive investment right now. If you told me I could only have one inflation-protected investment, I would go with the TIPS in these market conditions. But you can have both, and I like having both.
My plan, again, for I Bonds is create a tax-deferred, inflation-protected savings account that can never lose a penny of accumulated value. That is a plus over a TIPS, which will rise and fall in market value every day and can lose value in a deflationary period. Although I am holding all my TIPS to maturity, I have to time their maturities to meet my needs. With I Bonds, after 5 years I have access to part or all of the accumulated holdings, with never a risk of losing value.
Conclusion: At times in the recent past, I Bonds with a 0.0% fixed rate were much more attractive than a TIPS with a real yield deeply negative to inflation. Back then, I bought I Bonds but shunned TIPS. Now the reverse is true. I am still buying I Bonds because of the simplicity and flexibility.
In fact: If the Treasury raises the I Bond’s fixed rate to 1.4% or higher, I would likely add to my holdings in 2023 with a “gift-box” swap with my wife, and then most likely buy again before the end of April 2024.
• I Bond’s fixed rate should rise at the Nov. 1 reset
• Confused by I Bonds? Read my Q&A on I Bonds
• Let’s ‘try’ to clarify how an I Bond’s interest is calculated
• Inflation and I Bonds: Track the variable rate changes
• I Bonds: Here’s a simple way to track current value
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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. Please stay on topic and avoid political tirades.
David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They 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 
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A fixed rate of 4.2% (annual, 2.1% semi) beat the summation of all composite rates based upon the 1.4% fixed rate of November 2006 as follows: Starting with $10,000 the summation of composites resulted in a final $19,606.76, the fixed $4.2% resulted in a final of $20,271.
So if the EE bond ends up above 4.2%, then that also is a choice for long term inflation protection with the option to sell at any time after 12 months.
The above is dependent upon the accuracy of my math and the history of composites based upon the November 2006 fixed rate of 1.4%.
You get $19,608 if you use the eyebonds calculator which I agree I should have used that to begin with, still a 4.2% EE would beat it.
This article made me think about EE bonds too. They have been such a bad deal for so long, I had put them out of my mind. The old variable rate EEs were based on 90% of the 5-year Treasury, but I’m not sure how they come up with the rate on current issues. If it got anywhere close to 5%, I’d have to give EE bonds another chance.
The current fixed rate for EE Bonds is 2.5% but the Treasury guarantees they will double in value after 20 years, so the effective interest rate is around 3.53% if you hold that long. Just like for I Bonds, the Treasury has no announced formula for setting the fixed rate. In past years, the Treasury set the doubling period at 18 years, and before that 12 years, which created a compound rate of 6%. So the key question on Nov 1 will be: Will the Treasury lower the EE Bond’s doubling period? I hope so.
Decreasing the term of holding for the acute doubling event instead of adjusting the interest rate would be a crafty hack, but that would not appeal to me as much as what I consider to be a more straight forward increase of the interest rate to a more palatable 4.2%+ They already accept that the interest rate can go above 3.53% and when that is the case the acute doubling event is nullified. Changing the time period for the doubling event in my mind seems more cumbersome (with regard to legal documentation events) than maintaining the current operations of the EE and simply increasing the interest rate.
Treasury is trying to encourage long-term savings by using the doubling period, combined with a below-market fixed rate. If the doubling period is attractive, then EE Bonds are attractive. That’s not the case today.
While I get that EEs have specific properties like the ability to sell at face value plus interest and tax deferral/exemption for education, the spread between an EE and the equivalent STRIPS is way too high. The 20 year Treasury is bouncing around 5-5.3% and using the 1% haircut that I Bonds get from equivalent TIPS, should be paying closer to 4%, or doubling in 18 years instead of 20.
I know most people don’t pay attention to them, but what about EE bonds? What do you think the new interest rate will be when they reset on November 1st?
I’ve always been surprised by the people on this site, on Bogleheads, etc., who view I Bonds as a short-term vehicle, to be abandoned/redeemed as soon as some other fixed income security seems more attractive in strictly nominal terms.
I used to do that, but decided that doing so was short-sighted. I view I Bonds as (I can’t recall David’s exact phrasing) future inflation-adjusted cash for spending later in life. The 30-year accural period of an I Bond is a span of time that will cover my entire remaining statistical life expectancy. And, for anyone seeking a security linked to an official measure of inflation, as opposed to market predictions about inflation, TIPS and I Bonds are pretty much “the only game in town.” (Yes, I know the debates about the CPI and whether CPI “inflation” matches any individual household’s personally experienced “inflation.” But that’s what we have to work with.)
It would be nice if the amount of I Bond purchases allowed per year were unlimited, so that a person could say, “That looks pretty attractive. Time to back up the truck and buy $XXX,XXX. But Treasury’s annual purchase limits make that impossible, and once a calendar year has ended, it can’t be backfilled with retroactive I Bond purchases in a later year.
So my wife and I have both individual and individual trust accounts at Treasury Direct, to expand our I Bond purchases. And we haven’t cashed an I Bond since sometime in the late 2000–teens.
It would be beneficial to redeem the 0% fixed rate bonds and then purchase the new higher rate I bonds and/or treasury securities or other investments that offer higher rates.
That’s exactly what I was discussing above. You seem to be looking at I Bonds as a short-term holding to be redeemed when something else look better. I am looking at I Bonds as inflation-protected cash for spending in elder years, and therefore my goal is to accumulate.
If I actually needed the cash from my I Bonds paying 0% fixed in order to buy new I Bonds this year, or in 2024, 2025, etc., then redeeming them would make sense. But I don’t, and doing so would destroy that part of my total I Bond accumulation.
If/when the time eventually comes that I need I Bond holdings for living expense, hopefully many years from now, those 0%-fixed bonds will, of course, almost certainly be the first redeemed. But meanwhile, although 0% fixed does indeed feel terrible, they are at least still accruing whatever is the current official CPI–a claim which no nominal security can make.
David,
Since ibonds cannot be bought within an IRA, it is important to understand your current tax situation to compare the after-tax cost of holding an ibond (which is zero until you sell, much like your traditional IRA) to the after-tax cost of holding a T-bill as you suggest. I do not believe the T-bill wins in most cases, especially in the case of someone in the 22% or higher tax bracket, or in the marginal “tax torpedo” area of Social Security recipients.
The good thing about a flexible maturity is that you can time I Bond redemptions to fit within an income goal for a year. My wife and I set an adjusted gross income goal each year, with tax rates and IRMAA surcharges in mind. I Bond redemptions (or future maturities) will have to fit within the goal. The remaining amount is made up of Roth conversions, so we have flexibility.
I haven’t bought this year’s I-bond yet. I have the option to buy the 0.9% fixed rate at the end of October or buy 1.2% fixed rate (or higher) at the end of November.
From this post, it seems better to buy the I-bond at the end of November rather than at the end of October for a guaranteed higher fixed rate.
Is the understanding correct?
Yes, we know the variable rate will be higher at the reset, but don’t know for sure that the fixed rate will rise. I’d say it is highly likely to rise, but you can’t be 100% sure.
Thanks for being cautious.
You really won’t know until Nov 1st, it’s only a best guess. I personally have hedged my bets with half my allocation spent in May and the other half will be spent in Nov, no matter what happens, but I do think there is a better than 50% chance the new fixed rate will be higher than .9%
I probably still need to stick with 10K at the end of October. Then I will buy another 10K at then end of April for my wife so that the whole family just captures all of the fixed rates.
We have and will be continuing to exchange our 0% fixed rate IBonds for higher fixed rate ones while keeping an eye on our taxes (next tranche in Jan 24 via the gift box method). We look at IBonds as our self-insured Long Term Care cash reserve while TIPS serve to support lumpy expenses in retirement (e.g., new roof, siding, car). We recognize IBond’s CPI inflation bumps may not equal medical care inflation, but it’s close and taxed deferred until needed, becoming tax-free above 7.5% MAGI if care needs expand dramatically.
Thanks for another great article. I started cashing out my 0% fixed rate from ’12 ’15 and ’17. I’ve been stockpiling iBonds for over 10 years and couldnt justify holding the 0% ones with current interest rates.
Can you pull out your long term crystal ball? Since I’ve already limited out for 2023, I’m planning on doing some giftbox purchases with these higher fixed rates. But would it make sense for me to wait until closer to April 2024 to see if there is any shot at all the fixed rate could even going higher before loading up the gift box? Except for starting the clock in November not sure if it’s better to see if there is a chance the fixed could go even higher.
Impossible to say. I personally would not buy more than one set of gift-box purchases a year. Earlier this year, I cashed out 2 I Bonds with the intention of doing the gift-box at 0.9%. But then I saw the fixed rate was likely to rise, so I canceled that plan. In your case, waiting until April has little effect, since you could still do the gift box at the November rate. As you note, the only issue is starting the clock on the I Bond.
That’s interesting- I would love to learn more about why you are disinclined to store more than one year’s worth of IBond deliveries in the gift box. If a couple has (for example) 5 years worth of 0% fixed IBonds, and no need/desire to spend the funds in the next 5 years, wouldn’t they be strictly better off selling all of them, purchasing this year’s allotment of IBonds directly, and placing the remaining 4 years of IBonds in a gift box?
I suppose if the fixed rate was super exciting, I would consider more than one set. Back before October 2022, people were stacking up 10 sets of swaps because of the variable rate of 9.62%. But the fixed rate was 0.0% and now that investment is not favorable and it is going to take a long time to roll off. My main thinking is buying the conventional way is going to work out fine for me at this stage in my investment life.
We live in a (investment) world where nothing is stagnant forever.
If there is a period where nothing is changing, it is preceded (and succeeded) by periods where someone is throwing a knife up in the air and everyone trying to guess how high it will go and on its way back down, how soon and how far (zero = ground level) it will fall or even pierce below ground (deflation).
How high, how low is speculation. Sometimes we get it right, most often not.
We simply make decisions based on “can I live with this decision without regret?”
then you can travel to greece and macedonia without a care in the world and share some of your good fortune with the have not’s whereever int he world we are :-)!
Correction to my previous comment: the fixed rate for I Bonds purchased in January is 0.4%, not 0.9%.
We live in a world where we are constantly bombarded by data and we react compulsively.
Money is for helping live a good life and should not become an obsession.
The time-tested conservative approach to saving and investing in fixed income is a set and forget approach, buy and hold investing that is. It never is a GET and REGRET approach popularized in a data-driven world today which spoils fun in life which money was supposed to aid!
I Bonds and treasury securities are mainly for principal protection with a little interest on the side as a BONUS. And now, with TIPS, we have the luxury to hedge for inflation too with attractive coupon rates and REAL yields.
With I Bonds, emergency situations can be dealt without losing much accrued interest or principal no matter how high interest rates went……which makes it attractive for a LONG TERM SAFE PLACE to save money in and make a provision for flexibility, ease and 100% redemption of principal and close for accrued interest when emergency strikes. It is almost like a savings account except that it gives an inflation hedged return!
Investing for LONG TERM with a time-tested BUY/HOLD SET/FORGET approach serves the purpose of investing for living a joyous life!
David Enna shares USEFUL KNOWLEDGE to help understand this TIPS and I Bonds savings instruments so we can make INFORMED choices when we need to based on all the information / factors we need to consider at the time of BUY/HOLD and SET / FORGET decision making with no intent to live to get/regret until the end!
Happy Saving!
Totally agree!!!
I don’t believe that Treasury rounds the composite rate, so if the new fixed rate is 1.2% then the composite rate would be 5.16%. I’ve checked my TreasuryDirect account and it show that I Bonds that I purchased in January (variable rate 3.38%, fixed rate 0.9%) has a “Interest [composite] Rate” of 3.79%.
Good catch. You are right. I took that formula directly from the TreasuryDirect site, which said for the current rate:
Adding the parts gives 0.0429521
Rounding gives 0.043
Turning the decimal number to a percentage gives a composite rate of 4.30%
https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
I think rounding to 4.30% happened because the next level of rounding ended up at 0.043. I will alter my article.
Re today’s post, I am sure you already know this, but it might be worth saying to readers of that post. Each spouse can buy $10,000 of I bonds/year under their SSN. And a trust, including a family trust that uses one of the spouses’ Social Security numbers,can buy an additional $10,000. Thank You for your posts. I buy I bonds and TIPS for some long term inflation protection. Your posts are invaluable to me, and I enjoy hearing about your recent travels. John Swan Sent from Yahoo Mail for iPhone
I find myself thinking about liquidating my I Bonds in favor of TIPS – not for financial reasons, but because of the difficulty of dealing with TreasuryDirect. I’ve already encountered my own hassles, I am currently among those who without a bank that will redeem old Series E bonds received as gifts, I’ve got paper I Bonds I need to convert, my spouse has mysterious entries in Treasury Hunt that need to be addressed and I’ve recently read quite a few forum posts about the problems and delays that people’s heirs/executors have faced – even when everything is in an online account. I’ve been dragging my feet on our stuff because of the amount of time, faith and hassle involved. As such, I increasingly feel I should simplify my future estate by getting everything out of TreasuryDirect – including our I Bonds.
I understand. It is sad that one of the simplest and safest investments gets bogged down by bureaucracy.
As much as the platform is crusty, outdated and difficult and inconvenient to deal with, Treasurydirect is one of the safest places on this planet to park money with – directly with the government where there is implicit guarantee of the entire amount vs. banks and brokers where we have some protection from government agencies like fdic and sipc IF, when and where needed, like a lehman collapse! hope not!
The website is a little clunky, but I can live with that. My issues are with the customer support, incredibly long processing times, and forms which require difficult to get medallion signature guarantees, etc. Maybe they should make a deal with the post office and/or Western Union to facilitate receipt of paper bonds as well as validate and accept paperwork on their behalf (and to provide a useful receipt). Of course that would have to only be to support electronic transfers of funds.
It is unacceptable that FDIC insured banks will not cash Treasury bonds. Call your Congressman! I’ve gone through the paper to electronic conversion process with Treasury Direct and it did work. However, it took months to accomplish and was not transparent. I am concerned about those who have to deal with the estate of a deceased bond holder. Sounds like a quagmire according to my attorney.
Thanks for the info on the “gift box” approach. I can see it’s a way to buy ibonds earlier than you would be able to if you’ve reached your $10,000 limit. i.e. buy on Nov 1 and then send the “gift” in 2024. However, I’m confused about your comment ” then most likely buy again before the end of April 2024″. This will only work if the gift remains “unsent” or you’ll still be below the $10,000 maximum, because receiving the gift counts toward that maximum. Am I right?
That’s right. I would stash a set of $10,000 I Bonds into the gift box and then deliver them in a year when the fixed rate fell below 1.4%. The 2024 transactions will be conventional purchases. So the idea is to get the investment now, deliver it later at a time when the fixed rate falls.
Thanks. This means that I can gift $10k each for my wife and child and she can do the same. Sweet. One last thing, do you have any rule of thumb to quantify the advantage of ibonds over TIPS with respect to compounding? I’m not interested in short term income so my “favorite” TIPS are low coupon although I do own some at (1-2%). I’m thinking that a 2% coupon on a 4% real yield TIPS means that my compound rate is 2%. In that case an ibond with an average total rate of around 3% or more would be attractive – if compounding and tax deferring are important to me. Love to hear your thought on this.
To simplify things, I’d recommend just looking at the real yield, which is equal to the fixed rate of the I Bond and the real yield to maturity of the TIPS at your original purchase. However … The TIPS will pay out the coupon rate as current interest, so that part does not compound. Only the inflation accruals compound. The I Bond never pays out anything until redemption, so the entire balance compounds.
Does the $10k annual limit apply to when you redeem existing I bonds in order to purchase new ones?
Yes, the redemption has no effect on the amount you can purchase, which is still $10,000 per person per calendar year.
I agree with your opinion on this. I did sell off some of my 0% fixed rate I-Bonds in 2023 as T-Bill rates surged — but if the fixed rate is attractive, and the combined rate is something like a T-Bill, I will be a buyer in early 2024. I think it will be important to buy in early 2024, especially before Oct 31 1 2024, in case the Fed cuts rates should we have a rcession in 2024.
Another benefit of I Bonds (and sometimes a disadvantage) is that the fixed rate remains available all the way to the next rate reset. So even if the Fed begins pushing nominal yields lower, the new fixed rate will be there through April 2024.
Not sure for your reason to single out the fixed rate, as both the variable and fixed rates reset in May and Nov for new purchases.
I focus on the fixed rate because it continues with your I Bond purchase until redemption or maturity. The variable rate will change in six months — it might be lower or it might be higher, but the fixed rate for that I Bond will always be the same. So a high fixed rate is attractive.