By David Enna, Tipswatch.com
Last week, the Treasury set the fixed rate for I Bonds purchased from May to October 2024 at 1.3%, which combined with a variable rate of 2.96% results in a composite rate of 4.28% for six months.
As it turns out, that 4.28% composite rate also applies to I Bonds purchased from November 2023 to April 2024, because those also had a fixed rate of 1.3%. But what about I Bonds purchased in previous years, with fixed rates as low as 0.0%?
All I Bonds — no matter when they were purchased — will have the inflation-adjusted 2.96% variable rate applied for a full six months. The starting month depends on the original month of purchase, following this chart from TreasuryDirect:
For example: If you bought I Bonds in January 2024, that investment will earn a composite rate of 5.27% for six months, and then in July will begin earning 4.28% for six months. A purchase in April 2024 will earn 5.27% for six months, and then in October begin earning 4.28% for six months.
But what about those earlier I Bonds in your inventory, with much lower (or possibly higher) fixed rates? Any I Bond with a fixed rate of 0.0% is going to earn the variable rate, with no added fixed rate. So those will transition from earning the previous variable rate of 3.94% for six months to 2.96% for six months.
In this chart, I have compiled the new composite rates (which will roll into effect based on the original month of purchase) for all I Bonds back to November 2016, and then selected I Bonds with varying fixed rates back to May 1999. The chart also shows the current value of these I Bonds, assuming the I Bonds were purchased in the first month of each time period:
Note that the May 1 value shows total interest earned, ignoring the Treasury’s three-month penalty for redemptions before five years.
Thoughts
Because of the inflation protection built into I Bonds, earning 2.96% for six months isn’t a dreadful thing. Get over it! But … at a time when 4-week Treasury bills are yielding 5.47%, that 2.96% is looking weak. You can reach a similar conclusion with other low fixed rates:
- A fixed rate of 0.10% will generate a composite rate of 3.06% for six months.
- 0.20% = 3.16%
- 0.30% = 3.26%
- 0.40% = 3.37%
- 0.50% = 3.47%
- 0.70% = 3.67%
As I have written recently, this year I have redeemed 0.0% I Bonds to purchase the new 1.3% I Bonds, both in the traditional way in March and in gift-box swaps in April. I still have one set of 0.0% bonds remaining (from 2017) and a rather large collection of 0.1% fixed-rate I Bonds dating back to 2013.
At this point, I would not redeem any I Bond with a fixed rate of 0.2% or higher.
Also in the chart, notice the I Bonds issued from May to October 2007 with a fixed rate of 1.3%, same as today’s. Those I Bonds are very close to doubling in value in 17 years. They have generated a tax-deferred, annualized nominal return of 3.92% over a time when inflation averaged 2.4%. We can expect similar performance from these 2024 I Bonds.
My thinking: If market real yields remain high into the end of 2024, I will be looking to redeem — selectively — my remaining set of 0.0% I Bonds and some 0.1% versions to make gift-box purchases at 1.3%. I am in no rush to do this, because the 1.3% fixed rate will apply to all I Bond purchases through the end of October.
But what if real yields start declining, deeply? Then I will be definitely looking to make the swap to the 1.3% fixed rate because the November fixed-rate reset will be likely be lower than 1.3%.
At this point, there is no way to know. So just wait it out to October.
I am not a fan of stacking 10+ sets of gift-box swaps, because that will lock up the money for future distribution. One of the advantages of I Bonds is the ability to redeem after one year. But no one can redeem an I Bond that can’t be delivered because of the purchase cap.
Another option. If you are committed to redeeming low-fixed-rate I Bonds to buy the 1.3% version later this year, you could redeem now, place the proceeds in a money market account or in rolling 4-week T-bills earning 5.5% and then use that cash to buy the I Bonds in October, or possibly November.
You’d probably earn more than the 2.96% variable rate for several months. But there are two negatives to this strategy: 1) You will owe 2024 federal taxes on the interest earned, and 2) There is a slim chance that short-term yields could fall off sharply in the next few months.
Here’s a decent summary of the situation from CNBC, which includes (of course) a financial adviser telling you to sell your I Bonds:
If you need the money …
I keep stressing that the proper approach to I Bonds is to build a large reserve of inflation-protected, tax-deferred cash. At some point, you should start spending that money, either in retirement or to achieve other life goals. If you need the money, target the lower-fixed-rate I Bonds for the first redemptions.
• 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
• I Bond Manifesto: How this investment can work as an emergency fund
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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 
None of us three work as a Financial Journalist at CNBC, so not the same standard.
I-bonds aren’t subject to the whims and speculation of gold, commodities and stocks. If your dollar bills in I-bonds are beating inflation by 1.3% you know it’s there when you might need it.
I think we all need to consider what IBonds are protecting us from. Neither the Democrats nor Republicans care about fiscal responsibility anymore. No matter how wealthy you are inflation could destroy that wealth. I could see a future with high inflation but capped interest rates so we can afford to pay the interest on our debt (consider president Trump names a new Fed chair). If you think of everything as a currency then IBonds is one of the best we have. Stocks might be good too in the long run, but think about that PE of 8 during the high inflation period during the early 80s. Not very comforting for a retiree. Gold, Bitcoin, collectibles are also a possibility but could fail just when you need them. Gold and Bitcoin especially look unreliable as an inflation hedge. Ibonds and laddered TIPs look like the best currency we have at least for anyone in retirement.
Paul, I think you are referring to governments when they use financial repression to deal with debt by suppressing the interest rate so they can pay back debt at a lower rate.
If they can do that, why can’t a government also manipulate the statistics to indicate inflation is lower than what it really is? Can you imagine the payout for TIPS if they existed in the high interest rate environment of the 70s and 80s? What motivation to say inflation is lower than it really is.
Some people already say that the real inflation rate is actually higher than what the official sources say it is.
My perspective, which I will be happy to learn that I am wrong is that the CPI-U with food and energy does not reflect consummate inflation for all people. I think it would be best if it reflected consummate inflation for most people. The home owner to home renter ratio in the U.S. is 66/34, I think the CPI-U should adequately account for increases in home owner insurance. Instead the CPI-U with food and energy seems to weigh home ownership as a matter of luxury therefore the CPI-U contribution of rented shelter is better reflected than the inflation which occurs with home ownership. Landlords really cannot afford to outprice their tenants, but insurance companies push the limit with few strings attached.
The shelter index uses an implied rent model, which I can’t grasp. Somehow, in theory, property insurance is captured in that.
Thanks for your efforts. Always erudite and very useful.
I do wonder if I want to junk some of my pandemic I Bonds with the 0% fixed rates and redeem them early, even if I have to pay the three month penalty, or just wait another two or three years and just redeem them on time. I have a fixed rate 0.5% bond and agree that it is likely future years will drop below that level.
Me and my wife had purchased I Bonds in March of 2022 to the maximum limit. My understanding (also as per David) was that if you don’t need the money, you should leave it for the full 5 years – it will continue earning some interest; and it is tax-free. At that time, the variable rate was 7.62; it went up all the way to 9.62 and when started going down. The bonds are still earning the variable rate of Nov. 2023 – Apr. 2024 right (which was 3.94)? Until the end of August. So if I redeem them in October of October, I will lose the last 3 month (3.94, 2.98 and 2.98) but then re-purchase anew, I would get the 4.28 for the next 6 months…
I hope I calculated this correctly 🙂
Thank you again for such great info! There’s a typo in the Earnings for Recent and Selected I-Bonds chart. The buying period “May to October 2023” should be “May to October 2024.”
I agree. Nice catch.
Thanks for the alert. I had to get to a computer to change that image, but now it is fixed.
Where did you get the fixed rate of 3.6% for May 2000 purchases? I think it should be 3.3%, at least that’s what it says on the I-Bonds I bought that month.
I double checked and I think 3.60% is correct.
OK, an even better deal than I thought it was.
Just kills me I can buy Tbills or Agency’s earning 5.4% or better. But of course some of those have call features and TBills are only 5% out about 2 years. I initially intended to hold these at least 5 years and then draw out $1000/month if needed. But of course Trump tax cuts probably expire after 2025 and who knows. Sheesh, they get us coming and going….
Any reason not to wait until October to buy ibonds with new cash? And to time for near the end of October since the treasury considers a purchase made at the beginning and end of the month to earn the same interest.
This makes sense.
Do not focus too much on what an I Bond earns. The most valuable feature of the I Bond is that it does not go down in value if interest rates increase. For example, exactly four years ago the 2/15/50 30-yr Treasury ask price was $117.84535 and now the bid price is $59.1260 – a drop in value of roughly 50%. Would you rather be holding the I Bond issued four years ago with a base rate of 0.00% or the 2/15/50 30-yr Treasury?
That Feb 2020 30-year got a real yield of 0.261%, which at the time was the lowest in history for term. In my preview article I called it a “Death Star.” One year later at the Feb 2021 auction the real yield fell to -0.292%. A disastrous investment.
What is “real yield”? Yield to maturity (YTM) minus current inflation? Or what?
Real yield is the yield above official US inflation.
David, It is an option to set up LLCs to allow you to buy I bonds in any quantity you want. They are cheap in most states and can be set up in less than five minutes. I did this extensively in advance of the 9.6% rate and it worked fine. The Treasury Department challenged it at one time but when I showed them my documentation that agreed that what I was doing was fine. There were no complications with my taxes either as they are disregarded entities.
I believe that in general her Stephanie Lee’s commentary is correct. Unless of course she would make the proviso that if your intention is the defend against inflation in the long run there is still a place for I bonds in your portfolio.
I kinda had to laugh when they gave the incorrect variable rate on the CNBC video. Sure, the math adds up, 2.98 plus 1.30 equals 4.28, but everyone here knows it’s really 2.96%. However, they obviously didn’t use/know the equation of how it got there. Just made me laugh since they are the experts/advisors, yet got the numbers wrong. We’re all human.
A few years ago, when I Bonds were suddenly paying 9.62%, Becky Quick said on the air, “What is an I Bond? I’ve never heard of it.”
I guess she does not live up to her last name. *smirk*
To her defense, a lot of people (myself included) didn’t know either. However, she’s the “expert” so there goes her defense lol.
I Bonds existed for several years before I discovered they existed. And they are still a secret to the vast majority of people.