Treasury Inflation-Protected Securities

The one key rule for using TreasuryDirect …

Posted on October 13, 2024 by Tipswatch

By David Enna, Tipswatch.com

TreasuryDirect gets a lot of bad press, mostly deserved, for presenting a clunky website with a bureaucratic mess of rules and usually lousy customer service.

I’ve been using TreasuryDirect services for at least 32 years, even before the website launched in 2002. Overall, the system has worked for me, but obviously I am a very experienced user.

The Wall Street Journal last week presented an “exclusive” on one of the major faults of TreasuryDirect: You cannot sell traditional Treasury purchases on the site. The securities have to be transferred to a brokerage (a tedious process), and then sold. And TreasuryDirect, shockingly, says the process can take up to 12 months.

That leads to my one key rule for using TreasuryDirect: Never purchase anything that you may have the slightest need to sell before maturity. There are two exceptions to that rule:

U.S. Savings Bonds, which after a year can be redeemed at TreasuryDirect and then have money sent to your bank or brokerage within a couple days. TreasuryDirect is the only place you can buy electronic versions of Series I and EE Savings Bonds, and is the only place you can redeem them. This process works well.
Short-term T-bills, which will mature in 4 to 52 weeks. Buyers can wait out the maturity period. And smart investors can stagger their purchases to always have access to some money within a month. I am a fan of using TreasuryDirect to purchase T-bills, because the rollover process is flawless. A T-bill matures and a new one is purchased on the same day. At some brokerages, the rollover process can lead to a one-week delay.

It makes no sense to buy traditional Treasurys (TIPS, notes or bonds) at TreasuryDirect if you think you would need to sell them before maturity. The Wall Street Journal article says this about transfers:

TreasuryDirect tries to complete most of them within six weeks, but can take 12 months, depending on capacity. A notice on the TreasuryDirect website says some customer-service requests “may require 12 months or more to process.” The notice had said the longest delays were about six months until the end of July.

A spokesperson for the Treasury’s Bureau of the Fiscal Service said the program has “significant processing delays due to resource and technology constraints.” The Treasury Department is looking to modernize its program “to ensure better, more modern experiences.”

In a followup article on CNBC, the Treasury tried to spin a more positive outlook:

When asked about wait times, the spokesperson said that it “depends more on complexity than capacity” and that processing times are “well under one year right now and declining daily.”

“The website’s processing timeframes are meant to give the longest potential times for the complex, difficult cases — these processing times are often much shorter and continue to decrease as we dedicate more resources,” they said.

OK. But imagine if your brokerage told you it might need a year to complete your sales order. That brokerage would be out of business in weeks. Transferring securities is not a core goal of TreasuryDirect, clearly.

The WSJ article includes an anecdote about an investor who purchased a 20-year Treasury bond in January to lock in 4.75% returns. And then:

(The investor) was prepared to hold on to the bond through a mandatory 45-day waiting period before he could transfer it to his brokerage account.

Over the summer, he called TreasuryDirect’s customer-service line to check on the status of his transfer and was told processing could take up to a year. “I never in a million years would have put away $10,000 that I couldn’t get for a year if I needed it,” he said.

What is interesting in this anecdote is that the investor purchased the 20-year bond with the intention of moving it quickly to his brokerage account. When I read that, I screamed out loud at the breakfast table, “You have a brokerage account! Why didn’t you buy the Treasury bond in that brokerage account?”

But the story continues:

Even before learning about the delay, (the investor) had to print a transfer request form and get a medallion signature, a notary-style stamp to verify security transfers, before mailing it to the Treasury Department. The delay prompted him to file several complaints with the site and write a letter to his congressional representative hoping to expedite the process.

Again, all of this could have been avoided by simply purchasing any longer-term Treasury investment in a brokerage account, not TreasuryDirect. But the Wall Street Journal reports: “About two-thirds of the purchases on TreasuryDirect so far this year have been marketable securities instead of savings bonds.” I suspect a lot of those were T-bills, which are fine.

Treasurys of all types can be purchased in a brokerage account, usually with zero commission. Want to participate in a Treasury auction? You can do that at a brokerage, too, almost always with zero commission. You will get exactly the same yield and price as any auction buyer on TreasuryDirect.

Treasurys are liquid investments. Any Treasury you hold at a brokerage usually can be sold within days, but will incur a small commission and possible bid/ask spread. The sole advantage of TreasuryDirect for Treasury auctions is its minimum purchase of $100, much lower than the typical brokerage minimum of $1,000.

And one final point: You cannot open a tax-deferred account at TreasuryDirect. So if you want to purchase Treasury Inflation-Protected Securities in a retirement account, you must do that at a brokerage. This is the preferred way to purchase TIPS.

My experiences

I started using TreasuryDirect in its “legacy” form in the 1990s and transferred all securities to the current TreasuryDirect in 2002. Over the years, I have purchased many Treasury Inflation-Protected Securities there and all but six have matured. Those six will mature in years 2025 to 2029, plus 2041.

Back in 2018, our hourly-fee financial adviser (the noted author Allan Roth) suggested that we move all our TIPS holdings out of TreasuryDirect to a brokerage and then sell them, because TIPS don’t belong in a taxable account. That is the correct advice, but I didn’t do it. I wasn’t going to sell my TIPS holdings before maturity.

When I purchased these TIPS, I was absolutely certain I would hold them to maturity. So TreasuryDirect’s clunky transfer policies were not a concern. And I have never felt TIPS absolutely should be limited to a tax-deferred account. When these TreasuryDirect TIPS mature, I get the proceeds with nearly zero taxes owed (it’s all been prepaid).

One strange “advantage” of holding TIPS at TreasuryDirect is that the website will never show you — or calculate — market value. The only value it presents is somewhat recent par value x inflation index, which is what you will receive at maturity. Because TIPS can’t be traded at TreasuryDirect, the value it shows does not fluctuate with market jumps. I find this calming. Others would disagree.

But since 2018, I have never purchased another TIPS at TreasuryDirect. The reason: I have moved all these transactions to a traditional IRA at Vanguard, where money can be redistributed without any tax concerns.

The key takeaway from all this is that TreasuryDirect is exclusively great for one thing: purchasing, holding and redeeming savings bonds. It is also useful for purchasing and reinvesting T-bills. Beyond that, I’d recommend using a brokerage account for Treasury purchases.

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Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

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. NOTE: Comment threads can only be three responses deep. If you see that you cannot respond, create a new comment and reference the topic.

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.

Posted in Cash alternatives, I Bond, Investing in TIPS, Savings Bond, Treasury Bills, TreasuryDirect | 59 Comments

September inflation sets I Bond’s new variable rate at 1.90%

Posted on October 10, 2024 by Tipswatch

Social Security COLA will be 2.5% for payments beginning in January.

By David Enna, Tipswatch.com

The September inflation report, just released by the U.S. Bureau of Labor Statistics, gives the final pieces of data to determine 1) the new variable rate for U.S. Series I Savings Bonds (it will be 1.90%) and the Social Security cost-of-living adjustment for payments beginning in January (it will be 2.5%).

Plus, the report may give stock and bond markets a bit of a jolt today, with inflation running at a higher-than-expected rate for both the all-items and core measurements. This news, combined with last week’s positive jobs report, could cause the Federal Reserve to scale back its planned cuts in short-term interest rates.

I Bond variable rate

The September report provided the last month of a six-month string of inflation that determines the I Bond’s new variable rate, to be reset for purchases after November 1 and eventually rolling into effect for all I Bonds.

The BLS set September non-seasonally-adjusted CPI-U at 315.301, an increase of 0.16% over the August number. For the six months of April to September 2024, inflation increased 0.95%, which translates to a new variable rate of 1.90%, a sizable decline from the current rate of 2.96%. Here are the data:

View historical data on my I Bonds and Inflation page.

The I Bond’s permanent fixed rate will also be reset on November 1, and seems likely to fall below the current rate of 1.3%. I have projected the rate to be 1.2%, but that is an informed guess. If the fixed rate is 1.2%, the I Bond’s new composite rate will be 3.11%, down from the current 4.28%.

Keep in mind that I Bonds purchased in October will lock in the 1.3% fixed rate and get a full six months of the 4.28% composite rate. If you were planning to invest in I Bonds in 2024, or to add to holdings through gift-box or trust strategies, you should make that move before the end of this month.

Opinion: A new variable rate of 1.90% combined with a fixed rate of 1.2% (if that happens) would mean I Bonds will remain an attractive investment into 2025. That is because a high fixed rate is the most important factor. However, older I Bonds with very low fixed rates (for example, 0.2% or lower) are going to have yields well below market rates, for six months at least.

Treasury Inflation-Protected Securities

Investors in TIPS are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances on these investments. The September inflation report means TIPS principal balances will increase 0.16% in November, after increasing just 0.08% in October. Here are the new November inflation indexes for all TIPS.

Social Security COLA

The September inflation report was the third of three — for July to September — that determine the Social Security Administration’s cost-of-living adjustment for payments in 2025. The SSA uses a three-month average of a different index, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), to set its COLA.

For September, the BLS set CPI-W at 309.046, which produced a three-month average of 308.729, an increase of 2.5% over the same average for 2023. That means the Social Security COLA will be 2.5% for payments beginning in January. The numbers:

The increase of 2.5% will be the lowest since 2021, but it is slightly higher than the overall increase in U.S. inflation over the last year, 2.4%. The 2.5% increase will boost the average Social Security payment by about $50.

This year, the average monthly benefit payment for retirees is $1,927, according to the Social Security Administration. After the 2.5% increase, that will rise to $1,976 a month.

The inflation report

I’ll be honest: I was not expecting U.S. inflation to come in higher than expectations for September. Gasoline prices fell 4.1% in the month and are down 15.3% for the year. But other factors offset that decline:

Food at home prices increased 0.4% in September after being pretty tame for most of this year. The BLS said five of the six major grocery store food group indexes increased over the month.
For example, the index for meats, fish and eggs increased 0.8% in September. And costs for fruits and vegetables were up 0.9%.
Shelter costs increased 0.2% in September, down from 0.5% from August. But these costs remain 4.9% higher year over year.
Costs of medical care services increased 0.7% for the month after declining the previous two months.
Apparel costs were up 1.1% for the month.
Costs of motor vehicle insurance were up 1.2% for the month and a disturbing 16.3% year over year.

On the positive side, the overall annual inflation rate fell to 2.4%, the lowest level since February 2021. Here is the trend in annual all-items and core inflation over the last 12 months, showing that core inflation remains stubbornly high and in September actually trended higher:

The Federal Reserve

The combination of last week’s positive U.S. jobs report and this higher-than-expected inflation report should be giving the Fed jitters as it moves toward further cuts in short-term interest rates. I am pretty sure we won’t be seeing another 50 basis-point cut in 2024. From this morning’s Bloomberg report:

“Inflation is dying, but not dead,” said Olu Sonola, head of US economic research at Fitch Ratings. “Coming on the heels of the surprisingly strong September employment data, this report encourages the Fed to maintain a cautious stance with the pace of the easing cycle. The likely path is still a quarter point rate cut in November, but a December cut should not be taken for granted.”

I’d agree that a 25-basis-point cut is likely in November, and probably again in December. The Fed has room to move lower with annual inflation currently running at 2.4%. A neutral level for the federal funds rate could be around 3.5%, if inflation remains in this range.

The stock and bond markets seem to be taking today’s inflation news in stride, with the S&P 500 down only about 0.2% in early trading. Real yields have fallen slightly this morning, with the 5-year TIPS trading at 1.67%, down from 1.70% at yesterday’s close.

• Considering an I Bond rollover? Do it the right way.

• 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

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Posted in Cash alternatives, Federal Reserve, I Bond, Inflation, Investing in TIPS, Savings Bond, Social Security | Tagged Federal Reserve, finance, inflation, interest-rates, investing | 22 Comments

Forecast: The next I Bond fixed rate should be 1.20%

Posted on October 7, 2024 by Tipswatch

But there is danger of an ‘outlier’ decision by the Treasury.

By David Enna, Tipswatch.com

It’s already Oct. 7 and we are closing in on Treasury’s November reset of the fixed and variable rates for U.S. Series I Savings Bonds.

The current composite rate is 4.28%, which is calculated by combining a permanent fixed rate of 1.3% with a six-month inflation-adjusted variable rate of 2.96%. Both of those numbers will reset for I Bond purchases beginning November 1.

The variable rate. Thursday at 8:30 am EDT, we will learn the new variable rate, which will be set in stone by the release of the September U.S. inflation report, completing the March to September data used to set the rate.

View historical data on my Inflation and I Bonds page.

For the months of April to August, non-seasonally adjusted inflation has run at 0.79%. It seems likely that September inflation will be around 0.1% (or possibly less) which would give a six-month total of 0.89% and result in I Bond variable rate of 1.78%. That’s a guess. We will know for sure on Thursday.

The key thing is that the six-month variable rate, which eventually rolls out to all I Bonds depending on the month they were purchased, will be significantly lower than current 2.96%.

The fixed rate. The Treasury does not disclose exactly how it determines the I Bond’s fixed rate, which appears to track at a discount to the real yield of a 5-year TIPS. This is the cryptic information it provides:

The Secretary of the Treasury, or the Secretary’s designee, determines the fixed rate. The rate is based on market rates that have been adjusted to account for the value of components unique to savings bonds. These include the early redemption put option, tax deferral feature, deferred purchase feature, and Treasury’s administrative costs.

That statement makes it clear the Treasury examines “market rates,” and adjusts the I Bond’s fixed rate lower to account for the safety, tax-deferral and flexible maturity of I Bonds. I’ve tracked this decision for 13 years, and with the help of some Boglehead geniuses, I’ve settled on this predictive formula:

Take the six-month average of 5-year real yields and apply a ratio of 0.65.

I also look at the 10-year average, just as a back check. In this case, I am using the average of real yields from May 1 to Oct. 4, 2024. After applying the 0.65 ratio, the actual averages, so far, are 1.228619% for the 5-year TIPS and 1.235716% for the 10-year TIPS. The Treasury rounds the I Bond fixed rate to the tenth decimal point, or 1.20% for both these calculations.

You can see from the 5-year side of the chart that the ratio of 0.65 has been quite accurate, even for the November 2019 reset, when it appears the Treasury might have used a higher ratio to set the fixed rate at 0.20%. But it didn’t. The average of 5-year real yields was 0.24%. Apply a ratio of 0.65 and you get 0.156%, which rounds up to 0.20%.

So based on this data, which isn’t likely to change dramatically by the end of October, I’d predict that the I Bond’s new fixed rate will be 1.20%.

The tricky part

There is one thing I don’t know: Does the Treasury try to look forward to predict a trend in real yields? Based on the trend since 2017, when real yields have tended to move higher, it doesn’t look like it does.

October 2024 is an unusual case. The real yield on a 5-year TIPS dipped to as low as 1.41% on September 24. That is just 11 basis points higher than the I Bond’s fixed rate of 1.30%. Since then, however, in the aftermath of Friday’s positive U.S. jobs report, the 5-year real yield surged to close at 1.67%.

I follow real yields almost daily and here’s one thing I do know: You can’t assume to accurately predict the future. It is almost certain that the Federal Reserve will continue a series of short-term rate cuts well into 2025. But that doesn’t necessarily mean longer-term real yields will decline in lockstep.

Example: When the Fed announced a 50-basis-point rate cut on Sept. 18, the 5-year real yield closed at 1.49%. Today it stands at 1.67%.

So, in my opinion, the Treasury should not enter predictive mode and lower the I Bond’s fixed rate to adjust for potential future rate declines. That kind of decision would be an outlier and would be wrong.

I Bond strategy?

A new fixed rate of 1.20% would be a positive thing for I Bond investors, ensuring that this attractive rate would stay in effect for purchases through April 2025. The purchase cap resets on January 1, meaning everyone will have access to the new rate.

We will learn the new variable rate on Thursday, and it is likely to fall to a number around 1.8%, which combined with a fixed rate of 1.2% would translate to a composite rate of around 2.9% to 3.0%. Not exciting, for sure, but the key factor is the permanent fixed rate of 1.20%, which could end being quite attractive in 2025.

On Sept. 25 I posted an article about using the gift-box strategy to add to your I Bond holdings before the end of October. I am using this strategy, which I also used earlier this year, to lock in the 1.30% fixed rate. But it isn’t available to everyone, since it requires a trusted partner.

If the fixed rate remains at 1.20% into 2025, I Bonds will remain attractive as a way to build longer-term, inflation-protected and tax-deferred savings, with total safety.

Let’s hope the Treasury avoids the outlier route and sticks to its predictable formula.

• Considering an I Bond rollover? Do it the right way.

• 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

* * *

Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Posted in Cash alternatives, Federal Reserve, I Bond, Inflation, Investing in TIPS, Savings Bond, TreasuryDirect | Tagged bonds, investing, Treasury investments | 20 Comments

Print journalism: For me, it’s the end to an era

Posted on October 3, 2024 by Tipswatch

Newspaper companies once had a near-monopoly on local advertising. But the best businesses have to keep adapting.

By David Enna, Tipswatch.com

Today, after 38 1/2 continuous years, I let my subscription to the printed Charlotte Observer expire. I hoped to never see this day: My wife loves the printed paper and I worked at the Observer for 34 years. But the printed paper’s death spiral finally pushed me over the edge.

Officially, the Observer says my subscription is “In Grace,” which I think means it is heading to heaven. And probably the Observer will continue delivering it for a week or two to see if I change my mind. I intend to keep my digital subscription.

Keep in mind that The Observer — with a 138-year history — was once a very high-quality newspaper, twice winning the public service Pulitzer and a few others in past decades. At one point, in the early 1990s, the newsroom employed about 225 journalists and had a daily subscription count of about 225,000.

The corporate parent, McClatchy Corp., went bankrupt in 2020 and was acquired by a hedge fund, Chatham Asset Management. Today, the newsroom is down to about 35 journalists, backed up by a corporate team that copy edits a dozen papers each day. The design of the printed papers is done in the Philippines. The print circulation today is probably about 10,000, but McClatchy is pretty secretive on that topic.

When I see my former co-workers around town, I always ask, “Do you still get the printed Observer?” The answer is almost always “no.” I was a holdout because my wife pores over the printed paper and I do the crossword every day (with a pen).

“In an age in which print has become cost-prohibitive and is limited by early deadlines, The Observer must transform its business,” the newspaper’s editor, Rana Cash, wrote in a letter to readers.

I have heard from several friends who called the circulation help desk over the past year to complain about delivery problems. They were encouraged to drop the print subscription and just go digital. In other words: “We know print is doomed.”

Observer journalists still do quality work, when and where they can. And I will continue to read that work online. But my commitment to print died from a thousand pin-pricks:

No more morning delivery. A couple months ago, the Observer announced it was going to reduce its publication schedule from six days a week to three: Sunday, Wednesday and Friday. Plus, instead of having a carrier deliver the paper, it would be sent by U.S. mail.

That change went into effect a week ago, and so far I have received the Friday paper on Monday (our mail arrives after 5 p.m.) and the Sunday paper on Tuesday. Both papers contained content that was up to 4 days old by the time it reached me. The Friday paper that arrived Monday had an article saying Hurricane Helene was approaching the Florida coast. Actually, it hit land on Thursday evening and caused massive damage in the Carolinas on Friday.

Conclusion: The printed Observer can no longer cover breaking news.

No price cut. My latest subscription bill, which I didn’t pay, was for $21.45 for four weeks. As a retired employee, I was still getting a discount, but the price had been rising in recent years. The Observer quotes its “published rate” at $34.99 a week. I hope nobody is actually paying that.

Newspapers across the country often encourage readers (who are mostly elderly, let’s admit it) to sign up for automatic credit card renewals. And then, they just keep raising prices hoping the old folks don’t notice. Don’t sign up for auto-renewal!

No newsroom. I worked on the Observer’s online team in the center of the newsroom for 20 years and then got laid off in 2016. A few years later, when Covid struck, the Observer moved everyone out of offices in an uptown tower, and then eventually closed the newsroom forever.

I can’t imagine working at a newspaper without a newsroom, because interactions between news-gathering reporters feed knowledge and inspiration. You can’t get that on a Zoom call.

No future for local print journalism. I used to describe the Charlotte Observer as a manufacturing company that produced a product each day and delivered it to your home. That meant expenses — beyond the newsroom — for presses, ink, paper, trucks, gasoline, delivery, etc.

Meanwhile, journalism has shifted from print to digital, where distribution costs are near zero for each added subscriber. Readers prefer news that is updated 24 hours a day, and available on phones, tablets and computers. The near-zero cost of adding additional subscribers is why the New York Times and Washington Post allow me to renew my subscriptions for $1 a week, year after year.

(I still get the printed, home-delivered Wall Street Journal, although I stopped paying for it two years ago, while retaining a digital subscription. I guess the Journal wants — or needs — me as a print reader. A weird side note is that the Journal in our area is printed on the Observer presses six days a week.)

The lessons

Sorry for veering off topic today. But the point is, when you are investing in any industry, keep in mind the potential for a series of death-spiral events. Intel Corp., for example, is struggling today because of its emphasis on PC computing. Microsoft though, has expanded its hold on the work place and cloud-computing and is thriving.

Quality journalism is extremely important, especially on the local level. Who will be our watchdogs? Who will shine light on government spending and abuses? I urge you to support quality journalism, both locally and nationally. And that probably means a digital, not print, subscription.

Here are my digital subscriptions, which I will gladly continue as long as prices remain reasonable:

The Charlotte Observer
The Wall Street Journal
Bloomberg
The New York Times
The Washington Post
Barron’s

And FYI, USA Today is currently offering a legit $1 for one year subscription. (Just don’t forget to cancel after the year.)

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Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).

Posted in Inflation, Retirement | Tagged News media, Online subscriptions | 24 Comments

Considering an I Bond rollover? Do it the right way.

Posted on September 25, 2024 by Tipswatch

For some investors, cashing in low-fixed-rate I Bonds makes sense, combined with the gift-box strategy to add to holdings in October.

By David Enna, Tipswatch.com

We are just a month and a few days away from the November 1 rate reset for the U.S. Series I Savings Bond, when both the 1.3% fixed rate and 2.96% variable rate are likely to fall.

Investors purchasing I Bonds in the months of September or October can lock in the 1.3% fixed rate for its potential 30-year term, plus capture a full six months of the 2.96% variable rate (creating a composite rate of 4.28% for six months). The new composite rate as of November will likely be about 3.1%, or less.

So purchasing I Bonds in September or October looks appealing, but the problem for many investors is the purchase cap of $10,000 per person per year. Most people interested in I Bonds have already purchased them to the limit in 2024. However, there are ways to get around the limit — such as adding to holdings through the gift-box strategy, trusts, or business-owner strategies.

In this article I am going to look at using the gift-box strategy, combined with a “rollover” redemption of low-fixed-rate I Bonds to purchase more of the 1.3% fixed rate, the highest for I Bonds since May 2007. This won’t be for everyone, but I get a lot of feedback from readers who are plotting this course.

The rollover strategy

OK, this seems simple: Redeem some or all of your I Bonds with very low fixed rates (0.0% to 0.2%, for example) and then use that money in October to purchase new sets of $10,000, either as your first purchase of the year or using the gift-box strategy. But it is not quite that simple.

Be careful redeeming in TreasuryDirect.

When you go to redeem I Bonds, TreasuryDirect will present a page of all your holdings, showing the current interest rate and current value (minus the 3-month interest penalty, if the I Bond hasn’t been held for 5 years).

TreasuryDirect shows you the current interest rate, but not the fixed rate for each issue. Look at the wide variety of interest rates in my example. Which ones have the lowest fixed rates, making them targets for redemptions?

This isn’t easy. For example, the I Bond issued in January 2013 obviously has a fixed rate of 0.0%, because its interest rate matches the current variable rate of 2.96%.

But what about the I Bond issued in April 2017, with an much better interest rate of 3.94%? It must have a higher fixed rate, right? No. It has a fixed rate of 0.0% but is still paying the previous variable rate of 3.94%, which will transition to 2.96% on October 1. So this I Bond is a potential target for redemption.

In this list, the best targets for redemption are: March 2020, with a fixed rate of 0.20%; April 2017, with a fixed rate of 0.0%, November 2015, with a fixed rate of 0.10%, and January 2013, with a fixed rate of 0.0%.

Also consider federal taxes.

When you redeem an I Bond, you will owe federal income taxes on the interest earned. If an investor purchased $10,000 each of those four I Bonds, here would be the tax consequences of full redemptions on October 1:

March 2020: Proceeds of $12,136 after the 3-month interest penalty. Taxable income of $2,136.
April 2017: Proceeds of $12,932. Taxable income of $2,932.
November 2015: Proceeds of $13,308. Taxable income of $3,308.
January 2013: Proceeds of $13,624. Taxable income of $3,624.

Any of these redemptions would incur potential federal taxes of $450 to $700 or more, depending on your tax bracket. That’s a factor to consider. However, you may have useful ways to use the net cash, which softens the blow.

When to redeem?

With I Bonds, you want to redeem close to the first day of the month, because I Bonds do not earn interest for the month they are sold. So that means if you are planning to use this rollover strategy, you should place your redemption order on Tuesday, Oct. 1.

TreasuryDirect does not allow you to schedule redemptions, so you will need to do this manually. Also, when you get to the final redemption screen, make sure your bank or brokerage is listed as the “payment destination.” Otherwise, your money could be placed in TreasuryDirect’s “zero-percent C of I.” You don’t want that.

When to purchase?

After you redeem, you should see the money deposited into your account in a few days. It’s always worked for me, anyway. Then you can plan your purchase of the 1.3% I Bonds, which you will want to make late in the month of October. Why? Because I Bonds earn interest for an entire month, no matter how late they are purchased in that month.

TreasuryDirect allows you to schedule purchases. I’d suggest setting the purchase date to Friday, Sept. 27 or Tuesday, Oct. 29, to avoid any end-of-month pitfalls. Any order on Oct. 31 will be registered as a November I Bond, with the new lower fixed rate / variable rate combination.

Using the gift-box strategy

This isn’t for everyone, because it requires a trusted partner, such as a spouse or relative. Harry Sit of the TheFinanceBuff.com was the first to write about this strategy in December 2021, in an article titled “Buy I Bonds as a Gift: What Works and What Doesn’t.” When people ask me about the gift box, I point them to this article, which was well researched and thorough. So, go read that article if you don’t know about the strategy.

Some basics of the gift box strategy:

When you place an I Bond into the gift box, it begins earning interest in the month of purchase, just like any other I Bond, and continues earning interest just like any I Bond. However, this money is no longer yours. It belongs to the recipient of the gift.
The purchase does not count against your purchase limit for that year. It will count against the purchase limit for the recipient, in the year it is delivered.
Gift purchases are limited to $10,000 for each gift, but you can make multiple gift purchases of $10,000 for the same person. But the recipient can only receive one $10,000 gift a year, and that gift counts against their purchase limit for that year.
You must provide the recipient’s name and Social Security Number when you buy a gift. The recipient doesn’t need to have a TreasuryDirect account … yet. Only a personal account can buy or receive gifts. A trust or a business can’t buy a gift or receive a gift.
“I Bonds stored in your gift box are in limbo,” Harry Sit notes in his article. “You can’t cash them out because they’re not yours. The recipient can’t cash them out either because the bonds aren’t in their account yet.”
The recipient will need to open a TreasuryDirect account to receive the I Bond. Once it is delivered, the money is the recipient’s, who can then cash out or continue to hold the I Bond.

Here is TreasuryDirect’s video explaining the step-by-step process to complete a gift box purchase:

In his article, Harry Sit also provides a very useful step-by-step guide to completing a gift-box purchase.

The next fixed rate

In recent years I have settled on looking at the six-month average of the 5-year TIPS real yield and then using a ratio of 0.65 to project the I Bond’s next fixed rate. So far, the average real yield from May 1 to Sept. 23, 2024, has been 1.9259%. Apply the 0.65 ratio and you get 1.2518%, which could mean the fixed rate will maintain at 1.3%.

We have one more month of data to add, and I think that calculation is going to slip to something just below 1.25%, meaning a fixed rate of 1.2%, which is still attractive.

However … a huge however … we have never tried to make this projection in a time of sharply declining real yields. As of Monday, the 5-year TIPS real yield was only 17 basis points higher than the I Bond’s 1.3% fixed rate.

So it is entirely possible the Treasury will recognize this reality, consider what’s coming, and settle on a lower fixed rate. But I think the fixed rate will remain 1.0% or higher into next year.

Final thoughts

I wasn’t a fan of the gift-box strategy when it first erupted onto the scene in 2022 to allow investors to purchase large quantities of I Bonds with very high variable rates, but also 0.0% fixed rates. That didn’t make sense because a high fixed rate is the all-important factor. But now the strategy does make sense, because the I Bond’s fixed rate is high.

The rollover strategy is optional. You don’t need to use it if you can easily afford the cash to buy new sets of gift-box I Bonds. A lot of investors are content to hold I Bonds with low fixed rates for use as a longer-term emergency fund. If you are in the accumulation phase, hold them. If not, consider the rollover, pay the taxes and enjoy the extra cash.

I used the gift-box strategy in April 2024 to buy two extra sets of I Bonds with the fixed rate of 1.3%. And I will do it again in September or October for another two sets.

• 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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Follow Tipswatch on X (Twitter) for updates on daily Treasury auctions and real yield trends (when I am not traveling).