Treasury Inflation-Protected Securities

I Bond dilemma: Buy in April, in May, or not at all?

Posted on April 14, 2024 by Tipswatch

By David Enna, Tipswatch.com

With Wednesday’s release of the March inflation report, the buying equation for U.S. Series I Savings Bonds became a bit clearer. We now know the I Bond’s variable rate will fall from the current 3.94% to 2.96% at the May 1 reset.

That’s a big drop. Does it make I Bonds unattractive? I don’t think so, and the reason is the I Bond’s current fixed rate of 1.3%, the highest in more than 16 years. But the fixed rate will also reset on May 1. So there is the key question: Where will the Treasury reset the fixed rate?

Confused? This is fairly simple. An I Bond is a Treasury security that earns interest based on combining a fixed rate and an inflation rate.

The fixed rate will never change. So if you bought an I Bond in 2014 with a fixed rate of 0.2%, it will continue to have a 0.2% fixed rate for the life of the bond. Purchases through April 29, 2024, have a permanent fixed rate of 1.3%.
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 3.94% annualized and will drop to 2.96% after May 1. All I Bonds will eventually get the 2.96% variable rate, with the start date depending on the original month of purchase.
The composite rate is a combination of these two rates, currently 5.27%, annualized, for a full six months for any bond purchased through April 2024.

Projecting the fixed rate

The following projection results from an inexact science, and in fact is simply a guess based on a decade of observations. The Treasury has never revealed an exact formula for setting the fixed rate, but it has noted that current trends in real yields are a factor. TreasuryDirect provides this cryptic information:

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.

Based partly on feedback from Boglehead geniuses, I have settled on looking at the half-year average of the real yields of 5- and 10-year Treasury Inflation-Protected Securities as the best indicator of the next fixed rate. I then apply a ratio of 0.65 to the average. In recent years, this has been pretty accurate, as shown in this table:

The fixed-rate numbers shown in red are projections and have not been rounded.

In most cases, the 0.65 ratio has been on target, especially when applied to 5-year TIPS real yields. The May to October 2017 period is interesting, because the 5-year average was much lower than the 10 year, and the Treasury set the rate lower to match the 5-year average.

The Treasury always sets the fixed rate to a tenth decimal point, and my May 2024 projections are currently at 1.25% and 1.26%, with two weeks of data still to come. My conclusion (OK, guess) is that the Treasury will set the I Bond’s new fixed rate at either 1.2% or 1.3%.

But, as I always say, “The Treasury sometimes does weird things.”

What does this mean?

I Bond purchases are limited to $10,000 per person per year unless you use your tax return to get paper I Bonds (a bit late for that strategy) or add to your holdings through gift-box, trusts, or business-owner strategies.

In my opinion — and I know some readers disagree — April’s higher variable rate (3.94% vs. 2.96%) and the locked-in 1.3% fixed rate make purchasing I Bonds to the limit in April the wiser choice. For that reason, I already purchased to the limit in March and have scheduled a gift-box set for purchase on April 25.

In this chart I have included some potential fixed rate changes, ranging from 1.10% to 1.50%. The most likely results are 1.20% or 1.30%, but anything can happen. By buying in April, you guarantee that your investment will earn 5.27% for six months and 4.27% for six months, or around 4.8% for the year.

Buying in May drops the likely return to 4.17% or 4.27% for the first six months, and then an unknown return for the next six months, depending on inflation from April to September 2024.

If the fixed rate is set at 1.50%, the buyer in May will be the winner in the long run. I personally like the certainty of the April purchase.

If you want to purchase in April, you can go into TreasuryDirect at any time and schedule the transaction. I recommend setting the date at April 25 or 26 to give Treasury time to complete the transaction in April. If you wait until April 30, your I Bond will be issued in May.

The rollover strategy. With the variable rate dropping to 2.96%, I Bonds with a fixed rate of 0.0% will be paying 2.96% for six months. That’s below market, and some investors may want to redeem any I Bonds with 0.0% fixed rates and roll that money over into the 1.3% April version, either through new purchases or the gift-box strategy. I discussed that strategy in a March 31 post.

Or, just hold? I’ve always stressed that the best I Bond strategy is to continue building your stockpile, until you have an amount that would work as a “large” emergency spending resource in retirement, all tax-deferred and inflation protected. If you are in the accumulation phase, just keep the 0.0% I Bonds and add the 1.3% version. And then, someday, use this as a spending account when needed.

Wait until October or November? Some readers have speculated that real yields could continue rising through 2024, making a higher fixed rate likely later in the year. That could happen. It’s iffy. But one advantage of a higher rate reset in November is that the fixed rate would carry over to January 2025, when the purchase limit resets.

Are I Bonds that attractive?

With short-term T-bill and money market rates topping 5%, many investors are shunning I Bonds because of the potentially lower nominal return plus the three-month interest penalty for redemptions within five years. Some thoughts:

We just went through a phase of inflation hitting 40-year highs, and higher prices seem to be stubbornly hanging on nearly two years later. Inflation protection, for part of your portfolio, looks like a wise choice.
Eventually, the Federal Reserve would like to start cutting short-term interest rates and then the T-bill and money market returns will begin falling. Some banks have already started lowering rates on high-yield savings accounts.
I Bonds, if held for 5 years, create an inflation-protected store of cash you can use for future needs, with no penalty for redemption except for federal taxes on the interest.

Is this a short-term investment? I Bonds aren’t a good choice for money you will need in the next one or two years. You can get a 2-year Treasury note paying about 4.9%. That nominal return is likely to beat the return of an I Bond after the three-month interest penalty is applied.

Aren’t TIPS the better choice? There is an auction of a new 5-year TIPS this week and the real yield to maturity looks likely to be close to, or top, 2.0%. It could have a 70- to 80-basis-point advantage over the I Bond with a fixed rate of 1.3%. So yes, I think TIPS with real yields in the 2.0% range are more attractive. But many investors shun TIPS because of the complexity, and I Bonds have advantages of tax-deferred interest, a flexible maturity, and rock-solid deflation protection. I continue to invest in both.

Is inflation really a problem? The risk is there. Investments in TIPS and I Bonds provide insurance against unexpectedly high inflation, such as we saw in June 2022 when annual inflation rose to 9.1%. If inflation suddenly drops off, inflation-protection may slightly under-perform, but investors are still winners because no one wants high inflation.

I welcome your thoughts.

• 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

* * *

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.

Posted in Cash alternatives, I Bond, Inflation, Savings Bond, TreasuryDirect | 67 Comments

Next week’s 5-year TIPS auction has solid appeal

Posted on April 12, 2024 by Tipswatch

By David Enna, Tipswatch.com

Note: I am posting this auction preview early because my I Bond buying guide will be going up Sunday morning. Keep in mind that real yields are currently highly volatile and will change by Thursday’s auction.

The U.S. Treasury on Thursday will offer $22 billion in a new 5-year Treasury Inflation-Protected Security, CUSIP 91282CKL4. The real yield to maturity and coupon rate will be set by the auction results.

Definition: A TIPS is an investment that pays a coupon rate well below that of other Treasury investments of the same term. But with a TIPS, the principal balance adjusts each month (usually up, but sometimes down) to match the current U.S. inflation rate. So, the “real yield to maturity” of a TIPS indicates how much an investor will earn above inflation each year until maturity.

As the market stands one week out, it looks like this TIPS will get an attractive result: Potentially both a real yield and coupon rate higher than 2.0%. The Treasury’s 5-year real yield estimate as of the market close Thursday was 2.13%, which would result in a coupon rate at or above 2.0%.

But this market is volatile. Wednesday’s March inflation report reminded everyone that inflationary trends are continuing, and set off a rout in both the stock and bond markets. The 5-year real yield has increased 20 basis points since April 1. That is a huge move higher.

It appears that things are cooling today, with the 5-year TIPS trading at about 2.05%. So a lot can change before Thursday’s auction close at 1 p.m. EDT.

More auction details:

The Treasury offering of $23 billion is the highest ever for an TIPS auction of this term, up from $21 billion at last April’s auction. The increased supply, however, shouldn’t have much effect on demand.
The 5-year auction in October 2023 resulted in a real yield to maturity of 2.440% and a coupon rate of 2.375%, both 15-year highs. This auction looks unlikely, at this point, to break those marks.
If the coupon rate remains above 2.0%, it will be only the 2nd 5-year TIPS in 17 years to reach that mark.

Here is the trend in 5-year real yields over the last nine years:

So there is a lot to like about this TIPS, even in comparison with the U.S. Series I Savings Bond, currently with a real yield of 1.3%. The TIPS will probably have a 70+ basis-point advantage. At that spread, I would prefer the TIPS (but I continue to invest in both.)

Pricing

Because it is a new TIPS, CUSIP 91282CKL4 should auction with a price close to par value. The coupon rate will be set at the 1/8th-percentage-point marker below the auctioned real yield, so the unadjusted price will be below 100. However, this TIPS will have an inflation index of 1.00309 on the settlement date of April 30. Because of that, the price should be close to par, or even slightly above.

Inflation breakeven rate

With the nominal 5-year Treasury note currently trading at 4.54%, this TIPS at this moment would have an inflation breakeven rate of about 2.49%, fairly high by historical standards. A higher breakeven rate indicates that a TIPS is more expensive versus a nominal Treasury.

Is the 5-year note attractive at 4.54%? I’d say it is and it is likely to provide a return above inflation over the next 5 years. But with the TIPS, you get a guaranteed return of about 2.0% above inflation. I’d go with the guarantee.

Here is the trend in the 5-year inflation breakeven rate over the last 9 years, showing that the current level is high-ish, but well under the peak we saw in 2022.

Final thoughts

I just took a look at my 2029 TIPS holdings and I am decently allocated for that year. However … I may take a look at adding a bit at this auction if the real yield is likely to hold above 2.0% (a desirable target by historical standards.)

Things could get crazy in the next week, however, with a potential attack by Iran against Israel looming, oil prices rising, inflation fears growing. In times of fear, Treasury yields generally fall as demand rises. If you want to invest in this TIPS, keep an eye on the Treasury’s Real Yields Curve page (which updates at the close of the market each day) and Bloomberg’s U.S. Yields page (updates secondary-market trends in real time).

This TIPS auction closes Thursday at 1 p.m. EDT. Non-competitive bids at TreasuryDirect must be placed by noon Thursday. If you are putting an order in through a brokerage, make sure to place your order Wednesday or very early Thursday, because brokers cut off auction orders before the noon deadline.

I will be posting the auction results soon after the close on Thursday. Here is a history of auction results for this term over the last 9 years:

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• Upcoming schedule of TIPS auctions

* * *

Posted in I Bond, Inflation, Investing in TIPS, TreasuryDirect | Tagged bonds, inflation, interest-rates, investing | 36 Comments

March inflation sets I Bond’s new variable rate at 2.96%

Posted on April 10, 2024 by Tipswatch

Inflation again rose higher than expected in March, probably putting Fed rate cuts on hold.

By David Enna, Tipswatch.com

Updated analysis … I Bond dilemma: Buy in April, in May, or not at all?

Non-seasonally adjusted inflation rose 0.65% in March, the Bureau of Labor Statistics reported this morning, which sets the inflation-adjusted variable rate for U.S. Series I Savings Bonds at 2.96% for the May 1 reset.

I Bond purchases through the end of April carry a permanent fixed rate of 1.3% and a variable rate of 3.94%, resulting in an annualized composite rate of 5.27% for a full six months. At the May 1 reset, that variable rate will fall to 2.96% for I Bonds purchased in May to October, and then eventually for all I Bonds after six months of the 5.27% rate.

The I Bond’s fixed rate, which is permanent through its potential 30-year term, will also be reset on May 1. It appears likely, at this point, that the new fixed rate could fall into the 1.2% to 1.3% range.

Here are the inflation data used to determine the variable rates:

View historical data on my Inflation and I Bonds page.

What does this mean?

I will be writing more about this later this week, but today’s inflation report makes an I Bond investment in April preferable to a purchase in May. The April purchase will get a composite rate of 5.27% for a full six months, and then a rate of 4.27% for six months.

We won’t know what the composite rate will be for a purchase in May until the May 1 fixed-rate reset, but it is likely to be in the range of 4.17% to 4.27%.

Is a variable rate of 2.96% attractive? Not really in our current market, but that isn’t the important factor. The fixed rate of 1.3% is much more important than the variable rate.

Of course, if you are holding older I Bonds with fixed rates of 0.0%, you are going to earn 2.96% for six months after the current composite rate of 3.94% runs a full six months. This shows the value of the 1.3% fixed rate.

What about TIPS?

For March, the BLS set the non-seasonally adjusted inflation index at 312.332, which I noted was a 0.65% increase over the February number. This means that principal balances for all TIPS will increase 0.65% in May, after rising 0.62% in April.

These one-month numbers might look gaudy, but this is partially due to the way non-seasonal inflation works. The numbers tend to run higher than adjusted inflation from January to June, and then lower from July to December. Recall that in the October to December period we had three consecutive months of negative non-seasonally adjusted inflation.

Here are the new May Inflation Indexes for all TIPS.

The inflation report

While the stock and bond markets seemed to react to February’s higher-than-expected inflation with a yawn, this March report will be harder to ignore. Seasonally-adjusted all-items inflation came in at 0.4%, higher than the expectation of 0.3%. The annual inflation rate rose from 3.2% in February to 3.5% in March.

Core inflation, which removes food and energy, also exceeded expectations, rising 0.4% for the month and 3.8% year over year.

The BLS pointed to several factors that contributed to higher inflation. Costs of shelter increased 0.4% and are now up 5.7% year over year. Gasoline prices increased 1.7% in March after rising 3.8% in February and are now up 1.3% year over year.

Food prices, however, continued rising at a moderate pace, up 0.1% for the month and 2.2% over 12 months. The costs of food at home were unchanged. More items from the report:

Electricity costs rose 0.9% for the month and 5.0% year over year.
Costs of motor vehicle insurance rose 2.7% for the month and a ridiculous 22.2% year over year.
Medical care costs rose 0.6% and are up 2.1% year over year.
Airline fares rose 3.6% for the month but were down 0.4% for the year.
Apparel costs rose 0.7% but are up only 0.4% year over year.
Costs of used cars and trucks fell 1.1% and are down 2.2% over the year.
New vehicle prices also fell 0.2% and are down 0.1% year over year.

Here is the trend in all-items and core inflation over the last 12 months, showing the troubling rise in annual all-items inflation, even as core inflation inches lower. A lot of this was caused by rising gas prices:

What this means for future interest rates

We can conclude that the Fed is on “hold” for now and short-term interest rates will continue (for months) in the range of about 5.3% until we see some evidence that inflation is actually abating. I am noticing that today’s inflation report has had an immediate effect on real yields, with the yield on a 5-year TIPS popping to 2.03%, up about 10 basis points from yesterday’s close. The 10-year is up about 7 basis points to 2.07%.

From this morning’s Bloomberg report:

Excluding housing and energy, services prices accelerated to 4.8% from a year ago, the most since April 2023, according to Bloomberg calculations. “(I)t is another reason for delaying any rate cuts and/or reducing the number expected this year,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “If service sector inflation is sticky, then it doesn’t leave much room to ease.” …

“The sound you heard there was the door slamming on a June rate cut. That’s gone,” David Kelly, JP Morgan Asset Management’s chief global strategist, said. (Video follows …)

Nevertheless, I believe the Federal Reserve would like to get a couple 25-basis-point cuts in sometime this year, which it has strongly signaled. But both the U.S. economy and labor market remain strong. Are rate cuts truly needed?

Inflation analyst Michael Ashton had this to say this morning:

I can’t see any rational argument for cutting rates in June. Actually, on the data we have in hand I can’t see an argument for cutting rates in 2024. … To cut the overnight rate, the Fed would have to rely on forecasts that inflation is going to get better. And to do that now, when forecasts have been persistently wrong (and not by just a little bit but about the whole trajectory) since 2020, would be incredibly cavalier.

What’s next?

In a few days (probably Sunday morning) I will be posting a deeper analysis of the I Bond buying equation: In April, in May or not at all? As I noted, the data appear to make an April purchase more attractive than May, to lock in the 5.27% composite rate for six months.

We won’t know the I Bond’s new fixed rate until May 1, or more probably the morning of April 30. But at this point, I would guess, the fixed rate will remain in the range of 1.2% to 1.3%. More on that later.

In the meantime, TIPS investments are looking attractive again as real yields rise above 2.0%.

More on I Bonds:

• 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

More on TIPS:

• Now is an ideal time to build a TIPS ladder

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• Upcoming schedule of TIPS auctions

* * *

Posted in Cash alternatives, I Bond, Inflation, Investing in TIPS, Savings Bond | 34 Comments

Interested in swapping out 0.0% fixed-rate I Bonds? Here’s a guide.

Posted on March 31, 2024 by Tipswatch

By David Enna, Tipswatch.com

A logical strategy for some I Bond investors is to act now to redeem I Bonds with a fixed rate of 0.0% (and a current composite rate no higher than 3.94%) and use that money to invest in April 2024 I Bonds, with a fixed rate of 1.3% and a composite rate of 5.27% for a full six months.

This isn’t nuclear science, it is just simple math: A fixed rate of 1.3% is always more desirable than a fixed rate of 0.0%. That’s 130 basis points more desirable, over the potential 30 years of an I Bond investment.

Why act now?

April is the last month you can purchase an I Bond with a fixed rate of 1.3% and a six-month composite rate of 5.27%. On May 1, Treasury will be resetting the permanent fixed rate, and the variable rate will be also be reset, probably to a number lower than the current 3.94%.

Those are big unknowns. We won’t know the new variable rate until the release of the March inflation report on April 10. I am guessing the new number will be around 2.6%. It appears likely that the new fixed rate could hold at 1.3% or slip to 1.2%, based on this updated projection:

Reminder: This projection is simply an educated guess. The Treasury has not revealed its formula for setting the I Bond’s fixed rate.

One month remains before the Treasury actually has to make a decision, and real yields have been sliding a bit lower than the daily average in recent weeks. So the trend is more toward a fixed rate of 1.20%, in my opinion. But again, this is up to the whim of the U.S. Treasury.

On the purchasing side of the equation, there is no rush. And in fact you should schedule any April I Bond purchase late in the month, because any purchase at any date earns the full month of interest. I advise setting the date no later than Thursday, April 25, or Friday, April 26, to allow TreasuryDirect time to process it in April.

But if you want to redeem 0.0% I Bonds to swap to the 1.3% version in April, you should take that action Monday or Tuesday. Why? Because when you redeem an I Bond, you earn zero interest for the month of redemption. By placing the redemption order on April 1 (which actually takes effect April 2), you will earn a full month of interest for March.

One annoying thing about TreasuryDirect is that you cannot schedule a future date for redemption (unlike purchases, where you can). So if you want to redeem on Monday or Tuesday, you should log into TreasuryDirect and do it that day.

Which I Bonds to redeem?

My personal opinion: Hold any I Bond with a fixed rate above 0.0%, at least until you have redeemed all the 0.0% issues. In fact, I generally advise holding I Bonds until you actually need the money. That is the whole idea of I Bonds. But I also admit that a 1.3% fixed rate is way more desirable than 0.0%, so swapping is a logical strategy.

Older versus newer? You can’t redeem any I Bond you have owned for less than 12 months. If you redeem an I Bond you have held less than 5 years, you will incur a penalty of the last three months of interest, applied to composite rates of 3.38% or 3.94% or a combination. If you redeem I Bonds held for more than 5 years, there is no penalty.

However …. older I Bonds will have accrued much higher interest and so the tax penalty will be higher. So, would you rather face the 3-month interest penalty, or the higher tax bill? Up to you. I am probably going to opt for the lower tax bill.

Things can get confusing. Getting ready to redeem? Log into TreasuryDirect and navigate down the page to the “Current Holdings” section. Click on “Savings Bonds”.

On the next page, navigate down to the Savings Bond section and click on the radio button for Series I Savings Bond and click “Submit”.

The next page will show a listing of all your I Bonds and show the current interest rate. The issues with 0.0% fixed rates will show an interest rate of 3.38% or 3.94%. Any other number indicates that I Bond has a fixed rate higher than 0.0%.

And now for the confusing part: TreasuryDirect shows only the composite rate, not the fixed rate.

For example, the I Bond issued April 2023 has a composite rate of 3.79%, which is lower than the two I Bonds listed below it, issued in 2022 and 2021. But that April 2023 I Bond has a fixed rate of 0.4% and through March 2024 was still on the 3.38% variable rate. As of April 1, it will be paying 4.35% and that is not a target for redemption.

In this list, I would target redeeming the 0.0% I Bonds issued in January 2022, January 2021 or April 2017. Here are the potential proceeds if I redeem the entire amounts on Monday or Tuesday:

Jan 2022: $11,396, or $1,396 of taxable interest.
Jan 2021: $11,696, or $1,696 of taxable interest
April 2017: $12,684, or $2,684 of taxable interest

I am only going to do two redemptions, so I would choose Jan 2022 and Jan 2021, resulting in taxable interest of $3,092. (But also extra money I can use to travel later this year).

If you are looking at the listings in TreasuryDirect over this weekend, they will still be showing interest totals through February because March has not yet ended. I am thinking (hoping) that those totals will be updated on Monday. If they are not, I’d probably wait until Tuesday to redeem. (Can’t be too cautious with TreasuryDirect.)

Update: On Monday morning I confirmed that TreasuryDirect has updated with the March interest numbers and redemptions on Monday will be posted April 3.

And then … what’s next?

If you set up everything correctly in TreasuryDirect, the money from the redemptions should arrive in your bank or brokerage account in a couple of days.

And then, no rush if you are planning to purchase the April 2024 I Bond with the fixed rate of 1.3%. If you are positive you want to make the purchase in April you can go in immediately and schedule the purchase on TreasuryDirect’s “BuyDirect” page.

Again, I advise scheduling the purchase for late in the month, but not on the last day. Allow TreasuryDirect at least one business day to complete the transaction.

Using the gift box

If you have already purchased I Bonds up to the $10,000 limit in 2024, you could use the “gift box strategy” to purchase additional allotments to be delivered in a future year. This strategy requires that you have a trusted partner, such as a spouse, to make matching gifts.

Harry Sit of the TheFinanceBuff.com was the first to write about this strategy in a 2021 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 granted.
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.

Purchasing basics. To make a gift box purchase, click on the “BuyDirect” tab on your account homepage. Then click on the Series I radio button and click on Submit.

At this point, you will NOT be purchasing with your standard registration information. You will need to “Add New Registration” for the person receiving the gift, unless you have already done this. When filling out the information, click on “This is a gift.” at the bottom of the page.

Then, use this new registration to make a purchase. If you have done things correctly you will see “This is a gift” on the purchase review page. Then click “Submit” and you are done.

Then, logoff and log into the matching person’s account (assuming this is your spouse) and go through the same process to create a gift for yourself.

These gift purchases can be scheduled just like any I Bond purchase, and also can be canceled if circumstances change before the purchase date. Last year, I had scheduled a gift box swap with a 0.9% fixed rate, but canceled when I realized the fixed rate was likely to go higher on November 1.

In summary

I feel like I have covered a lot of ground here and may have missed some details. A lot of people have already made these 0.0% swaps, so use the comment section to provide advice if you have any. A couple of reminders:

Wait until at least Monday to make any redemptions, so you will get full benefit of the March interest.
Be careful to target 0.0% I Bonds in TreasuryDirect, since the site shows only the composite rate, not the fixed rate.
Don’t feel undue pressure to make any I Bond purchases until later in April when we will know the new variable rate and have more data on the potential future fixed rate.
And finally … there is nothing wrong with doing nothing and holding on to those 0.0% fixed-rate I Bonds. That money will continuing growing with inflation until redemption.

• I Bond buying guide for 2024: Be patient

• 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

* * *

Posted in Cash alternatives, I Bond, Inflation, Savings Bond, Taxes, TreasuryDirect | 51 Comments

A 5-year TIPS will mature April 15. How did it do as an investment?

Posted on March 27, 2024 by Tipswatch

Answer: Very well.

By David Enna, Tipswatch.com

I got a reader question this week about CUSIP 9128286N5, a 5-year Treasury Inflation-Protected Security that will mature on April 15, 2024. The question reminded me that this TIPS has completed its cycle, with its final inflation index set by the February inflation report.

As a reminder, each month’s daily inflation indexes for TIPS are set by the inflation report two months earlier. So February’s non-seasonally adjusted inflation of 0.62% set the April 15 inflation index for this TIPS: 1.22640.

That is all we need to know to judge how CUSIP 9128286N5 did as an investment, at least versus the matching nominal Treasury in April 2019. And the answer is: It did extremely well.

On April 15, an investor who purchased $10,000 par value at the originating auction will get $12,264 in principal and a final coupon payment of $30.66.

In my preview article for the April 18, 2019, auction, I surmised that this offering was “relatively” attractive but that 5-year CDs yielding above 3% were a compelling alternative. See? I can be wrong. Way off, in this case, but there was no way to know that U.S. inflation was going to surge to a 40-year high three years later.

CUSIP 9128286N5 auctioned with a real yield to maturity of 0.515%, versus the 5-year nominal Treasury note yielding 2.37% on that day. That created an inflation breakeven rate of 1.85%, meaning this TIPS would out-perform the Treasury if inflation averaged 1.85% over the next 5 years.

The result: Inflation averaged 4.1%, giving this TIPS a 2.25% advantage over the comparable 5-year Treasury note. That is by far the highest positive variance for any 5- or 10-year TIPS over the last dozen years.

CUSIP 9128286N5 generated an annualized nominal return of 4.6%, which I’d call spectacular versus the meager yields available in April 2019. Here are data for all 5-year TIPS that have matured since April 2012. Note the early trend of under-performance has dramatically shifted because of the ultra-high inflation of recent years.

View more data on my TIPS vs Nominals page. Click on image for larger version.

To view this chart at a glance, the annual variance number in the last column shows how the inflation breakeven rate compared to actual 5-year annual inflation. When the numbers are green, a TIPS was the superior investment. When they are red, the nominal Treasury was the better investment.

The next decade could be entirely different. Never predict the future decade based on the performance of the past decade.

This TIPS versus an I Bond

This comparison is especially interesting, because the U.S. Series I Savings Bond was being offered with a 0.5% fixed rate in April 2109, so the performance should be very close to the TIPS. Let’s look at a $10,000 investment:

I Bond: As of April 1, the I Bond’s value was $12,396 and can now be redeemed without penalty.
TIPS: As of April 15, the TIPS investor will receive $12,264 in principal and a final coupon payment of $30.66. But keep in mind that the TIPS has been paying an annual coupon payment of 0.5% along the way. Eyebonds.info says the total interest paid will be $275.88 over the five years on a $10,000 investment.

The result is that the TIPS had a slight edge in performance.

Notes and qualifications

My TIPS vs. Nominals chart is an estimate of performance.

Keep in mind that interest on a nominal Treasury and the TIPS coupon rate is paid out as current-year income and not reinvested. So in the case of a nominal Treasury, the interest earned could be reinvested elsewhere, which would potentially boost the gain. For certain, we don’t know what the investor could have earned precisely on an investment after re-investments.

In the case of a TIPS, the inflation adjustment compounds over time, and that will give TIPS a slight boost in return that isn’t reflected in the “average inflation” numbers presented in the chart.

• Confused by TIPS? Read my Q&A on TIPS

• TIPS in depth: Understand the language

• TIPS on the secondary market: Things to consider

• Upcoming schedule of TIPS auctions

* * *