I Bonds: Let’s handicap the May fixed-rate reset

Posted on March 9, 2023 by Tipswatch

Everything you are about to read is based on facts … and plain old guesswork.

By David Enna, Tipswatch.com

Update, April 28, 2023: Treasury raises I Bond’s fixed rate to 0.9%; new composite rate is 4.30%

Note, March 13: It has been 5 days since I wrote this article, and while I think it presents a reasonable theoretical way to look at the I Bond’s fixed rate, these predictions are totally shot, at least for now. The 10-year real yield is currently trading around 1.22%, down about 44 basis points in the last 5 days. So … in this troubling environment of bank bailouts, the Fed and markets are likely to change course. Yields leading up to the May 1 decision are likely to be very volatile. (But I think this all still makes a strong case for investing in inflation protection.)

Read this article knowing that it is almost impossible to predict what the I Bond’s fixed rate reset will be on May 1. There are simply too many unpredictable factors.

And now, the original article:

I’ve been getting a lot of questions from readers asking: “Do you think the Treasury will raise the I Bond’s fixed rate on May 1? And what should we do about it?”

It’s still too early to speculate (a lot happens in the bond market every week), but I do think the fixed rate is probably going up on May 1. But by how much? No one can say. The Treasury has no announced formula for setting the I Bond’s rate. It seems to be set based on “whim.” But maybe not totally whim.

First, here are some details about the U.S. Series I Savings Bond, a security that earns interest based on combining a fixed rate and an inflation rate.

  • The fixed rate will never change. Purchases through April 30, 2023, will have a fixed rate of 0.4%. The fixed rate is essentially the “real yield” of an I Bond, the amount its return will exceed future inflation.
  • 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 6.48% annualized. It will adjust again on May 1, 2023, for all I Bonds, no matter when they were purchased. The starting month of the new rate depends on the month you purchased an I Bond.
  • The combination of these two rates creates the I Bond’s six-month composite rate, which is currently 6.89% annualized for I Bonds purchased through April 30.

The fixed rate is extremely important for an I Bond investor, especially a long-term investor, because it stays with the I Bond for 30 years, or until the I Bond is redeemed. A higher fixed rate is very desirable.

But even if the fixed rate rises on May 1, if the increase is small — say from 0.4% to 0.6% — an investor still might want to buy in April to lock in the 6.89% interest rate for a full six months. On a $10,000 investment, that equals $344.50 in interest. A 0.2% increase in the fixed rate only adds $20 a year.

It looks likely that the I Bond’s variable rate will fall on May 1. This is uncertain, with two months of inflation unreported, but the variable rate could fall to something like 3.50%. If the fixed rate rises to 0.6%, the new composite rate would be around 4.12%.

So the investment equation is: 6.89% before May 1 and something like 4.12% after May 1. For a short-term investor, buying before May 1 will make more sense. For the long-term holder of I Bonds, buying after May 1 may be wiser. But of course if you wait, you won’t know if the fixed rate is actually going higher. It’s a risk. Or … it could rise somewhere much higher, like 0.8% or 1.0% and you’d be very happy.

Alternatives. Buy half your $10,000 I Bond allocation in April and the other half in May. Or, some investors — those with spouses and two separate TreasuryDirect accounts — could use the “gift box” strategy. Buy your full allocation in April and then, if the fixed rate rises dramatically, use the gift box in May to invest another $10,000 each.

Handicapping the fixed rate

Although the Treasury has no public formula for setting the I Bond’s fixed rate, I have long speculated that the fixed rate will tend to track (although lower) with the real yield of a 10-year Treasury Inflation-Protected Security. Last October, I suggested that the fixed rate was likely to rise to a range of 0.3% to 0.5%, even though a higher fixed rate was justified. The Treasury settled on 0.4%. I got lucky on that prediction.

On October 31, 2022, the 10-year TIPS was yielding 1.58%. The I Bond’s fixed rate generally lags 50 to 75 basis points lower than the 10-year real yield, so a higher fixed rate was justified, in my opinion. But real yields at that point had just recently surged higher. It was hard to forecast a longer-term trend.

Several readers have suggested that the Treasury may take an average of the 10-year real yield over the previous six months and then apply a ratio to that yield to set the I Bond’s fixed rate. I liked that idea, at least in theory. So I took a look at recent rate-setting periods where the fixed rate was set higher than 0.0% to compare the six-month-average theory against the most-recent-yield theory:

OK, to be honest, neither theory works well enough to be relied on as a predictor and that puts us back to the “whim of the Treasury” theory for setting the I Bond’s fixed rate. It says so right in the Federal Register:

The Secretary of the Treasury determines the fixed rate of return. The fixed rate is established for the life of the bond. This amendment clarifies that the fixed rate of return will always be greater than or equal to 0%.

Still, I think market real yields do play a role in this rate-setting exercise.

Half-year average theory. To apply this theory, I determined the average 10-year real yield over the rate-setting periods — May to October and November to April for each period the fixed rate was set above 0.0%. Then I calculated the ratio of the new fixed rate to the six-month average.

In the most recent rate reset in November 2022, the fixed rate of 0.40% was 56% of the 0.72% six-month average for the 10-year real yield. If you applied that ratio to current 10-year real yield average of 1.41%, you get a fixed rate of 0.80%, rounded to the tenth decimal point. (Fixed rates are always set to the tenth decimal point, such as 0.40% currently.)

But … this history of rate resets is highly inconsistent, with the ratio averaging just 34%. If you apply that to the current average of 1.41%, you get a fixed rate of 0.50% (rounded), still higher than the current 0.40%.

The more-recent ratios have tended to fall around 60%, which would give you a fixed rate of 0.80%.

Most recent real yield theory. This theory — which looks at the yield spread between the I Bond’s new fixed rate and the most recent 10-year TIPS yield — is also hugely inconsistent, but it generally does a good job of predicting when the fixed rate is likely to rise or fall.

The fixed rate of 0.4% in November resulted in a yield spread of 118 basis points, the highest margin going back 13 years. It’s possible the Treasury saw the then-recent surge in real yields as temporary, so it held the fixed rate lower than it might have otherwise.

If you apply a spread of 50 to 75 basis points (the average is 67 bps) you get a fixed rate of 0.90% to 1.20%, based on the current real yield of 1.66%.

Conclusion

I think the fixed rate is heading higher, possibly to around 0.6% on the low end and 1.0% on the high end. Let’s just say –er, guess — 0.8%. Feel free to crowdsource your own ideas and theories in the comments sections below.

Plus, remember that a lot can change before May 1, and the Treasury can do anything on a “whim.”

I’ll be taking another look at this issue — and potential I Bond investing strategies — after we learn the new variable rate, which will be set by the March inflation report released on April 12, 2023.

• I Bonds: A not-so-simple buying guide for 2023

• 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.

Posted in I Bond, Inflation, Savings Bond, TreasuryDirect | 42 Comments

Debt-limit crisis: Lessons from the 2011 earthquake

Posted on March 6, 2023 by Tipswatch

The 2011 crisis led to an S&P downgrade of U.S. debt. This year could be worse.

By David Enna, Tipswatch.com

When I launched this website back in April 2011, I figured I had chosen one of the most placid and unexciting corners of the investing world: inflation-protected investments. Boring. Staid.

In the days leading up to my first post — on April 10, 2011 — real yields on a 5-year TIPS had started to slip below zero. That was a milestone, and a bit of a shock. But the 10-year TIPS was still yielding a solid 0.96% above inflation.

All of that was about to change. By the end of 2011, the 5-year real yield had plummeted to -0.76% and the 10-year also broke into the negative, at -0.07%. This chart shows the amazing drop in TIPS yields over the course of 2011 and through the entire year of 2012:

Click on image for a larger version.

In the middle of 2011, something shifted, but why?

Debt-limit crisis of 2011: A monumental event

Back in late 2011, I was quick to blame Federal Reserve manipulation of the Treasury market for the pathetically low yields on TIPS. One of the episodes of quantitative easing had to be behind this sudden shift, right? Wrong.

  • QE1 began in November 2008
  • A second phase of QE1 began in March 2009
  • QE2 began in November 2010

So in the years leading up to 2011-2012, real yields were declining but gradually. Something else happened exactly in late July to early August 2011: A crisis over increasing the U.S. government’s debt limit, the exact crisis we are rolling toward in 2023. A government in crisis; Congressional negotiations heading nowhere. Here are some headlines from that time, which we could see repeated this summer:

Yes, on Aug. 6, 2011, for the first time in history, Standard and Poors lowered its rating on U.S. debt from AAA to AA+, with a negative outlook.

Market reaction

Global stock markets declined on August 8, 2011, following the S&P announcement. All three major U.S. stock indexes declined 5% to 7% percent in one day. However, U.S. Treasurys, which had been the subject of the downgrade, actually rose in price and the dollar gained in value. The flight to safety was on.

This chart compares the performance of the TIP ETF, the long-term Treasury ETF (TLT) and the S&P 500 (SPY). It shows how the market earthquake struck precisely in mid 2011 and hit Treasuries (positively) and stocks (negatively):

Splitting point
Click on the image for a larger version.

Fear was the trigger: The stock market dropped and Treasurys soared. The Federal Reserved stepped in – one month later – to begin Operation Twist, selling short-term debt and using the money to buy longer-term debt. The intent was to flatten the yield curve (a problem that does not need fixing in 2023).

One last chart shows the massive moves in Treasurys and the stock market in a single month, August 2011:

Click on image for a larger version.

What is truly remarkable is that Treasury investments thrived amid this debt crisis and the downgrade from Standard and Poors. Fear was the driving force, and U.S. Treasurys were again shown to be the world’s premier “safety-first” investment.

2023: ‘This time is different’

Here we are, in March 2023, rolling toward the exact crisis we saw in 2011. Just like then, we have a Democratic president and a divided Congress (in 2011, by the way, Vice President Joe Biden was serving as the Senate President). But this isn’t a deja vu event. Things are quite different:

  1. A divided Republican party. I am trying to avoid making this about politics, but it’s clear that about 20 House Republicans will attempt to block any attempt to raise the debt ceiling, right to the brink of disaster.
  2. A no-compromise Democratic Party. Democratic leaders are strongly opposed to cuts in spending for social programs, including Social Security and Medicare. Most Democrats are refusing to even discuss spending cuts. A compromise will be very difficult to achieve in 2023.
  3. Where’s the middle ground? It’s going to take middle-of-the-road Republicans and Democrats to break from party pressure to reach a debt-limit agreement. In 2011, a lot of people were talking compromise. In 2023, you can hear crickets.
  4. A hamstrung Federal Reserve. U.S. inflation is likely to continue running well above the Fed’s target of 2% all summer. The Fed has limited ability to step in to support the bond or stock markets, even if disaster looms.
  5. A volatile Treasury market. In June 2011, the 10-year note was yielding 2.96%, very close to what it was a year earlier, 3.29%. Today, the 10-year is at 3.97%, up 211 basis points from one year earlier. This market is now more unpredictable and less steady than it was in 2011.
  6. A weakening economy. As interest rates continue to climb, many economists have been sounding the alarm about a looming recession. In 2011, the U.S. stock market was able to recover fairly quickly from the debt crisis, with the S&P 500 posting a total return of 16% in 2012 and 32% in 2013. There’s a lot more risk in 2023 with stocks still at fairly high valuations and the economy on a tightrope.

On the positive side, Biden has skills at negotiating a Congressional compromise. Eventually, both sides will probably have to “give” — a little.

Also interesting: Current Fed President Jay Powell played a key role is settling the 2011 debt crisis. At the time, Powell was a former Treasury official who was working for $1 a year as a visiting scholar at the Bipartisan Policy Center. Powell used his influence to help settle the issue, as CNN note in a recent article.

NPR’s Planet Money did a podcast recently on Powell’s role in 2011. Give it a listen:

Worst-case scenarios

A lot of readers have been asking me what will happen if the debt-ceiling negotiations fail and the U.S. government goes into debt-lock. My answer is: I don’t know. Will I Bonds continue to be issued? Will the United States continue paying interest on its debt? Will the U.S. pay out maturing Treasurys? Will Social Security payments get slashed? I don’t know.

The most probable outcome, in my opinion, is that we will come to the brink of debt disaster — and maybe even take a quick leap off the cliff — before Congress settles the issue by kicking the can down the road. Maybe Democrats will need to bend on some future spending cuts. Maybe Republicans will have to silence the ultra-hawks.

The Brookings Institution earlier this year issued a paper titled, “How worried should we be if the debt ceiling isn’t lifted?” It starts off with a bang:

“Once again, the debt ceiling is in the news and a cause for concern. If the debt ceiling binds, and the U.S. Treasury does not have the ability to pay its obligations, the negative economic effects would quickly mount and risk triggering a deep recession.”

In speculating on how a debt-lock could be handled, the authors note that the U.S. government created a contingency plan in 2011 at the height of the crisis:

“Under the plan, there would be no default on Treasury securities. Treasury would continue to pay interest on those Treasury securities as it comes due. And, as securities mature, Treasury would pay that principal by auctioning new securities for the same amount (and thus not increasing the overall stock of debt held by the public). Treasury would delay payments for all other obligations until it had at least enough cash to pay a full day’s obligations. In other words, it will delay payments to agencies, contractors, Social Security beneficiaries, and Medicare providers rather than attempting to pick and choose which payments to make that are due on a given day.”

You can read the full contingency plan here.

The Brookings paper also speculates on the level of non-interest spending cuts needed if the government goes into debt-lock:

“If the debt limit binds, and the Treasury were to make interest payments, then other outlays will have to be cut in an average month by about 20%.”

And it continues with this grim scenario:

“If the impasse were to drag on, market conditions would likely worsen with each passing day. Concerns about a default would grow with mounting legal and political pressures as Treasury security holders were prioritized above others to whom the federal government had obligations.

“In a worst-case scenario, at some point Treasury would be forced to delay a payment of interest or principal on U.S. debt. Such an outright default on Treasury securities would very likely result in severe disruption to the Treasury securities market with acute spillovers to other financial markets and to the cost and availability of credit to households and businesses. Those developments could undermine the reputation of the Treasury market as the safest and most liquid in the world. “

This Brookings scenario seems to indicate that Treasurys (and savings bonds) would continue to pay interest and continue to be issued in at least scaled-back form. All other government spending would be at risk. It’s highly likely we would see severe disruptions in the stock and bond markets.

Final thoughts

I am going to move forward trusting that a solution (although a temporary one) will be found for 2023’s version of the debt-ceiling crisis. But this is going to get ugly. Fasten your seat belts.

Note: Comments are welcome, but keep them constructive. No political flame-throwing will be allowed. However, politics is the issue today; so just keep comments on the topic and focused on solutions.

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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.

Posted in Federal Reserve, Investing in TIPS, Savings Bond, Social Security | 47 Comments

January Inflation: What It Means for Your Savings

Posted on March 4, 2023 by Tipswatch

Do AI innovations signal the end to human journalism? Let’s take a look.

And now, for something completely different on a Saturday morning, I asked Bing.com’s new ChatGPT-powered software to write an article on January inflation, in the style of Tipswatch.com. I gave it no more information. The top headline was written by Bing; the links you see in the article were created by Bing. And here we go:

By Bing

The latest inflation report for January showed that consumer prices rose 6.4% from a year ago, slightly higher than economists’ expectations. This was mainly driven by increases in food, energy and housing costs. The core inflation rate, which excludes food and energy, was 6% (wrong; it was 5.6%), also above forecasts.

These numbers indicate that inflation remains elevated and persistent, despite some signs of moderation in recent months. The Federal Reserve has acknowledged this challenge and has signaled its intention to raise interest rates several times this year to combat inflationary pressures. However, some Fed officials have also expressed caution about tightening monetary policy too quickly or too much, given the uncertainty about the pandemic and its impact on economic activity.

So what does this mean for your savings? If you are holding cash or low-yielding fixed-income investments, you are losing purchasing power every month as inflation erodes your real returns. To protect your savings from inflation, you may want to consider investing in Treasury Inflation-Protected Securities (TIPS), which adjust their principal and interest payments based on changes in the Consumer Price Index (CPI).

TIPS are currently offering attractive real yields across all maturities, ranging from 1.60% to 1.80% (wrong; current range is 1.45% to 1.55%). This means that you can lock in a positive return above inflation for up to 30 years with TIPS. Moreover, TIPS also offer tax advantages if you hold them in tax-deferred accounts such as IRAs or 401(k)s.

Another option to hedge against inflation is to buy Series I Savings Bonds (I Bonds), which also pay interest based on changes in CPI but have some additional features that make them more flexible than TIPS. For example, I Bonds have no maturity date (wrong; it is 30 years) and can be redeemed anytime after one year without penalty (except for three months’ interest if redeemed within five years). They also have a maximum purchase limit of $10,000 per person per year and are exempt from state and local income taxes.

The current composite rate for I Bonds issued from November 2022 to April 2023 is an impressive 9.6% (wrong; it is 6.89%), which consists of a fixed rate of 0% (wrong; it is 0.4%) plus a variable rate of 9.54% (wrong; it is 6.48%) based on CPI data from September 2022. However, this rate will change every six months depending on new CPI data released by the Bureau of Labor Statistics. Based on current projections, the variable rate for I Bonds issued from May 2023 to October 2023 could drop significantly to around 3.5%.

Therefore, if you are interested in buying I Bonds at their current high rate, you may want to act soon before they reset in May. You can buy I Bonds online through TreasuryDirect.gov or through payroll deduction plans offered by some employers.

In summary, January inflation was higher than expected and poses a risk to your savings if you don’t take steps to protect them from losing value over time. TIPS and I Bonds are two options that can help you preserve your purchasing power and earn positive real returns amid high inflation.

— End of Bing article —

Reaction

If you want to compare, you can go back and look at my original article on January inflation, from which Bing “borrowed” information without linking to the actual article. (It did link to my Inflation and I Bonds page, however.) My article includes helpful charts, something Bing lacks at this point.

Bing’s writing style is crisp and clear, with no spelling errors — certainly in the style of Tipswatch.com! I like that it expanded the topic from January inflation to focus on its effect on your savings and then suggest I Bonds and TIPS as a possible solution.

Bing made some puzzling errors. Where did it get a core inflation rate of 6.0% instead of the actual 5.6%? And it ran into serious problems when it tried to explain the current variable rate and fixed rate of I Bonds issued through the end of April. The answer was right there on the page it was referencing:

I Bonds purchased from November 2022 through April 2023 will pay an inflation-adjusted annual rate of 6.48%, and when combined with a fixed rate of 0.4%, creates an annualized composite rate of 6.89% for six months.

Overall, this attempt was a fail. However, it probably would have gotten a B in a college freshman econ class. Think the professor would have caught those mistakes?

Crosschecking with Google search

Was Bing’s incorrect information too difficult to find? Let’s see how Google search does with these specific questions:

What was the January core inflation rate?

Answer: 5.6%. Correct.

What is the maturity date of an I Bond?

Answer: 30 years. Correct.

What is the current real yield of a 30-year TIPS?

Answer: 1.63%. That was correct on Thursday, but Friday’s close was 1.49%, based on Treasury estimates.

What is the current I Bond composite rate?

Answer: 6.89%. Correct.

What is the current I Bond fixed rate?

Answer: Nothing specific, but does link to correct page on TreasuryDirect.

What is the current I Bond variable rate:

Answer: Nothing specific, same link as above.

What is Bing Chat?

Bing is Microsoft’s search engine and it has gotten a lot of attention in recent weeks as it began rolling out its artificial intelligence chat feature, which can answer questions in expanded (and possibly thoughtful) discussions.

Microsoft calls this “your AI-powered copilot for the web.” It says these features are all powered by an upgraded version of GPT 3.5, the OpenAI language model that powers ChatGPT.

I asked Bing how it is powered and it responded:

Bing chat is powered by a combination of natural language processing, machine learning and artificial intelligence technologies. These technologies enable me to understand your messages, generate relevant responses and learn from your feedback. I’m always trying to improve my skills and knowledge.

Microsoft calls its version of the AI software the “Prometheus model,” apparently named after the Greek god who gave humans fire (and thus, technology). Of course, a quick search with Bing would show that Prometheus is also a 2012 film, the fifth installment in the Alien franchise. It’s a horror film about an android with a high level of artificial intelligence.

My feedback is that Bing wrote a convincingly authentic article with several major errors. It still needs work, but … whether we like it or not … it marks a step toward a complex and possibly confusing future.

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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.

Posted in I Bond, Inflation, Investing in TIPS | 28 Comments

Short-term Treasurys: Is it time to go out a little longer?

Posted on February 26, 2023 by Tipswatch

Yields could continue to rise, but it may be time to think longer term.

By David Enna, Tipswatch.com

In the last week, I got calls from CNBC and Bloomberg reporters asking to talk about the rise in demand for short-term Treasurys, triggered by the recent surge in yield on a 26-week T-bill to 5+%.

Why is that a big deal? Well, take a look at this amazing chart:

Click on image for larger version

Last week, the 26-week Treasury bill crossed the 5% barrier for the first time since July 2007 — nearly 16 years ago. And for much of those 16 years, nominal yields on this ultra-safe investment were hugging very close to zero. Getting a no-risk, short-term return of 5% on your money is highly appealing, even if U.S. inflation continues to run at an annual rate of 6.4%.

Last July, I wrote an article detailing a strategy for staggering purchases of 13-week and 26-week Treasury bills, spacing out purchases and then rolling them over to capture rising interest rates, while also preserving easy access to your money. At the time, the 13-week was yielding 1.73%; today it is at 4.68%. The 26-week was yielding 2.62%; today it is 5.05%.

That strategy worked very well: It got money working immediately while also capturing future increases in interest rates. But at some point, possibly in the next six months, the Federal Reserve is going to call a halt to rate increases and move into “hold” mode. The rollover strategy would still work, but there will be no short-term rate increases to capture.

What’s the next move?

As interest rates near a peak — and I don’t claim to know when that will be — wouldn’t it be smart to begin allocating some funds to longer terms of U.S. Treasurys? Eventually, maybe sometime in 2024, short-term rates will begin moving lower (I think). At that point,the rollover strategy won’t be attractive.

Just look at the 26-week yield chart again. Notice how each time the yield peaks it begins a rather quick move downward? And notice how the past peaks have been followed rather quickly by a recession? Is that where we are heading?

Also, consider that if you buy a 26-week Treasury this week (the next auction is Monday), it is going to mature in August, possibly right at the peak of the U.S. debt crisis. Will that really matter? Probably not, but things could get a little crazy between now and then. And could that craziness make the Fed more cautious?

Longer-duration Treasurys will generally do well in a recession because interest rates are likely to fall, resulting in a higher value for your investment. Nothing is certain, of course, but the market seems to be shifting its focus toward medium-term Treasurys.

Here are January vs. February auction results for Treasury issues of various terms:

The chart shows that the 26-week T-bill is now the “sweet spot” investment, with the highest nominal yield across the entire maturity spectrum. But … notice how yields have been rising faster for the longer-term Treasurys, with the yield on a 5-year Treasury note rising 58 basis points in a month, versus 24 basis points for the 26-week. The 10-year Treasury note is now trading around 3.95%.

These longer-term yields may continue to rise, but they are starting to get attractive, matching the highs of October 2022 and closing in on the highs of June 2006. Here are long-term views for the 2-, 5- and 10-year Treasury notes:

Click on an image for a larger version.

What’s the strategy?

My idea is to add some medium- or even longer-term nominal Treasurys if I can find attractive rates, as a hedge against future recession and eventual declines in interest rates.

Keep in mind that 4-week to 26-week Treasury bills will remain the ideal investment for your short-term cash needs. Another sensible option for cash is a top-of-class money market fund, such as Vanguard’s Treasury Money Market Fund (VUSXX), with a 7-day SEC yield of 4.55%.

Are bank CDs an option? Sure. Online banks often offer promotional rates to lure your investment. You can probably find a 6-month CD paying 4.75% or a one-year at 5%. Those rates are competitive. Also, you can find 5-year CDs paying around 4.65%, also competitive. But do you really want to open another new account at an unknown bank? Plus, interest from these accounts face state income taxes, while Treasurys are free of state taxation.

So this week I decided to hunt through the secondary Treasury market to see if I could find a 5-year Treasury yielding close to 5%, or a 10-year at 4%. (I’d prefer to see the 10-year at 5%, but I decided to be realistic.) My plan was to nibble into these nominal investments as a backstop to my ladder of TIPS investments.

As of Friday afternoon, my search failed but the market is getting close, at least for the 10-year:

Market conditions right now remind me a lot of late September and October 2022, when nominal and real yields were peaking. At that time, I bought a 5-year Treasury note at auction with a yield of 4.22%, very close to today’s market. But by early November, yields began falling in reaction to a series of weak inflation reports.

I doubt that yields will plummet in the near term, and the Federal Reserve seems strongly committed to raising short-term interest rates another 50 to 75 basis points before summer. So let’s be realistic, I’ll admit I have no strategy. I just want to hedge my inflation bets with some reasonable nominal yields.

After hunting around Friday, I ended up making a “nibble” investment in CUSIP 91282CAE1, which matures Aug. 15, 2030. It has a coupon rate of 0.625%. The price was 78.453, resulting in a yield to maturity of 3.99%. This is how it would work if I had invested $10,000:

  • Cost of investment: $7,845.30
  • Future interest: about $471
  • Paid at maturity: $10,000
  • Total return about $10,471.

Not spectacular, I admit. I think we may see better opportunities in coming weeks.

Conclusion. As the Federal Reserve nears the end of its rate-hiking cycle, it could be wise to look at stretching out the term of your Treasury investments, at least a bit. If recession strikes, interest rates are likely to fall, boosting the value of a nominal Treasury.

However, “this time could be different,” especially if inflation continues at high levels. Then the Federal Reserve would have to continue pushing rates higher. Nothing is certain.

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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.

Posted in Investing in TIPS | 78 Comments

I Bonds: Here’s a simple way to track current value

Posted on February 21, 2023 by Tipswatch

TreasuryDirect’s information often confuses investors. There is another way.

By David Enna, Tipswatch.com

Almost every week, I get questions about the way TreasuryDirect shows the current value of I Bonds purchased within the last five years. Here are recent examples:

“I-Bond was purchased last April. So far … the actual annual earning rate is not 7.12% as we saw last April but low. Is it because the current holding has not included the last 3 month interest? Can you explain it? Thank you.”

… “I invested $10,000 on 6/13/22 and I only gained $156 in value on 11/1/22. That seems low given that the interest rate was 9.62%. Help!”

The usual advice. You can check the total value of your Series I Savings Bonds after logging into TreasuryDirect’s account pages and then clicking through to the totals for the individual bonds. Or you can use the Treasury’s Savings Bond Calculator, which TreasuryDirect claims is only for paper I Bonds (maximum amount of $5,000 each) and isn’t accurate for electronic I Bonds. But it is accurate for electronic bonds, you just have to double the $5,000 amounts for purchases of $10,000 in that form.

I wrote a step-by-step guide to using the Savings Bond Calculator back in June 2018, and I think the basics remain just about the same. One of the advantages of using the calculator is that it creates a browser-based file you store on your computer. It can be updated without actually logging in to TreasuryDirect, and then saved again.

Confusion arises when investors check account balances at TreasuryDirect — or use the Savings Bond Calculator — because they will not see the last three months of interest for I Bonds that have not been held five years. I’ve written about this several times, including this August 2022 article: “Don’t go ballistic over the way TreasuryDirect reports I Bond interest.”

But there is actually a very easy way to track the current value of your I Bonds, including those three months of interest that TreasuryDirect hides for recent purchases.

Eyebonds.info: A valuable resource

If you want to track the current value of your I Bond investment, Eyebonds.info is an excellent and reliable site. It’s a creation of Bob Hinkley, a retired corporate financial analyst and computer programmer (and famed Boglehead contributor). It’s very simple to use:

  1. Go to the homepage.
  2. Click on I Bonds.
  3. Find the month you purchased the I Bond in the table and click on it.
  4. Click on the investment amount listed below that matches your original investment.

The page that then displays the earned-interest history of your I Bond, all the way to the end of the your current composite rate (the end month depends on the month you purchased the I Bond). The numbers presented do not subtract the last three months of interest, so remember if you redeem early, you will lose those three months of interest.

Now, let’s run through some examples. In these examples, I am presenting results for a $10,000 investment in April of various years. The top section of each chart shows the Savings Bond Calculator’s presentation (doubled to match the $10,000 investment). The bottom section of each example comes from Eyebonds.info.

Click on the image for a larger version.

Example 1 is for a $10,000 I Bond purchased in April 2022. TreasuryDirect shows a value of $10,436, but that does not include the last three months of interest. The Eyebonds.info presentation shows a current value (as of Feb. 1, 2023) of $10,684 and continues with interest calculations through October 1. Note that the Eyebonds.info information for Nov. 1, 2022, matches TreasuryDirect’s calcuation, because it does not include interest for November, December and January.

Also, note that I Bonds earn interest for the previous month on the first day of each month. Don’t get confused by that. You don’t earn interest until the month is completed.

Click on the image for a larger version.

Example 2 is for a $10,000 I Bond purchased in April 2021. TreasuryDirect shows a value of $10,712, minus the three months interest. Eyebonds.info shows a current value of $10,968, which includes the last three months of interest through the end of January.

Click on the image for a larger version.

Example 3 is for a $10,000 I Bond purchased in April 2020. TreasuryDirect shows a value of $10,936, which excludes the last three months of interest. Eyebonds.info shows a Feb. 1 value of $11,200, which includes those three months of interest.

Click on the image for a larger version.

Example 4 is for an I Bond issued in April 2017, which has now passed the five-year holding period and is no longer subject to the three-month interest penalty. TreasuryDirect shows a February 2023 value of $11,892, exactly matching the information on Eyebonds.info because the interest penalty is no longer in effect.

TreasuryDirect’s reasoning

By eliminating (hiding, actually) the last three months of interest for I Bonds held less than 5 years, TreasuryDirect is attempting to cause less confusion, not more confusion. If it showed the full total, and investors redeemed early, they would swamp TreasuryDirect with complaints they were cheated. So TreasuryDirect focuses on presenting an accurate current redemption value, not current total value.

I’ve suggested that TreasuryDirect simply create two columns, one for redemption value and one for current value. That would really lessen investor confusion. But … that’s not happening.

Anyway, Eyebonds.info is a tremendous resource for tracking and understanding the current and near-future value of your I Bonds. It also has historical information on TIPS, and a treasure-chest of information on U.S. inflation dating back to 1971.

The site also has an Excel-based I Bond Calculator you can download. I haven’t used it, but a lot of my readers seem passionate enough (and nerdy enough?) to give it a try. Let me know how it works. For me, the Savings Bond Calculator and Eyebonds.info are all I really need.

• I Bonds: A not-so-simple buying guide for 2023

• 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 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.

Posted in Investing in TIPS, TreasuryDirect | 29 Comments