Uncertainty surrounds this week’s 10-year TIPS auction

Posted on November 13, 2022 by Tipswatch

Have we passed the peak for real yields? Or is this another head-fake?

By David Enna, Tipswatch.com

Well, that was a wild week. Look back to Nov. 3, when both 5- and 10-year TIPS real yields were closing in on 12-year highs, with the 5-year at 1.82% and the 10-year at 1.74%, based on U.S. Treasury estimates. Then came Thursday’s October inflation report, and everything changed.

October inflation came in well below expectations, only the second downside surprise in more than a year. Annual all-items inflation was running at 7.7%, below estimates of 8.0%, and core inflation came in at 6.3%, below estimates of 6.6%. Both the stock and bond markets took this as a signal the Federal Reserve can soon begin easing future interest rate increases. The S&P 500 soared nearly 6.5% in the next two days. The U.S. bond market — represented by the AGG ETF — rose about 2.1% in a single day (the bond market was closed Friday in honor of Veterans Day).

For bonds, higher prices equal lower yields. And real yields on Treasury Inflation-Protected Securities moved substantially lower from Nov. 3 to Nov. 10, according to Treasury estimates:

  • The 5-year real yield fell from 1.82% to 1.48%, a drop of 35 basis points.
  • The 10-year real yield fell from 1.74% to 1.43%, a fall of 31 basis points.
  • The 30-year real yield fell from 1.76% to 1.58%, a drop of 18 basis points.

And now, on Thursday, the Treasury will offer $15 billion in a reopening auction of CUSIP 91282CEZ0, creating a 9-year, 8-month TIPS. At this point, although real yields are down, this TIPS still looks attractive. But we are entering a week of high uncertainty.

A look at CUSIP 91282CEZ0

Update: 10-year TIPS reopening auction gets real yield of 1.485%, highest in more than 12 years

I’ve been a fan of this TIPS, buying a small amount at the originating auction on July 21, which produced a real yield of maturity of 0.630% and set the coupon rate at 0.625%. At the time, that was the highest coupon for a new TIPS in three years. Then I bought a larger amount in the first reopening on Sept. 22, which boosted the real yield to 1.248%, the highest in more than 12 years.

CUSIP 91282CEZ0 trades on the secondary market, and at the week’s close it had a real yield of 1.40% and a price of $92.98 for $100 of value, according to Bloomberg’s Current Yields page. That quote may include some international trading on Friday, because it is a bit below the Wall Street Journal‘s Thursday real yield estimate of 1.432%.

Definition: The “real yield” of a TIPS is its yield above official future U.S. inflation, over the term of the TIPS. So a real yield of 1.40% means an investment in this TIPS will exceed U.S. inflation by 1.40% for 9 years, 8 months. If inflation averages 2.5%, you’d get a nominal return of 3.9%, pretty much on par with a nominal U.S. Treasury. But if inflation averages 4.5%, you’d get a nominal return of 5.9%.

So let’s go with the real yield of 1.40% and price of $92.98, which is below par value because the real yield is currently well above the coupon rate of 0.625%. This TIPS will carry an inflation index of 1.02147 on the settlement date of Nov. 30. That means investors will be paying about $94.98 for $102.15 of accrued value, plus maybe 23 cents more for accrued interest.

An investor buying $10,000 in par value of this TIPS will pay about $9,521 for about $10,215 in accrued value plus $23 in accrued interest. That is a rough estimate and things can change before Thursday.

It’s still attractive. While we might have been dreaming two weeks ago of 10-year real yields reaching 2.0% or higher, a yield in the range of 1.40% is still attractive, at least in view of the past decade of ultra-low interest rates. It would be the highest real yield for any 9- to 10-year TIPS auction since April 2010, when a 10-year TIPS reopening auction got a real yield of 1.709%.

Here is the trend in the 10-year real yield over the last 12 years, showing that current yields remain at decade-old highs:

Note that Treasury data for this chart does not include Thursday, when the real yield fell 21 basis points.

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

• Upcoming schedule of TIPS auctions

Inflation breakeven rate

With the nominal 10-year Treasury note now yielding 3.81%, a 10-year TIPS with a real yield of 1.40% gets an inflation breakeven rate of 2.41%, in line with recent auction results. Inflation expectations have been falling in recent months, as the Federal Reserve shows resolve in fighting inflation with higher interest rates and balance sheet reductions. At this point, with U.S. inflation running at 7.7% annually, this breakeven rate looks reasonable.

Here is the trend in the 10-year inflation breakeven rate over the last 12 years, showing that the current rate remains at the top end of the historical range, but below the surge to nearly 3.0% in April 2022, just as the Federal Reserve was beginning to tighten:

Thoughts on this auction

Have we hit a top in the trend of higher real yields? Or was last week’s volatility just another head-fake in a year of bond market fluctuations? Personal opinion: It’s hard for me to resist this auction, since I have bought this same TIPS twice at lower real yields. On the other hand, have I already bought enough TIPS maturing in 2032? Should I look elsewhere? Should I wait until January’s auction of a new-issue 10-year TIPS, when real yields could be even lower? (Or not.)

Each investor will need to find answers to those questions. My general feeling throughout 2022 has been to load up on TIPS while real yields are attractive. My fear: This might not last long. Then again, maybe we have entered a “new era” in the U.S. bond market? Uncertainty.

As an alternative to this 10-year TIPS auction, I have considered going to the secondary market to buy TIPS maturing in 2030 and 2031, two holes in my TIPS ladder caused by the ultra-low yields of the 2020 to 2021 era. Those TIPS also had deep declines in yields after the October inflation report:

I checked on Fidelity’s trading platform Saturday morning and prices were slightly higher than Thursday’s close, but I can’t view prices for smaller lots. (Vanguard’s platform no longer lists any of these, not sure why.) There’s no way to know what we will see Monday, but if the real yields on these remain higher than the current yield of CUSIP 91282CEZ0 I might head in this direction to fill gaps in my TIPS ladder. Then I would look to fill the 2033 slot in January.

I still view this reopening of CUSIP 91282CEZ0 as a solid investment, despite the dip in yields. If you are considering investing, make sure to watch Bloomberg’s Current Yields page for real-time updates on its yield and price. 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’ll be posting the results soon after the auction closes at 1 p.m. ET Thursday.

Here is a history of 9- to 10-year TIPS auctions back to 2018, when the Federal Reserve launched its last tightening cycle, lasting until early 2020. Note that one year ago, on Nov. 18, 2021, a 10-year TIPS reopening got a real yield of -1.145%, the lowest in history for this term.

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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. The investments he discusses 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 | 18 Comments

This week, I bought a historically disastrous TIPS

Posted on November 11, 2022 by Tipswatch

It is CUSIP 912810RA8, first auctioned on Feb. 13, 2013. It wasn’t a great investment back in 2013. But now …

By David Enna, Tipswatch.com

Earlier this week, on Wednesday afternoon, I did something I’ve never done before: I bought a TIPS on the secondary market. Oh sure, many of you have done that many times before. But not me. I’m the “buy at auction and hold to maturity” guy.

Why would I do that? Because I had been eyeing the potential to buy a TIPS, probably with a maturity of around 20 years, with a real yield to maturity higher than 2.0%. Each day, sometimes several times a day, I’d take a look at TIPS maturing in 2040 to 2044, which seemed to be the sweet spot for that 2.0% real yield. (The 30-year TIPS — which I would not buy — actually had a lower real yield.)

The U.S. Treasury, unfortunately, stopped offering 20-year TIPS at auction back in January 2009 and very few were ever offered. I’ve argued it would be an excellent addition to the TIPS lineup, but the Treasury doesn’t seem to listen to me. The lack of this maturity creates a “hole” in TIPS maturities, with zero TIPS maturing from July 2032 to February 2040.

My personal TIPS ladder, until this week, ended with a 30-year TIPS I purchased back in 2011, with a still-sweet coupon rate of 2.125%. I wanted to extend that ladder by one final issue.

I had looked earlier in the day on Wednesday and found nothing I could snag above 2.0%. But I checked again Wednesday afternoon and noticed that CUSIP 912810RA8, which matures Feb. 15, 2043, was being offered with a real yield to maturity of 2.02% for my investment of $10,000. So … I bought it. This chart shows why I thought a 20-year real yield above 2.0% looked historically attractive:

This chart ends on Nov. 9, 2022, but does not reflect the slightly above-market yield of CUSIP 912810RA8.

Let’s look at CUSIP 912810RA8

The originating auction for this 30-year TIPS was on Feb. 21, 2013, and yes, I wrote a preview article about that auction. (I’ve been at this a long time.) I wasn’t too impressed. Even then I was worried if I would live long enough for the TIPS to reach maturity:

“My strategy with TIPS is to buy them and hold them to maturity. I don’t ever look at their prices on the secondary market, I don’t care. Viewed this way, TIPS are a very conservative, very predictable, and very boring investment. The problem with a 30-year TIPS is: Will I live long enough to see it mature? I am 59. I could live to 89.”

Oh, to be young again. Now I am 69, and looking at very same TIPS. My biggest problem back in 2013 was that the Federal Reserve had launched into quantitative easing, forcing Treasury yields lower. I noted that real yields at that point — around 0.60% — were historically low, which is not good for a very long-term investment. From my 2013 preview article:

“Someday – maybe soon, or maybe not – 30-year TIPS will again be yielding 1.5%, or 2%, or more. When that day comes, the secondary-market value of a long-term TIPS yielding 0.6% is going to be crushed.”

Zoom forward to November 2022. Now, finally, the real yield to maturity for this TIPS — at least on Wednesday — had finally broken the 2.0% barrier, reaching 2.02%. The original investors in CUSIP 912810RA8 had indeed taken a beating. The original auction got a real yield to maturity of 0.639%, setting the coupon rate at 0.625%. Investors paid an unadjusted price of $99.62 for $100 of par value. On Wednesday, this TIPS was selling on the secondary market with a price of $76.73, down 23% from the original purchase price.

Now, let’s look at the basics of my purchase of $10,000 of par value in this TIPS:

This purchase at Vanguard (in a traditional IRA account) incurred zero commissions.

Note that I purchased $12,890 in principal in this TIPS for just $9,890. That means I paid below the par value of $10,000, which is guaranteed to be returned at maturity, even if severe deflation sets in. (I consider this more of an oddity that a true issue.) But more importantly, note that the original purchaser of this TIPS had accumulated $2,890 of inflation accruals, but the rise in the real yield from the original coupon rate of 0.625% to Wednesday’s real yield of 2.02% had wiped out that entire inflation accrual. Of course, the holder of this TIPS had collected a coupon rate of 0.625% along the way, but losing your entire inflation accrual is … painful.

This is a reason I am definitely not a fan of long-term Treasurys of any type, unless the nominal or real yields are historically attractive. And this TIPS investment could end up biting me if real yields continue climbing to 3% or 4%. But … no problem, I am holding to maturity, if I live that long.

Did I luck out?

Who knows, but Thursday’s weaker-than-expected inflation report has sent Treasury yields plummeting. As of the market close Thursday, CUSIP 912810RA8 was trading with a real yield of 1.83%, down about 19 basis points in one day, and its price was about $79.69 for $100 of value, about 3.8% higher than the price I paid. But … who cares? I really do intend to hold this to maturity.

The secondary market for TIPS is complex and if you intend to dip in with purchases, you need to understand the basics of any purchase … par value, inflation index, market price, accrued interest. I hope this article will help.

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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. The investments he discusses 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 | 32 Comments

October inflation cools a bit, coming in below expectations

Posted on November 10, 2022 by Tipswatch

Will the Federal Reserve take this as a signal to begin slowing interest rate increases?

By David Enna, Tipswatch.com

The stock and bond markets finally got a positive surprise today with the release of the October inflation report, with monthly and annual numbers coming in well below expectations.

Click on image for larger version.

The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4% in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all-items index increased 7.7%. Core inflation, which removes food and energy, rose 0.3% for the month and 6.3% year over year. All of these numbers were below expectations, as shown in the chart.

The BLS noted that the 7.7% increase in all-items inflation was the smallest 12-month increase since the period ending January 2022. This was the second month in a row that U.S. inflation ran at 0.4%, which sets an annual pace of 4.8%, well below the 2022 high of 9.1% set in June. Realistically, even 4.8% remains unacceptably high, but inflation watchers can take some comfort that the U.S. inflation appears to be trending down.

The October “cool-down” came despite a 4.0% monthly increase in the price of gasoline, breaking three consecutive months of steep declines. Gasoline prices remain 17.5% higher year over year. Also, shelter costs rose 0.8% and are now up 6.9% year over year. The BLS said shelter costs accounted for more than half of the increase in October inflation. The shelter increase was the highest for the category since August 1990. More from the report:

  • The costs of food at home increased 0.4% for the month, down a bit from recent trends and the smallest monthly increase since December 2021. But food at home prices are still up 12.4% year over year.
  • The index for meats, poultry, fish, and eggs rose 0.6% over the month. In contrast, the index for fruits and vegetables fell 0.9% in October.
  • The rent index rose 0.7% over the month.
  • The costs of medical care services fell 0.6% in October and were up 5.4% year over year.
  • Apparel costs also fell, down 0.7% for the month.
  • The costs of used cars and trucks fell 2.4% for the month and are up only 2% over the last year, following a strong surge higher in 2021. The costs of new vehicles were up 0.4% for the month and 8.4% year over year.
  • The index for airline fares fell 1.1% in October.

The BLS noted that the October report was a “mix of increases and declines,” and the overall result was an inflation rate below economist expectations. Here is the 12-month trend in all-items and core inflation, clearly showing the gradual trend downward in all-items inflation since early summer.

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and U.S. Series I Savings Bonds are also interested in non-seasonally adjusted inflation, which is used to adjust principal balances on TIPS and set future interest rates for I Bonds. For October, the BLS set the inflation index at 298.012, an increase of 0.41% over the September number. The annual increase was 7.7%.

For TIPS. The October inflation number means that principal balances for all TIPS will increase 0.41% in December, after a 0.22% increase in November. For the year ending in December, TIPS principal balances will have increased 7.7%. Here are the new December Inflation Indexes for all TIPS.

For I Bonds. The October report is the first in a series of six — from October to March — that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset May 1. So far, that increase is 0.41%, but just one month of data is meaningless. Here are the numbers:

What this means for future interest rates

Clearly, the softening of the inflation trend in October could give the Federal Reserve reason to opt for a 50-basis-point increase in the federal funds rate in December, instead of 75 basis points. In fact, I’d say that is likely if prices continue to stabilize, and the Fed could potentially pause its rate increases in spring to summer 2023. But inflation doesn’t follow predictable patterns.

Core inflation at 6.3% remains much too high. The Fed knows this. The markets know this. Rate increases are likely to continue, but possibly the pace of increases will be slowing. Inflation tracker Michael Ashton posted this today on his E-piphany site:

The Fed … will take the peak in Core as a reason to step down to 50bps at the next meeting, then probably 25bps, and ending at around 5%. If rates are at 5% and median inflation is around the same level late next year, it isn’t clear that much higher rates would be called for especially in a recession. But neither will much lower rates. So I think overnight rates get to 5% and then stay stuck there for a while.

The immediate result of today’s inflation report was a sizable drop in real and nominal yields, with the 10-year Treasury note dropping from 4.12% to about 3.92% and the 10-year TIPS real yield falling from about 1.70% to about 1.54%. But we have learned to expect volatility in the bond market, one of the hallmarks of 2022.

The result, however, could be a lower real yield on the 10-year TIPS to be reopened at auction on November 17. I will be posting a preview of that auction over the weekend.

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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. The investments he discusses 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, I Bond, Inflation, Investing in TIPS | 17 Comments

Short-term I Bond investors: Be patient with your exit strategy

Posted on November 6, 2022 by Tipswatch

By David Enna, Tipswatch.com

Even before I Bond investors crashed the TreasuryDirect website in late October, many financial journalists were pondering this question: “How fast can you get out of I Bonds?” For example, this from MarketWatch in early October:

“You can hold on to Series I bonds for 30 years, but if you jumped in when the interest rate skyrocketed to 9.62%, you might be looking for an off-ramp well before then. If you were attracted primarily by the high yield, you may want to sell sometime in 2023.”

The reason, at least in theory, was that the I Bond’s inflation-adjusted variable rate was about to fall from the super-enticing 9.62% (for six months, annualized) to a lower rate, which ended up being 6.48%, not quite as “super,” but still enticing. Many new investors have bought into I Bonds as a short-term investment, which is totally logical. You can’t find returns like this on any other very safe investment.

A couple of things complicate an I Bond exit strategy: 1) You must hold the I Bond for 12 months before you redeem it, and 2) if you redeem before 5 years you will lose the last three months of interest. Because of that interest penalty, savvy investors will want to exit at a time when the last three months of interest are below current market rates. And that may mean waiting well beyond the required 12-month holding period.

The conventional approach. My advice on exiting I Bonds remains: “Redeem when you need the money.” I Bonds held for 5 years become an easily accessed pot of inflation-protected savings. So … my conventional thinking is: Buy I Bonds every year. After 5 years, consider selling when you need the money. And target the I Bonds with a 0.0% fixed rate for the first sales.

The short-term approach. OK … you need the money very soon, and you used I Bonds as a short-term savings investment. If you really need the money, just redeem after 12 months and take the 3-month interest penalty. You will still do OK. But the wiser approach, if you can afford it, is to hold off on redemptions until the 3-month penalty is applied to a lower interest rate and therefore less painful.

In this chart I have laid out the optimal exit month for all I Bonds purchased from October 2021 to November 2022. This is all subject to change, of course, because we don’t know what the I Bond’s next variable rate will be at the reset on May 1, based on October 2022 to March 2023 inflation.

Click on the image for a larger version.

The key to understanding this chart is that I Bonds earn the then-current composite rate for a full six months after the initial month of purchase. This is very important in planning your exit strategy.

For example, investors who bought I Bonds in October 2021 earned 3.54% for six months, then 7.12% for six months, then began collecting 9.62% just last month — in October 2022. They will launch into the 6.48% rate in April 2023. The next variable rate will begin in October 2023. Add three months to that and the optimal redemption date for I Bonds purchased in October 2021 is January 2024. (This assumes that the next variable rate reset will be below market rates. That may not be true.)

Investors who bought in November 2021 collected 7.12% for six months and then 9.62% for six months and this month began collecting 6.48% for six months. Add three months to that, and you get an optimal redemption month of August 2023.

Like a lot of people, I bought my full allocation of I Bonds in January 2022. My optimal month for redemption for those bonds doesn’t come until October 2023. That could be a factor if I wanted to sell those 0.0% fixed rate I Bonds and buy I Bonds with a higher fixed rate. (Mostly likely, I won’t be doing this.)

And so on through the chart. A lot of people bought I Bonds in October 2022, crashing the TreasuryDirect system. Those people will collect 9.62% for six months, then 6.48% for six months. Add 3 months and you get to an optimal redemption month of January 2024.

The holding period is potentially shortest for people who purchase I Bonds this month, in November 2022. They will collect 6.89% for six months (higher because the fixed rate rose to 0.40% for these purchases) and then an unknown rate for six months. If that rate is low enough, the optimal redemption rate could be November 2023, because the 3-month interest penalty could potentially fit into the first year.

Beware of assumptions! This chart lays out a potential optimal redemption dates for people looking to maximize earnings on a short-term I Bond investment. But if the next variable rate comes in very high — and it could — that would push out the holding period another six months for people who can afford to wait.

But my main point is: Don’t be too quick to hit the “exit” button on your I Bond investment. Take full advantage of the attractive rates you are now earning.

• 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. The investments he discusses 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, Savings Bond, TreasuryDirect | 66 Comments

Treasury sets I Bond’s new fixed rate at 0.4%; composite rate is now 6.89%

Posted on November 1, 2022 by Tipswatch

Fixed rate for Series EE Savings Bonds soars from 0.1% to 2.1%; doubling period remains at 20 years.

By David Enna, Tipswatch.com

The U.S. Treasury announced this morning it is raising the fixed rate of the U.S Series I Savings Bond from 0.0% to 0.4% for I Bonds purchased from November 2022 through April 2023. This combines with the new inflation-adjusted variable rate of 6.48% to create a composite return of 6.89% for purchases from November to April.

Here is the announcement:

The composite rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the 30-year life of the bond, and the semiannual inflation rate. The 6.89% composite rate for I bonds bought from November 2022 through April 2023 applies for the first six months after the issue date. The composite rate combines a 0.40% fixed rate of return with the 6.48% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 287.504 in March 2022 to 296.808 in September 2022, a six-month change of 3.24%.

And here is my translation:

  • An I Bond earns interest based on combining a fixed rate and a semi-annual inflation rate. The fixed rate – which now rises to 0.4% – will never change. So I Bonds purchased from November 1, 2022, to April 30, 2023, will carry a fixed rate of 0.4% through the 30-year potential life of the bond.
  • The inflation-adjusted rate (also called the variable rate) changes every six months to reflect the running rate of non-seasonally adjusted inflation. That rate is now set at 6.48% annualized, down from the current 9.62%. It will update again on May 1, 2023, based on U.S. inflation from September 2022 to March 2023.
  • The combination of the fixed rate and inflation-adjusted rate creates the I Bonds’ composite interest rate, which was 9.62% but now falls to 6.89%, still very attractive. An I Bond bought today will earn 6.89% (annualized) for six months and then get a new composite rate every six months for its 30-year term. The fixed rate will remain at 0.4% for the life of the I Bond.

Here is how the Treasury calculated the I Bond’s new composite rate:

It’s important to note, however, that all I Bonds — no matter when they were issued — will get that 6.48% inflation-adjusted rate for six months (annualized), on top of any existing fixed rate. So an I Bond purchased in October will receive 9.62% for six months, and then 6.48% for six months.

There has been a lot of news coverage lately noting that the I Bond’s variable rate was “falling off a cliff,” but that 6.48% rate is highly attractive and is the third-highest inflation-adjusted rate in I Bond history.

Here are the inflation numbers used to determine the new inflation-adjusted variable rate:

Obviously, I Bonds remain a very attractive investment. A higher fixed rate is always preferable, since it remains with the I Bond for the entire potential term of 30 years. The composite rate of 6.89% is much better than any other very safe investment, and this one comes with future inflation protection.

I advise using I Bonds as a long-term investment, building up a large store of inflation-protected cash. And I’d absolutely advise against selling any I Bonds you currently own until three months beyond the time when both the 9.62% and 6.48% variable rates are complete. (If you haven’t owned the I Bond for 5 years, you will lose the latest three months of interest.)

The month that triggers the new 6.48% variable rate depends on the month that you originally bought the I Bond.

Issue month of your bondNew rates take effect
JanuaryJanuary 1 and July 1
FebruaryFebruary 1 and August 1
MarchMarch 1 and September 1
AprilApril 1 and October 1
MayMay 1 and November 1
JuneJune 1 and December 1
JulyJuly 1 and January 1
AugustAugust 1 and February 1
SeptemberSeptember 1 and March 1
OctoberOctober 1 and April 1
NovemberNovember 1 and May 1
DecemberDecember 1 and June 1

The fixed rate of an I Bond is equivalent to the “real yield” of a Treasury Inflation-Protected Security. It tells you how much the I Bond will yield above the official U.S. inflation rate. So, for these new I Bonds issued from November to April, the investment will earn 0.4% above official U.S. inflation for up to 30 years. A higher fixed rate is a very good reason to hold the I Bond long term.

And remember: The I Bond’s purchase cap of $10,000 per person per year will reset on January 1, so everyone will have access to this 0.4% fixed rate in 2023.

EE Bond gets higher fixed rate

Here is the Treasury’s announcement:

Series EE bonds issued from November 2022 through April 2023 earn today’s announced rate of 2.10%. All Series EE bonds issued since May 2005 earn a fixed rate in the first 20 years after issue. At 20 years, the bonds will be worth at least two times their purchase price. The bonds will continue to earn interest at their original fixed rate for an additional 10 years unless new terms and conditions are announced before the final 10-year period begins.

And here is my translation:

  • The EE Bonds’ fixed rate soars from a paltry 0.1% (where it has been since November 2015) to a more competitive 2.1%. This is a huge upgrade for EE Bond investors, but keep in mind …
  • An EE Bond held for 20 years immediately doubles in value, creating an investment with a compounded return of 3.53%, tax-deferred. So, if you invest $10,000 at age 40, you can collect $20,000 at age 60, with $10,000 of that total becoming taxable.
  • After the doubling in value at 20 years, the EE Bond will revert to earning 2.1 % for another 10 years.

This change to the fixed rate is a big deal because under the old fixed rate of 0.1%, it made no sense to invest in an EE Bonds unless you could absolutely hold it for 20 years. Now it makes sense to hold for 20 years, but it isn’t an absolute necessity.

But even with the higher fixed rate, EE Bonds in November 2022 aren’t particularly attractive, since you can get 4.66% right now on a 1-year Treasury bill, or 4.44% on a 20-year bond.

The EE Bond will outperform an I Bond with a fixed rate of 0.4% if inflation averages less than about 3.1% a year over the next 20 years. I think that is a possibility (but who knows, given current inflation trends).

• 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.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses 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 | 60 Comments