10-year TIPS reopens Thursday: How low can it go?

Posted on November 15, 2021 by Tipswatch

By David Enna, Tipswatch.com

The U.S. Treasury will offer $14 billion in a 10-year TIPS reopening auction on Thursday. The real yield is likely to crash through the record low for any TIPS auction of this term. And the weird thing is: Demand could be pretty high for this offering.

This is CUSIP 91282CCM1, and the auction will create a 9-year, 8-month TIPS. Here is its history:

  • CUSIP 91282CCM1 was created at an originating auction on July 22, 2021, generating a real yield to maturity of -1.016%, currently the record low for any 9- to 10-year TIPS auction. It was assigned a coupon rate of 0.125%, the lowest the Treasury will go for any TIPS.
  • Its first reopening auction was Sept. 23, 2021, where it got a real yield to maturity of -0.939%.

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 (or in this case, below) inflation.

When you see a negative real yield to maturity, it doesn’t mean an investor is accepting a negative nominal return. But it does mean the investment will underperform official U.S. inflation.

CUSIP 91282CCM1 trades on the secondary market, so you can track its real yield and cost in real time on Bloomberg’s Current Yields page. As of Friday’s market close, it was trading with a real yield to maturity of -1.18% and a price of $113.38 for $100 of par value.

In other words, to collect that 0.125% coupon rate plus official U.S. inflation for 9 years, 8 months, investors are willing to pay a 13%+ premium to par for this TIPS. Why? Because inflationary fears are surging. A TIPS offers protection against inflation surprises, and investors are worried about where future inflation is heading.

Here’s a simple chart that shows a key yield trend in 2021:

Since the beginning of 2021, 10-year nominal Treasury yields have increased 65 basis points, while 10-year real yields have fallen 7 basis points. That’s a swing of 71 basis points. The yield spread on that chart is equivalent to the 10-year inflation breakeven rate, and with U.S. inflation currently running at an annual rate of 6.2%, it’s conceivable the spread could continue expanding.

Here is a chart comparing the nominal yield of a 10-year Treasury note against the real yield of a 10-year TIPS, over the last two years. During the depths of market panic in March 2020, the yield spread shrank to as low at 0.50%, but has been expanding ever since.

Inflation breakeven rate

With a 10-year nominal Treasury yielding 1.56% on the secondary market, CUSIP 91282CCM1 currently has an inflation breakeven rate of 2.74%, at the very top of the Treasury’s history of the 10-year breakeven rate, which dates back to 2009. This means that a 10-year TIPS is “all-time expensive” versus a nominal Treasury. Here is the history of the breakeven rate over the last two years, showing the steady surge higher, triggered by massive economic stimulus programs launched in March 2020:

If you invest in TIPS mutual funds, you probably have noticed they have done very well in 2021; much better than the overall bond market. Schwab’s U.S. TIPS ETF (SCHP) has had a total return of 6.11% year to date, after a return of 10.86% in 2020. Compare that to Vanguard’s Total Bond ETF (BND), with a total return of -1.83% year to date, following 7.71% in 2020.

TIPS are in a Goldilocks scenario right now, benefiting from a combination of lower real yields (causing net asset values to increase) and surging inflation (adding to principal balances of all TIPS). It can’t last forever, though. In fact, the turn-around can be fast, and severe, as I noted in this article: 2013: A year of surging real and nominal yields. Here is a chart from that article, showing how the overall TIPS market under-performed as the Fed prepared to scale back its bond-buying stimulus:

Thoughts on the auction

Investors in Thursday’s auction should be aware that this TIPS will carry a very high inflation index of 1.02337, meaning that the adjusted price will be boosted by about 2.3%, but investors will receive a matching amount of additional principal. If the real yield to maturity comes in at around -1.18%, the adjusted price should be about $113.70 for about $102.34 of principal, after accrued inflation is added in. But a lot can change by Thursday.

Although I won’t be a buyer, I’m expecting reasonably strong demand for this issue. Keep in mind that the December inflation accrual will be 0.83%, based on non-seasonally adjusted inflation in October. Investors know that, and the current yield probably reflects it. But investors will recoup 0.83% of the premium price in a single month.

If you are investing, you should keep an eye on Bloomberg’s Current Yields page, which shows its real yield and price in real time. The last auction of this term, in September, got a bit of surprise boost in yield. It followed by a day a Federal Reserve announcement detailing plans for future tapering of its bond-buying program. Since then, the tapering has begun, with almost no effect on the TIPS market.

I’ll report the auction results soon after the close at 1 p.m. Thursday. Here’s a history of recent TIPS auctions of this term, showing the decline into deeply negative real yields triggered by Federal Reserve actions in March 2020:

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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 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 | 5 Comments

Medicare Part B’s monthly premium, deductible costs will surge 14.6% for 2022

Posted on November 14, 2021 by Tipswatch

The typical person on Medicare will pay at least $289 more in 2022, just for Part B coverage, and double that to $578 for a couple. IRMAA surcharges are also increasing 14.5%.

By David Enna, Tipswatch.com

Just a month after learning their Social Security payments will increase 5.9% in 2022, retirees got some harsh news Friday: Medicare Part B premiums will increase 14.5% next year, to $170.10 a month. Also, the annual deductible for all Medicare Part B participants will increase to $233, up 14.8% from this year’s level.

The Centers for Medicare and Medicaid Services announced the new rates Friday afternoon. CMS also announced new income tiers and costs for Income-Related Monthly Adjustment Amounts, IRMAA for short, that add Part B and Part D surcharges for higher-income participants.

Any day now, if you are on Medicare, you will get a letter from CMS informing you of these new premium and deductible costs for 2022. If you planned poorly, you may be meeting up with IRMAA, and you really don’t want to meet IRMAA. These surcharges can be lofty, so it’s smart to plan ahead to limit these costs.

Let’s dive into the key Medicare changes for 2022.

Part A: Hospital insurance

Most people who reach age 65 go on Medicare Part A, even if they are still working. Medicare Part A covers inpatient hospital, skilled nursing facility and some home health care services. About 99% of Medicare beneficiaries do not have a Part A premium since they have at least 40 quarters of Medicare-covered employment.

Although coverage is generally free, Part A has some sizable deductibles and coinsurance costs, and those will be rising in 2022:

Keep in mind that most people on Medicare have a Medigap or Medicare Advantage plan that will cover all or most of the Part A deductible and coinsurance amounts. For example, all standardized Medicare Supplement (Medigap) plans, A through N, provide coverage for Part A coinsurance, and most also cover all or most of the Part A deductible costs.

Part B: Medical insurance

Medicare Part B can be described as covering “outpatient services,” things like doctor visits, some lab tests, an annual wellness exam, flu shots, diabetes screenings, etc. Medicare Part B generally pays 80% of approved costs of covered services, and you pay the other 20%. Some services, like flu shots and a wellness visit, may cost you nothing.

Part B deductible. Before Medicare pays anything, you have to meet your Part B deductible each year. For 2022, that deductible is increasing to $233, up from $203 in 2021, an increase of 14.8%. Most Medigap plans do not cover this deductible and as of Jan. 1, 2020, Medigap plans sold to new people were not allowed to cover the Part B deductible. But once the deductible is met, Medicare and Medigap plans will cover some or all of your Part B costs.

Part B premium. The Part B monthly premium, paid by all people on Medicare, is rising to $170.10 in 2022, up from $148.50 in 2021, an increase of 14.5%. CMS noted this increase is unusually high, caused by several factors:

  • For 2021, Congress put a cap on the Part B premium increase in one of its COVID-19 spending bills, holding the cost increase to just $3 a month. The 2022 increase will recoup some of that lost revenue.
  • CMS noted “rising prices and utilization across the health care system.”
  • CMS said is building “contingency reserves” due to the uncertainty regarding the potential use of the Alzheimer’s drug, Aduhelm, by people on Medicare. CMS is currently analyzing use of this drug, “which could, if covered, result in significantly higher expenditures for the Medicare program.”

So, for most people in 2022, Medicare Part B is going to cost $170.10 a month for the premium, plus the cost of the $233 deductible. That’s a total cost of $2,274 a year, up from $1,985 for 2021, an increase of 14.6%.

Beware: IRMAA is lurking

Since 2007, a beneficiary’s Part B monthly premium is based on reported income, known as MAGI, or modified adjusted gross income. According to the Social Security Administration handbook, for Medicare’s purposes MAGI is adjusted gross income (line 11 of the 2020 federal income tax form) plus tax-exempt interest.

Here are the 2022 Part B total premiums for high-income beneficiaries, which apply to income reported on your 2020 tax return:

These income-related monthly adjustment amounts affect about 7% of people with Medicare Part B. And it’s important to note that people on Medicare Advantage plans continue to pay the Part B premium, and are also subject to the IRMAA surcharges.

CMS just announced these 2022 IRMAA levels, but they are triggered by income you reported on your 2020 federal tax return. These charges are universally misunderstood. They are called 2022 IRMAA levels, but apply to the 2020 tax return. In other words, when you filed your 2020 return earlier this year, you could not know the income levels that would trigger the surcharges. And a tiny mistake can be very expensive.

When you file your 2021 return next year, realize that you won’t know the relevant IRMAA levels until November 2022, many months after you have filed. It’s a crazy system.

Part D: Drug coverage

IRMAA surcharges also apply to Medicare’s Part D premiums for drug coverage. There is no “standard” Part D premium — the cost you pay depends on the Part D insurer and plan you choose. The IRMAA cost, if any, is added on top of your base premium. People in Medicare Advantage plans don’t pay a separate Part D premium, since those plans include Medicare Advantage Prescription Drug (MAPD) coverage. But Part D is built into Medicare Advantage, and the IRMAA surcharge still applies.

Here are the Part D IRMAA levels for 2022, based on reported income for 2020:

IRMAA can pack a wallop

The IRMAA penalty isn’t a “progressive tax” that ramps up as you go over an income level. Instead, going $1 over the limit is the same as going thousands of dollars over the limit, and incurs the same surcharge. And while the IRMAA surcharges are increasing 14.5% across the board, the IRMAA income tiers only increased around 3%, less than the rate of inflation.

Here is a look at the annual costs of Parts B and D, plus IRMAA, for 2022, based on income reported for 2020:

My advice: Recognize IRMAA and plan for it

It’s worth noting that the first IRMAA tier for both singles and couples is not too daunting. It adds just $965 to the annual costs for a single filer, and $1,930 to the annual costs for a couple. But the next tier up starts to get pricey, increasing annual costs by $2,426 for a single filer and $4,853 for joint filers.

So I think people looking to take capital gains, buy a boat, make Roth conversions, etc., could feel comfortable in hitting that first IRMAA tier. In fact, anyone planning on doing major Roth conversions over a period of time should probably shoot for that level, but not higher, if possible.

Anyone reaching age 63 this year, and everyone already on Medicare, should be paying careful attention to income levels each year. That means tracking capital gains distributions, dividends, pension payments, annuity income, Roth conversions, IRA withdrawals, Social Security income, etc. It’s a lot of work, but can avoid financial pain.

Another key consideration is that Required Minimum Distributions are required from traditional tax-deferred accounts beginning at age 72. If you have sizable holdings in these accounts, you could be facing years of higher Medicare premiums triggered by RMDs. And if one spouse dies, and the surviving spouse inherits tax-deferred holdings, the problem magnifies. The surviving spouse now will file a single tax return, pushing IRMAA costs much higher.

So making some Roth conversions, within reason, before reaching age 72 makes good financial sense. Plus, it’s wise to use tax-deferred accounts for charitable giving, beginning at age 70, when qualified charitable distributions are allowed.

You can appeal an IRMAA ruling

The Social Security Administration has very specific rules that will allow you to get a waiver of the IRMAA surcharge, if you meet certain criteria for a “life-changing event” in 2020, which include:

  • Work stoppage
  • Work reduction
  • Employer settlement payment
  • Death of spouse
  • Divorce
  • Loss of pension income

You’ll need to fill out IRS Form SSA-44 to request the waiver.

Closing thoughts

The surge in Part B costs was anticipated because of last year’s congressionally-mandated limit, but an increase of 14.5% surprised me. As recently as August, Medicare trustees had projected a smaller increase of $10 from the current $148.50.

The result: A typical person on Medicare will be paying at least $289 a year more, just for Part B coverage. That’s $24 a month, and $48 a month for a couple. In addition, they most likely they will also face higher costs for Part D and Medigap coverage.

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Feel free to post comments or questions below. Comments must be civil and on-topic. 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 purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in Medicare, Retirement, Social Security | 21 Comments

U.S. inflation surged 0.9% in October, well above expectations

Posted on November 10, 2021 by Tipswatch

When inflation rises to the highest level in 31 years, that is significant.

By David Enna, Tipswatch.com

Attention, Federal Reserve: This 2021 surge in U.S. inflation is no longer looking “transitory.” It’s looking dangerous.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9% in October on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 6.2%, a three-decade high. Those results were well above economist expectations for an increase of 0.5% for the month and 5.8% year-over-year.

The annual increase of 6.2% was the largest, the BLS said, since the period ending November 1990, nearly 31 years ago. It noted that the surge in prices was “broad based,” hitting diverse areas like food, medical care, new and used cars, household furnishings and shelter.

Core inflation, which removes food and energy, rose 0.6% in October and 4.6% year of year. Those results also greatly exceeded consensus estimates of 0.4% for the month and 4.3% for the year.

As is usually the case when inflation surges, gasoline prices were a key cause. Gas prices were up 6.1% in October and are now up 49.6% in the last year. Even more troubling is the cost of food: The index for “food at home” increased 1.0% in October, and is now up 5.4% over the last year. The index for meats, poultry, fish, and eggs continued to rise sharply, increasing 1.7% following a 2.2% increase in September. The index for beef rose 3.1% over the month. Over the last decade, increases in food prices have remained relatively moderate. That is no longer the case.

The surge in prices was widespread across the economy:

  • Natural gas prices increased 6.6% for the month, the largest monthly increase since March 2014.
  • The index for new vehicles rose 1.4% in October and 9.8% year over year.
  • Costs for used cars and trucks rose 2.5% in the month, restarting an upward trend after two months of declines.
  • Shelter costs rose 0.5% for the month are are now up 3.5% year over year.
  • The medical care index rose 0.5% for the month, the largest monthly increase since May 2020.
  • One positive note: The index for alcoholic beverages decreased 0.2% for the month.

Here is the trend over the last year for both all-items and core inflation, showing a new surge higher in October after a few months of stability at an already high rate of inflation. The chart demonstrates that monthly inflation numbers are likely to continue very high through March 2022 because of low baseline numbers from early in 2021.

What this means for TIPS and I Bonds

Investors in Treasury Inflation-Protected Securities and 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 on I Bonds. For October, the BLS set the inflation index at 276.589, an increase of 0.83% over the September number.

For TIPS. The October inflation report means that principal balances for all TIPS will rise 0.83% in December, following increases of 0.21% in October and 0.27% in November. For the year ending in December, TIPS balances will have increased 6.2% to match inflation. Here are the December inflation indexes for all TIPS.

For I Bonds. The October report is the first in a six-month period (October to March) that will determine the I Bond’s new inflation-adjusted variable rate, which will be reset May 1, 2022. After just a month, inflation has increased 0.83%, which translates to a variable rate of 1.66%. The current variable rate is 7.12%, based on inflation from April to September 2021.

Here are the relevant numbers:

What this means for future interest rates

In the very short term, I don’t expect the Federal Reserve to take any step to increase its federal funds rate. That is still probably 12 to 18 months away. But in the face of this current inflationary surge, the Fed needs to keep tapping the brakes on its bond-buying quantitative easing. So far this morning, stock market futures are mildly lower, indicating that this inflationary news isn’t scaring off investors.

The Fed says it has the “tools” to calm runaway inflation, but does it have the courage and political will to use those tools, which would involve sending short-term interest rates much higher? This action would also greatly increase the U.S. government’s borrowing costs at a time of massive deficits.

From this morning’s Wall Street Journal report:

“Federal Reserve officials are closely watching inflation measures to gauge whether the recent jump in prices will be temporary or lasting. One such factor is consumer expectations of future inflation, which can prove self-fulfilling as households are more likely to demand higher wages and accept higher prices in anticipation of higher future price growth. … Consumers’ median inflation expectation for three years from now stayed at 4.2% in October, the same as in September, according to a survey by the New York Fed. That level is the highest since the survey began in 2013.”

I do think that people shopping for groceries and seeing prices rising more than 5% over the last year are well aware of this inflationary threat. At least for now, inflation is becoming part of the U.S. economic equation. The Fed knows this.

I’ll end with this commentary from inflation guru Michael Ashton, author of the E-piphany blog:

“Seriously, this month’s report – while expected, at some level – turns my stomach. We have learned these lessons, painfully, long ago: you can’t spend in an out-of-control fashion and you can’t print the money that you’re spending. That’s fiscal policy 101 and monetary policy 101. Flunk them all, I say. … “

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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 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 | 15 Comments

First rule of I Bonds: Don’t rush to sell your I Bonds

Posted on November 5, 2021 by Tipswatch

I Bonds have a 30-year term, but you can sell them any time after 5 years with no penalty. My suggestion: Hold them until you really need the money.

By David Enna, Tipswatch.com

The I Bond’s new inflation-adjusted variable rate — a gaudy 7.12% for six months — is bringing a lot of fresh interest to these inflation-protected Savings Bonds. With all the media coverage, some investors have questions. Such as this one from a reader:

“I purchased I Bonds in 2011. Do you think I should sell those and purchase again or leave them as it is? I don’t want to increase my bond portfolio more than where it is.”

This very common question is understandable, but it comes from a basic misunderstanding of how I Bonds work — and after all, 95% of Americans have no idea how I Bonds work.

The new variable rate everyone is talking about — 7.12% for six months — applies to all I Bonds ever issued, not just the newly minted November 2021 version. Every I Bond is going to earn at least 7.12%, annualized, for six months, after the current variable rate of 3.54% ends its six-month term. So there is no reason to sell old I Bonds to buy this new November version, and in fact, there are good reasons not to sell I Bonds to buy the new one.

When the 7.12% variable rate kicks in will depend on when the investor bought the I Bond. Here is the schedule from TreasuryDirect:

(One confusing thing about this chart, however: I Bonds that are less than 5 years old will be listed on TreasuryDirect’s site and the Savings Bond Calculator without the latest three months of interest. TreasuryDirect notes: “When looking at changes in values for these bonds, rate changes will seem to be delayed by three months.” This confuses and frustrates a lot of investors.)

Why redeeming early can be a mistake

The reader who posed the original question purchased I Bonds in 2011. Through that entire year, I Bonds got a permanent fixed rate of 0.0%, exactly where it is now. So the value of this I Bond has grown about 20.9% over the last decade. With a $10,000 investment, the value is now about $12,090, roughly.

As I noted, there is no benefit to redeeming those 2011 I Bonds to purchase I Bonds in November 2021. The fixed rate remains at 0.0%, and all I Bonds will get the 7.12% variable rate for six months..

The big problem with redeeming early is that the interest earned will be immediately taxable as income on the investor’s federal tax return. The hit on $2,090 interest would be a tax of about $460 for someone in the 22% tax bracket.

To sum up: No benefit, with a cost of $460. Don’t redeem older I Bonds to purchase new ones in November 2021.

When does redeeming make sense?

I Bonds were first issued in September 1998 and those earliest ones won’t mature until September 2028, so maturing I Bonds are not an issue. (FYI: I Bonds issued in 1998 carry a fixed rate of 3.4% and will now be earning a composite rate of 10.64% for six months. Definitely hang on to those.)

My one premise for redeeming I Bonds is this: Don’t do it, until you really, really need the money. Because of the $10,000 per person per year purchase cap, it takes years to build up a sizable cache of inflation-protected I Bonds. If you redeem $10,000 in I Bonds, the purchase cap still applies, so your holdings can’t grow in that year.

Obviously, it doesn’t make sense to redeem I Bonds right now — for any reason — with a very generous interest rate taking effect for six months. And inflation could continue at a high rate well into 2022. Now is a great time to own I Bonds, not to sell them.

In the future, if you do need the money and decide to redeem:

  1. Redeem I Bonds you have held 5 years or longer, to avoid losing three months of interest.
  2. If the current variable rate is high — like it is now — let that rate run its six-month course before redeeming.
  3. Redeem I Bonds with a 0.0% fixed rate before any others. A higher fixed rate is always preferable. If you have been buying I Bonds for many years, you certainly have issues with 0.0% fixed rates. Redeem those first.

However, figuring out which I Bonds have a 0.0% fixed rate can be confusing, because the TreasuryDirect site will show you the issue date and the current interest rate, but not the fixed rate. The current interest rate can be confusing, because of the month-by-month rolling dates for interest rate changes. For example, your holdings right now might show interest rates of 3.54%, 3.64%, 4.05%, 3.74%, 7.12%, 7.22%, 7.43%, and so on. The ones with interest rates of 3.54% and 7.12% definitely have a fixed rate of 0.0%.

To sum up: Don’t be redeeming any I Bonds right now. Eventually, when you do redeem, carefully examine your holdings and redeem those with fixed rates of 0.0%.

Does it ever make sense to redeem I Bonds to buy new I Bonds?

Yes, I think so, under these circumstances:

  1. The new I Bonds have a substantially higher fixed rate than the I Bonds you will be redeeming. And then, even if that is true, only redeem if ..
  2. You need to raise the cash to buy the new, higher-rate I Bonds. Redeeming 0.0% I Bonds to purchase 0.5% I Bonds (which was possible from November 2018 through October 2019) makes sense if you have no other tax-efficient way to raise the cash.

I did this sort of rollover during that 2018 to 2019 stretch, unloading I Bonds with a 0.0% fixed rate to grab the new 0.5% fixed rate. That meant 1) my overall holdings did not increase in those years, and 2) I owed some taxes on the redeemed interest. Now, with that 7.12% interest pouring in, I guess I should have just held on and found the cash elsewhere.

Oh well, lessons learned.

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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 purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Posted in I Bond, Savings Bond | 34 Comments

I Bond’s fixed rate holds at 0.0%; composite rate soars to 7.12%

Posted on November 1, 2021 by Tipswatch

Treasury also maintains EE Bond’s doubling period at 20 years

By David Enna, Tipswatch.com

The U.S. Treasury just announced the November 2021 to April 2022 terms for U.S. Series I Bonds and EE Bonds, and there were no surprises. Both of these Savings Bonds remain exceptional investments in our current low-interest-rate market.

I Bonds

Here are details from the Treasury’s 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 7.12% composite rate for I bonds bought from November 2021 through April 2022 applies for the first six months after the issue date. The composite rate combines a 0.00% fixed rate of return with the 7.12% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 264.877 in March 2021 to 274.310 in September 2021, a six-month change of 3.56%.”

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 will continue at 0.0% – will never change. So I Bonds purchased from Nov, 1, 2021, to April 30, 2022, will carry a fixed rate of 0.0% 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 7.12% annualized. It will update again on May 1, 2022, based on U.S. inflation from September 2021 to March 2022.
  • The combination of the fixed rate and inflation-adjusted rate creates the I Bonds’ composite interest rate, which was 3.54% but now rises to 7.12%. An I Bond bought today will earn 7.12% (annualized) for six months and then get a new composite rate every six months for its 30-year term.

It’s important to note, however, that all I Bonds — no matter when they were issued — will get that 7.12% inflation-adjusted rate for six months, on top of any existing fixed rate. So an I Bond purchased in October will receive 3.54% for six months, and then 7.12% for six months. I Bonds purchased back in September 1998 (with a fixed rate of 3.4%), will receive a composite rate of 10.64% for six months.

Here is the formula the Treasury used to determine the I Bond’s new composite rate:

The composite rate for I bonds issued from November 2021 through April 2022 is 7.12%
Here’s how the Treasury set that composite rate:
Fixed rate0.00%
Semiannual inflation rate3.56%
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)][0.0000 + (2 x 0.0356) + (0.0000 x 0.0356)]
Composite rate  [0.0000 + 0.0712 + 0.0000000]
Composite rate0.0712000
Composite rate0.0712
Composite rate  7.12%

None of this was a surprise, but the new terms do mean I Bonds remain a very attractive investment, earning at least 3.56% over the next year, and probably much higher. That compares to 0.15% for a 1-year Treasury and maybe 0.60% for a best-in-nation 1-year bank CD. In other words, in a worst-case scenario I Bonds will return close to six times the earnings of the next-best very safe investment. The actual return will likely be higher than 5% over the next 12 months.

(An I Bond has to be held one year before it can be redeemed, but an investor can purchase the I Bond near the end of a month and get full credit for the month. That means an I Bond can be, effectively, an 11-month investment. I Bonds redeemed from 1 to 5 years face a penalty of three months interest; after 5 years there is no penalty.)

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. Right now, an I Bond will exactly match U.S. inflation. Because the Treasury held the I Bond’s fixed rate at 0.0%, it will track official U.S. inflation, but not exceed it, except after a period of extended deflation.

I Bonds carry a purchase limit of $10,000 per person per year, and must be purchased electronically at TreasuryDirect. Investors also have the option of receiving up to $5,000 in paper I Bonds in lieu of a federal tax refund. Learn more about I Bonds in the I Bonds Manifesto.

EE Bonds

Here are the Treasury’s terms announced Monday:

“Series EE bonds issued from November 2021 through April 2022 earn today’s announced rate of 0.10%. 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 remains at 0.1%, where it has been since November 2015. Awful, right? (Check out your current money market savings rate, somewhere around 0.05%, or less.) But the EE Bonds’ fixed rate is irrelevant because…
  • An EE Bond held for 20 years immediately doubles in value, creating an investment with a compounded return of 3.5%, 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 reverts to earning 0.1% for another 10 years.

Retaining this 20-year doubling is a big deal. The Treasury has changed this holding period several times in the past, so there was a possibility the terms could change in 2021, with the 20-year nominal Treasury currently yielding 1.98%, well below the EE Bond’s potential of 3.5%.

What this means: You should only invest in EE Bonds if you are absolutely certain you can hold them for 20 years. (And after 20 years they should be immediately redeemed.) They are an ideal “bridge” investment for someone around age 40, who can build an annual stream of income starting at age 60, potentially delaying Social Security benefits until age 70.

The EE Bond will also outperform an I Bond if inflation averages less than 3.5% a year over the next 20 years. I think that is a reasonable possibility (but who knows, given current inflation trends). For anyone with a secure 20-year timeline for investment, an EE Bond remains very attractive.

I Bonds vs. EE Bonds

I Bonds are the talk of the financial world right how, sporting a gaudy 7.12% annual return for six months. No one is talking about EE Bonds, which the financial media typically report as returning 0.1% without ever mentioning the doubling in value over 20 years.

EE Bonds remain a solid, very safe investment for someone who can hold them for 20 years. Their effective yield of 3.5% over 20 years is 157 basis points higher than the yield of a 20-year nominal Treasury. That is huge, and equivalent to about 30% of extra value over a 20-year Treasury bond.

I Bonds are the most attractive, very safe inflation-protected investment in the world. The real yield of an I Bond is 171 basis points better than the real yield of a 5-year TIPS. When it comes to inflation protection, there is no contest.

A combination of I Bonds and EE Bonds also makes sense, providing both inflation protection and strong deflation protection. But EE Bonds only make sense for an investor committed to holding them for 20 years.

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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 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 | 22 Comments