What should I do with ibonds?

The Treasury recently announced new rates for Series I savings bonds, or i-bonds. I-bonds purchased between now and October, 2023 will earn a composite interest rate of 4.30%. However, 0.90% of this composite rate is made up of a fixed rate. This fixed-rate only applies to new i-bond purchases. If you already own i-bonds from last year, your composite rate is actually lower than 4.30%. Declining inflation rates for existing i-bond holders may make i-bonds less attractive to hold onto. But rising fixed rates on new purchases mean they remain an appealing inflation-hedged investment for new money.

The fixed rate impact

I-bonds became extremely popular thanks to their 7-10% yields throughout 2021-2022. When we first recommended buying them in November of 2021, the rate was 7.12%. We doubled up on that recommendation after i-bond rates jumped to 9.68% one year ago. However, we warned last November that i-bonds may not be as good of an investment when compared to TIPS or regular Treasuries. At the time, the rate had fallen to 6.89% which included a 0.40% fixed rate.

I-bonds purchased between November 2021-October 2022 boasted high yields, but no fixed rate. The lack of a fixed rate means those i-bonds are yielding less than the 4.30% composite rate that the Treasury just announced.

Because the fixed rate stays the same for the life of the bond when purchased, i-bonds are arguably still attractive for new purchases. While the inflation rate that makes up the i-bond has fallen from 6.48% to 3.38%, the fixed-rate component has risen from 0.40% to 0.90%.

This means that i-bonds purchased today will earn a minimum of 0.90% per year for the next 30 years, plus any interest paid as a result of the inflation rate. While that 0.90% fixed rate is paltry compared to short-term treasury rates, it’s a higher coupon than the majority of Treasury-Inflation Protected Securities (TIPS) trading on the market. Back in November, when the fixed-rate portion of i-bonds was still just 0.40%, we suggested that TIPS were a better inflation-beating investment. That debate is more competitive today now that the i-bond’s fixed rate has more than doubled.

Should I sell old i-bonds?

For those holding onto i-bonds with a 0% fixed rate, the decision to hold or redeem is more complicated. At 3.38%, the annualized rate is 1.75% below the yield on six month treasury bills, which are, as of this writing, yielding 5.14%. However, if you were to sell an i-bond purchased within the last five years, you’d forfeit the last 3 months worth of interest.

We wouldn’t recommend forfeiting the last 3 months of interest on the 6.48% inflation rate from November 2022. But, after that 6-month window is up, it may make sense to forfeit 3 months worth of interest on the 3.38% inflation rate in exchange for buying 6-month treasury bills or new i-bonds with the 0.90% fixed rate built in.

It’s important to remember that your six month window is tied to your purchase date. For reference, this six month window refers to the semi-annual reset built into i-bonds. Consider the following table:

For example, i-bonds purchased in May 2022, earned 9.62% annualized through October 2022. Then in November 2022, that same purchaser started earning 6.48% through April 2023. A different person who bought i-bonds in September 2022 earned 9.62% annualized through February 2023. Then they started earning 6.48%, which will last until July 2023. That purchaser won’t see their rate decline to the new, 3.38% rate, until August of this summer.

Understanding when your six month window started is very important before considering if you should forfeit any interest. If you get your dates wrong, you could end up forfeiting a higher interest amount than you intended.

Final considerations

I-bonds that do not have a fixed rate are less attractive investments today compared to available rates in the marketplace. If you have ample liquidity, we’d recommend just buying 6-month treasury bills in the open market where yields are currently five precent plus. If you have money tied up in i-bonds that you want to free up for other investments, then make sure you wait until after you’ve spent three months inside the latest interest bearing window that is only paying 3.38%.

Forfeiting three months of interest at 3.38% is only 0.85%. At today’s treasury rates, you can make up that difference in the open market. But you need to judge where rates are three to six months from now before making a final decision. If you forfeit three months of interest at the 6.48% rate, which is still accumulating for many people, you’re giving up 1.62%. That’s a number you can’t get back in the open market today.

The math behind the inflation rate, and recent readings on inflation, suggest that i-bond rates likely drop further when the new rate is announced in October later this year. But, if inflation flares up again next year, that same math equation will propel i-bond rates back up, benefitting holders.

The bottom line is i-bonds with no fixed rate are less attractive than they were one year ago. But, due to the new, 0.90% fixed rate, which lasts for the life of the bond, new purchases may still be appropriate for some buyers. Please reach out to us if you would like to discuss your options.

Please note: In this article, we left out some details as far as “what are i-bonds?” — but we’ve covered the material in earlier pieces. You can learn more about i-bonds here, or here.