Sometimes it pays to procrastinate.

Individual investors rushed to purchase series I Treasury inflation-linked savings bonds last week, before a Friday deadline to get a 9.6% interest rate for the first six months.

There were record daily purchases of about $1 billion of I Bonds Friday and $7 billion for October. Investors were so eager to get the juicy rate that the TreasuryDirect website struggled under the traffic last week. Many people couldn’t access it.

Yet the new rate structure for I Bonds actually is more attractive, even though the rate of 6.89% for the first six months, announced earlier Tuesday by the Treasury, is lower, Barron’s estimates.

Why? Investors now will get a fixed rate of 0.4% annually in addition to an inflation adjustment, which gave people who bought the debt from May through October their 9.6% yield. Those buyers will get a fixed rate of zero for the life of the savings bond, plus the inflation adjustment, which is reset every six months based on the consumer price index.

The benefit of the 0.4% fixed rate will play out over time because I Bonds have a maturity of 30 years. After about four years, current buyers should be ahead of those who bought bonds last week.

The new rate of 6.89% reflects the inflation component of 6.49% based on inflation from March to September plus the fixed rate of 0.4%.

Many investors don’t realize there are two parts to the I Bond rate: the fixed rate plus the inflation adjustment. As the Treasury states on the TreasuryDirect website: “You know the fixed rate of interest that you will get for your bond when you buy the bond. The fixed rate never changes.”

The Treasury announces a new I Bond rate every six months, including the fixed rate that applies for the life of the bonds. That rate applies to bonds sold over the ensuing six-month period.

The fixed rate of 0.4% likely was set because of this year’s sharp increase in real, or inflation-adjusted, rates on Treasury inflation-protected securities, or TIPS. The real yield on TIPS 912828B253 –1.54% , which are bonds sold periodically by the Treasury with five-, 10-, and 30-year maturities, is up to about 1.5% from negative 1% at the start of 2022.

That means the fixed rate on I bonds is below the 1.5% real rate on TIPs.

Still, I Bonds have one key advantage. Taxes on I Bond interest can be deferred until the bonds are redeemed, or until they mature in 30 years. This isn’t the case with TIPS.

Interest on I Bonds, TIPs, and other Treasury obligations is exempt from state and local taxes, but subject to federal income taxes.

The main drawback with I Bonds is that individuals can buy only $10,000 per calendar year, although they can get an additional $5,000 in paper bonds using the proceeds of tax refunds. I Bonds are generally available only virtually, via the TreasuryDirect website. Certain partnership structures allow for the purchase of another $10,000 a year.

Investors must hold I Bonds them for a year and lose a quarter’s interest if the debt is redeemed within five years. Interest on I Bonds accrues and is added to the value of the bonds rather than paid in cash, so that it compounds over time.

Write to Andrew Bary at andrew.bary@barrons.com


LINK: https://www.barrons.com/articl...7331542&noredirect=y

6.49% is still the third highest inflation-adjusted I Bond rate in history.

quote:

The benefit of the 0.4% fixed rate will play out over time because I Bonds have a maturity of 30 years. After about four years, current buyers should be ahead of those who bought bonds last week.

Yep. After 46.65 months, to be exact.

But if you had no intention of sitting on them long-term, there was certainly a viable strategy to buy $10k worth of I Bonds before the end of October, sit on it for 15 months (since you lose the last 3 months worth of interest), and then cash out, having earned a totally risk-free combined 8.045% return on investment: 9.6% for 6 months and then 6.49% for 6 months.

Basically treating it similar to a 15 month CD, but earning 8+% instead of the current 4ish% on a short term 1-2 year CD.

This message has been edited. Last edited by: RogueJSK,

So, you buy these on Treasury Direct only. What do they do, send you a physical paper bond instrument (like an old school savings bond)? Or is everything in an on-line "account?"

No way to hold these in a brokerage IRA account, then? I understand that there are ETFs that invest in these, but...

quote:

Originally posted by architect:
So, you buy these on Treasury Direct only. What do they do, send you a physical paper bond instrument (like an old school savings bond)? Or is everything in an on-line "account?"

Paper I Bonds used to be available at banks up until 2012, but now paper I Bonds can only be obtained if you request your federal tax refund in the form of I Bonds instead of a cash refund.

Otherwise, if buying I Bonds normally, they're strictly in the form of electronic savings bonds held in your online TreasuryDirect account.

quote:

No way to hold these in a brokerage IRA account, then?

Not I Bonds. You can invest in some other types of government bonds in a brokerage account, but not Series EE or I savings bonds specifically.

quote:

Originally posted by RogueJSK:
6.49% is still the third highest inflation-adjusted I Bond rate in history.

quote:

The benefit of the 0.4% fixed rate will play out over time because I Bonds have a maturity of 30 years. After about four years, current buyers should be ahead of those who bought bonds last week.

Yep. After 46.65 months, to be exact.

But if you had no intention of sitting on them long-term, there was certainly a viable strategy to buy $10k worth of I Bonds before the end of October, sit on it for 15 months (since you lose the last 3 months worth of interest), and then cash out, having earned a totally risk-free combined 8.045% return on investment: 9.6% for 6 months and then 6.49% for 6 months.

Basically treating it similar to a 15 month CD, but earning 8+% instead of the current 4ish% on a short term 1-2 year CD.

Not sure what your state tax situation is, but for those with State Income tax, it is illegal for the state to collect state income tax on i-bonds.

depending on your state income tax rate this is another benefit as compared to a CD. As an example, In Oregon that rate is generally 9% for middle class incomes and up.

quote:

Originally posted by RogueJSK:
Basically treating it similar to a 15 month CD, but earning 8+% instead of the current 4ish% on a short term 1-2 year CD.

That was our reason for buying them back in April.

We had been discussing purchasing a house w/ land, but hadn't found anything that checks all the boxes and in our price range, so we thought we'd hold off for a year or two. I bonds were the best no-risk rates at the time to stash some cash (compared to CDs, Savings, etc.). I doubt we'll keep it in there for 5 years, it depends on how things shake out.