Composite rate will fall from 6.89% to 4.30%, but the fixed rate of 0.9% is highly attractive for long-term holders.
By David Enna, Tipswatch.com
Surprise! I Bonds purchased from May to October 2023 will get a fixed rate of 0.9% and a composite rate of 4.3%, TreasuryDirect announced this morning, jumping the gun on its expected May 1 press release. It’s all right there on its homepage:
At first, I thought this was posted by mistake, jumping ahead of Monday’s announcement. In the 12 years I have been writing about I Bonds, the new rates have never been announced early.
A few minutes later, the TreasuryDirect site went down, possibly because of the “what the hell?” factor driving traffic. But I was able to return to the site a bit later and it loaded, with the same information.
I had been speculating that the I Bond’s new fixed rate would be about 0.6%, so 0.9% is great news. It is the highest fixed rate since the reset in November 2007. The fixed rate tells you how much the I Bond will earn above official U.S. inflation. It is equivalent to the “real yield to maturity” of a Treasury Inflation-Protected Security.
The site has the full information on the new rate and how it was determined, combining the new inflation-adjusted variable rate of 3.38% with the new fixed rate of 0.9%.
| Fixed rate | 0.90% |
|---|---|
| Semiannual (1/2 year) inflation rate | 1.69% |
| Composite rate formula: [Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)] | [0.0090 + (2 x 0.0169) + (0.0090 x 0.0169)] |
| Gives a composite rate of | [0.0090 + 0.0338 + 0.0001521] |
| Adding the parts gives | 0.0429521 |
| Rounding gives | 0.043 |
| Turning the decimal number to a percentage gives a composite rate of | 4.30% |
TreasuryDirect’s page listing the history of fixed rates now includes the 0.9% rate, more than doubling the 0.4% fixed rate in effect for purchases through April 30.
The current composite rate for I Bonds purchased through April 30 is 6.89% and that will fall to 4.3% for purchases from May to October 2023. But the fixed rate of 0.9% makes the May-to-October purchases very attractive.
Just as an aside, the new composite rate for I Bonds purchased from November 2022 to April 2023 will be 3.79%, which reflects the fixed rate of 0.4% and inflation-adjusted rate of 3.38%.
TreasuryDirect said this week that the last day to place orders for the 6.89% rate was yesterday, April 27. (I placed my order on April 26.) So I am assuming that any I Bond purchased today will get the new May 1 rate. And that could be why the Treasury decided to post the new rate information, since we can assume it will take effect for purchases today.
EE Bonds
The Treasury also announced that the new fixed rate for EE Bonds will be 2.5% for savings bonds issued from May 1 to Oct. 31, 2023. This is up from the current fixed rate of 2.1%. The Treasury is retaining the policy that EE Bonds are guaranteed to double in value if held for 20 years, creating an effective interest rate of 3.53%.
Gift box strategy?
The Treasury limits purchases of I Bonds to $10,000 per person per year, so investors need to think through a strategy for the best time to invest. If you were planning on holding the I Bonds for less than 2 years, the smart move was to buy in April, locking in an annual return of about 5.4%. For long-term holders, buying in May is preferable, locking in the 0.9% fixed rate for the full 30-year term of the I Bond.
Earnings from the new 0.9% fixed rate create a breakeven period of about 3 years, 8 months. If you plan to hold less than 3 years, 8 months, buying in April works out better. Anything longer will make the May rate more attractive.
The dilemma: Now the fixed rate rises to 0.9%, but you already bought your full allocation this year. (True for me.) What do you do?
If you bought in April, like I did, you can still use the gift box strategy if you have a spouse or a trusted friend or family member with a separate TreasuryDirect account. Using this strategy, anytime before the end of October you can place $10,000 into the TreasuryDirect gift box, assigned to your partner, and your partner would do the same for you.
Some basics of the gift box strategy:
- When you place an I Bond into the gift box, it begins earning interest in the month of purchase, just like any other I Bond, and continues earning interest just like any I Bond. However, this money is no longer yours. It belongs to the recipient of the gift.
- The purchase does not count against your purchase limit for that year. It will count against the purchase limit for the recipient, in the year it is granted.
- Gift purchases are limited to $10,000 for each gift, but you can make multiple gift purchases of $10,000 for the same person. But the recipient can only receive one $10,000 gift a year, and that gift counts against their purchase limit for that year.
- You must provide the recipient’s name and Social Security Number when you buy a gift. The recipient doesn’t need to have a TreasuryDirect account … yet. Only a personal account can buy or receive gifts. A trust or a business can’t buy a gift or receive a gift.
- “I Bonds stored in your gift box are in limbo,” Harry Sit notes in his article. “You can’t cash them out because they’re not yours. The recipient can’t cash them out either because the bonds aren’t in their account yet.”
- The recipient will need to open a TreasuryDirect account to receive the I Bond. Once it is delivered, the money is the recipient’s, who can then cash out or continue to hold the I Bond.
Rolling over 0.0% fixed rates?
If you are holding I Bonds with 0.0% fixed rate — especially those held for five years or more — you can consider redeeming those older I Bonds for new ones with the 0.9% fixed rate. When you redeem, you will owe federal taxes on the interest earned.
I think this is a sound strategy, especially if you don’t want to raise another $20,000 to buy I Bonds this year in two separate accounts.
One key thing to consider is to wait until the current variable rate of 6.48% has completed and the new rate of 3.38% has begun. You have until October to make a purchase of I Bonds with the 0.9% fixed rate. No rush.
If you have held the I Bond less than five years, consider waiting an extra three months to have the three-month interest penalty apply to the lower composite rate.
Projecting the fixed rate
We still don’t know how the Treasury decides on setting the fixed rate of the I Bond, but it’s becoming clear that the rate tracks higher and lower with real yields of Treasury Inflation-Protected Securities. We just don’t know how much. TreasuryDirect recently added this “less vague” statement to its FAQ page on I Bonds, clearly indicating that market real yields are a factor in setting the fixed rate:
The Secretary of the Treasury, or the Secretary’s designee, determines the fixed rate. The rate is based on market rates that have been adjusted to account for the value of components unique to savings bonds. These include the early redemption put option, tax deferral feature, deferred purchase feature, and Treasury’s administrative costs.
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Here is the final version of my two prediction models for the I Bond’s fixed rate. The columns on the left show how the fixed rate compares with the average of the 10-year real yield over the last six-month rate-setting period. The columns on the right show how the fixed rate compares with the latest real yield of the 10-year TIPS.
I have limited these numbers to the times when the Treasury raised the fixed rate above 0.0% going back to November 2013, solidly in the era of Federal Reserve intervention in the U.S. bond market.
If you look at the calculation on the right, the average yield spread between the latest 10-year TIPS and the I Bond fixed rate is 38 basis points. The new fixed rate of 0.9% is 36 basis points below the current 10-year real yield of 1.26%. So that looks good as a predictor, but this calculation isn’t very reliable except to predict if the fixed rate is likely to rise or fall.
The half-year average calculation is more reliable, I think, and in more recent rate changes the ratio has been in the range of 0.59 to 0.77. Today’s fixed rate announcement of 0.9% puts the ratio at 0.66, right in the middle. I think this half-year-average formula is more reliable, but still nowhere near perfect.
To close, here is the history of all fixed rates for I Bonds back to their inception in September 1998:
•
• 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
* * *
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.
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FAQs
I Bond’s fixed rate will rise to 0.9% on May 1, TreasuryDirect says? ›
I Bond's fixed rate will rise to 0.9% on May 1, TreasuryDirect says. Composite rate will fall from 6.89% to 4.30%, but the fixed rate of 0.9% is highly attractive for long-term holders.
Will the I Bond fixed rate go up in May? ›Coverage began in earnest in May 2021 when the 6-month 'inflation rate' of 1.77% was announced (which is 3.54% annualized!). Then, in November 2021 I bond rates doubled to 7.12% and then 9.62% in May 2022! Now, for purchases in May 2023 the rate is 4.30%. More importantly, the fixed rate is 0.90%.
What will the next I Bond rate be in May 2023? ›Starting in May 2023, Series I bonds will earn a minimum interest rate of 3.38% according to newly released U.S. inflation data. While this is good compared to historical bond performances, some investors may find it underwhelming compared to more recent issues.
What will the new I Bond rate be on May 1st? ›May 1, 2023. Series EE savings bonds issued May 2023 through October 2023 will earn an annual fixed rate of 2.50% and Series I savings bonds will earn a composite rate of 4.30%, a portion of which is indexed to inflation every six months. The EE bond fixed rate applies to a bond's 20-year original maturity.
What is the fixed rate prediction for I Bond? ›May 2023 fixed rate will be 0.90%, total composite rate is 4.30% for next 6 months. For Savings I bonds bought from May 1, 2023 through October 31, 2023, the fixed rate will be 0.90% and the total composite rate will be 4.30%.
Will the fixed rate on I bonds change? ›For I bonds issued November 1, 2022 to April 30, 2023. You know the fixed rate of interest that you will get for your bond when you buy the bond. The fixed rate never changes.
Are I Bond rates expected to go up? ›The 3.79% forecast is assuming that the Treasury keeps the fixed rate for new I Bonds at 0.4%, as it is now, Pederson said. He expects the fixed rate to hold at 0.4% or possibly tick a bit higher. The Treasury has been known to occasionally tweak the fixed rate when new rates for the savings bonds are announced.
Is there a downside to I bonds? ›Cons of Buying I Bonds
I bonds are meant for longer-term investors. If you don't hold on to your I bond for a full year, you will not receive any interest. You must create an account at TreasuryDirect to buy I bonds; they cannot be purchased through your custodian, online investment account, or local bank.
- Isbank – Raisin UK - 1 Year Fixed Term Deposit - 5%
- OakNorth Bank – Fixed Term Savings Account - 4.86%
- United Trust Bank – UTB 1 Year Bond - 4.85%
- Close Brothers Savings – 1 Year Fixed Rate Bond - 4.85%
- Charter Savings Bank – Fixed Rate Bond - 4.85%
The latest iBond Series HK$15,000,000,000 Retail Bonds Due 2024 (Issue No.: 03GB2406R; Stock Code: 4246) (2024 iBond) has a minimum denomination of HK$10,000 and a term of three years. The semi-annual interest payments are linked to average annual inflation in Hong Kong, subject to a minimum interest rate of 2.00%.
What date do we get the new I Bond rate? ›
Current I Bond interest rate now
The current bond composite rate is 4.3%. That rate applies for the first six months for bonds issued from May 2023 to October 2023. For example, if you purchased I bonds on May 1, 2023, the 4.3% rate would be in effect until Oct. 31, 2023.
"It is possible that the I Bond fixed rate could rise in May," he said, "so it does make sense to hedge your bets by buying half of your annual I Bond purchase before May and the other half after April." Buying before the end of April also makes sense to lock in the 6.89% annualized rate for the next six months.
Do you pay taxes on I bonds? ›You owe tax on the interest the bond earned until it was reissued. You are the new owner of a reissued bond. You owe tax on the interest the bond earns after it was reissued.
Why are I bond rates so high? ›The interest rate on I Bonds is directly correlated with inflation. If inflation is high, the interest rate is high. If inflation is low, the rate is low. Inflation is very high right now.
Why buy Series I bonds? ›Series I savings bonds protect you from inflation. With an I bond, you earn both a fixed rate of interest and a rate that changes with inflation.
What is the I bond yield forecast? ›The United States 30 Years Government Bond Yield is expected to be 3.936% by the end of September 2023. It would mean an increase of 18.6 bp, if compared to last quotation (3.75%, last update 6 May 2023 2:15 GMT+0). Forecasts are calculated with a trend following algorithm.
Should I buy I bonds before May? ›The variable rate on I bonds will drop in May. Those who want short-term returns might prefer to buy I bonds in April to lock in higher rates. Long-term investors might be better served by waiting.
What affects the I bond fixed rate? ›The fixed rate stays the same for the life of the bond. The inflation rate can change every six months from the issue date of the bond. When the inflation rate changes, the earnings rate does too.
Are I bonds a good investment in 2023? ›The interest rate for Series I Bonds is unimpressive in some economic environments. But during the high inflation period of 2022-2023, however, these bonds are extremely attractive. Bonds issued in the six months leading up to October 2022 paid an impressive 9.62% interest rate.
Is there a limit to how many I bonds I can buy? ›How much can I buy? Individual purchase limits for I bonds are $15,000 per calendar year — $10,000 worth of electronic I bonds and $5,000 worth of paper I bonds. Paper I bonds can only be purchased using your federal tax refund and are not bought electronically.
How often can I buy I bonds? ›
In any one calendar year, you may buy up to $10,000 in Series EE electronic savings bonds AND up to $10,000 in Series I electronic savings bonds for yourself as owner of the bonds. That is in addition to the amount you can spend on buying savings bonds for a child or as gifts.
Can you buy I bonds at a bank? ›Individuals, organizations, fiduciaries, and corporate investors may buy Treasury securities through a bank, broker, or dealer.
Why should I not buy an Ibond? ›The initial rate is only guaranteed for the first six months of ownership. After that, the rate can fall, down to a fixed-rate component which, as of May 1, 2023, stood at 0.9%. One-year lockup. You can't get your money back at all the first year, so you shouldn't invest any funds you'll absolutely need anytime soon.
Is there anything better than I bonds? ›TIPs offer comparable inflation protection relative to I Bonds at higher yields, a significant advantage. TIPs are also somewhat riskier, more volatile securities, with quite a bit of interest rate risk. Both asset classes are good investments, but TIPs are slightly better, due to their higher yields.
What is better than an Ibond? ›Another advantage is that TIPS make regular, semiannual interest payments, whereas I Bond investors only receive their accrued income when they sell. That makes TIPS preferable to I Bonds for those seeking current income.
Where can I get 5% interest on my money? ›- UFB Premier Savings (previously known as UFB Preferred Savings)
- Varo Savings Account.
- Mango Savings™
- Western Alliance Bank Savings Account.
- Newtek Bank Personal High Yield Savings.
- CFG Bank High Yield Money Market Account.
- Laurel Road High Yield Savings®
- Bask Interest Savings Account.
While 7% with Landmark Credit Union is the highest available interest rate, other high-yield savings accounts exist and may be more worth it based on each bank's unique requirements.
How much will a Series I bond be worth in 1 year? ›I bonds are a type of savings bond that are designed to protect your investment from inflation. Some people opt to use their tax refund to purchase I bonds. I bonds have a 4.30% interest rate until October 31, 2023. If rates stay the same you could earn over $434 in interest in one year.
What are the risks of I bonds? ›Special Considerations. Series I bonds are considered low risk since they are backed by the full faith and credit of the U.S. government and their redemption value cannot decline. But with this safety comes a low return, comparable to that of a high-interest savings account or certificate of deposit (CD).
What will be the interest rate I bonds in January 2023? ›| Maturity | Used for December 2022 | Indicated for January 2023 |
|---|---|---|
| 1 Year | 4-5/8% | 4-3/4% |
| 5 Years | 4-1/8% | 3-3/4% |
| 15 Years | 4-1/4% | 3-3/4% |
| 20 Years | 4-3/8% | 3-7/8% |
What is the 5 year average I bond rate? ›
Basic Info. 5 Year Treasury Rate is at 3.29%, compared to 3.37% the previous market day and 2.93% last year. This is lower than the long term average of 3.74%. The 5 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 5 years.
What is the rate of I bonds in 2023? ›The semiannual inflation rate is 1.69 percent. That's a 3.38 percent annualized rate of inflation. After applying a certain formula and rounding, the Treasury arrived at the 4.30 percent composite rate for I bonds issued from May 2023 through October 2023.
Is I Bond a good investment? ›I bonds are a great idea for retirees and other investors looking for competitive inflation-adjusted returns. “They offer such a great deal that the government limits the annual purchase amount to $10,000 per Social Security number,” Reilly notes.
How long do you have to hold an Ibond? ›You must own the bond for at least five years to receive all of the interest that is due. You cannot cash out an I bond before holding it for a year; if you do so after that point (but before five years), you forfeit three months of interest.
What is the best way to buy I bonds? ›The most common way to buy I Bonds is to visit TreasuryDirect, the government website that allows for the purchase of government securities. You won't need to worry about paying fees or a commission to buy the bonds.
Do you get a 1099 for I bonds? ›Note: You only get a 1099-INT if you actually got the interest on a savings bond. If you are waiting until your EE or I bond matures (finishes its life) to take the interest on it, you will not get a 1099-INT for that bond until we actually pay you the interest.
How do I avoid taxes on I bonds? ›One way to avoid paying any federal income tax on accrued I bond interest is to cash in the bonds before the maturity date and use the proceeds to help pay for college or other higher education expenses.
How do I not get taxed on I bonds? ›You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent. Only certain qualified higher education costs are covered, including: Tuition.
What is the downside to Series I savings bonds? ›Another disadvantage is I bonds can't be purchased and held in a traditional or Roth IRA. The I bonds have to be held in a taxable account. A final disadvantage of I bonds is there is an interest penalty if the bonds are redeemed in the first five years.
What is the 10 year yield on I Bond? ›10 Year Treasury Rate is at 3.44%, compared to 3.37% the previous market day and 3.05% last year. This is lower than the long term average of 4.25%. The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 year.
How often is interest added to I bonds? ›
Part of the interest rate is tied to the inflation rate and so the rate changes every 6 months. I Bonds earn interest each month, and the interest is compounded every six months. You can earn interest on them for as long as 30 years, and can cash them out after 5 years without losing interest.
Is TreasuryDirect a government website? ›Home — TreasuryDirect. A .gov website belongs to an official government organization in the United States.
What will the I Bond rate be in May? ›I bond rates from May 2018 to May 2023
The rates are as follows: May 2018, 2.52%; November 2018, 2.83%; May 2019, 1.9%; November 2019, 2.22%; May 2020, 1.06%; November 2020, 1.68%; May 2021, 3.54%; November 2021, 7.12%; May 2022, 9.62%; November 2022, 6.89%; May 2023, 4.3%.
The fixed segment of an I bond's rate never changes, from the date of purchase through maturity. The variable, inflation-based part is reset twice a year, in May and November. It's determined by a somewhat complicated formula that takes into account the consumer price index (CPI).
How often is I Bond interest rate changed? ›I bond fixed rates are determined each May 1 and November 1. Each fixed rate applies to all I bonds issued in the six months following the rate determination. The semiannual inflation rate is determined each May 1 and November 1.
Does my I bond rate change every 6 months? ›I savings bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months we apply the bond's interest rate to a new principal value.
Can I buy $10000 worth of I bonds every year? ›Series I savings bonds are often considered a hedge against inflation. The current composite rate for I bonds is 4.3%. You can't buy more than $10,000 in electronic I bonds for yourself annually.
What day of the month do I bonds pay interest? ›(a) Interest, if any, accrues on the first day of each month; that is, we add the interest earned on a bond during any given month to its value at the beginning of the following month.
Are I Series bonds a good investment? ›I bonds: A low-risk investing strategy
Because I bonds are backed by the U.S. government they carry very little risk. Plus, you'll have the added bonus of protecting your cash's purchasing power.
Key Points. The variable rate on I bonds will drop in May. Those who want short-term returns might prefer to buy I bonds in April to lock in higher rates. Long-term investors might be better served by waiting.
Does it matter what day of the month you buy an I bond? ›
The Treasury Department says that you will still get a full month's worth of interest no matter if you purchase your I bond on the first or last business day of the month. However, there are a few big caveats. For one thing, I bonds can't be cashed out within the first year.
What is the best way to invest in I bonds? ›How To Buy I Bonds. You can buy I bonds electronically online at the TreasuryDirect website. You can also purchase up to $5,000 per year of paper I bonds with the proceeds from your tax return.