OT: I Bond Strategy

With the rate on I-Bonds going to 9.62%, it seems like a no brainer to pull out all the stops and buy as much as possible. Bonds bought before the end of April would have a blended rate of 8.37% for a full year!

I just discovered the Gift Box at Treasury Direct. While my wife and I are each capped at $10,000 per year (and have hit that limit for 2022), we can give unlimited gifts to one another…the gifted bonds sit in the Gift Box until given. The only catch is that the gifted bond counts toward the RECIPIENT’S limit for the year received.

I’m thinking of our buying at least enough to be given to one another in 2023 and 2024 (thus no purchases in those years). For the fixed income portion of one’s portfolio, is it worth going into 2025 or beyond?

Has nothing to do with Berkshire (thus the OT), but I value the perspectives of the folks on this board to I thought I’d raise the matter.

For details see https://thefinancebuff.com/buy-i-bonds-as-gift.html

12 Likes

<With the rate on I-Bonds going to 9.62%, it seems like a no brainer to pull out all the stops and buy as much as possible. Bonds bought before the end of April would have a blended rate of 8.37% for a full year!

I have bought the maximum. It could be sold after one year, would lose 3 months’ interest if sold before 5 years. It looks like a great idea for money sitting to cover next few years’ expense.

1 Like

It looks like a great idea for money sitting to cover next few years’ expense.

Yeah, that is the key, by their very nature you are at best treading water. It is hard to wrap your head around because you see oooooh 9% awesome, but in reality you are getting 0% after inflation. So it is better than a savings account where you are getting -8%, but it is not really an investment. Like you said, a place to park your emergency fund cash.

I feel like inflation is the #1 issue that will impact returns in the next 5 and figuring out real returns is going to be a challenge, we’ll all make money, but will it be really making money?

Warren B did have a letter on inflation and bonds in the 70s, I read it and it didn’t seem useful now. The standard advice is usually commodities, so a metals ETF may be the way to go. I’m not sure commodities do better than GOOG at this point, GOOG obviously has the ability to raise revenue with inflation, every second is a new auction for ad space. I still like residential real estate, many places didn’t really build houses the last couple years and the labor & supply chain issues is making it difficult to get started back up now. I did buy 3 houses in Florida for rentals, leveraged with 30 year mortgages, I think I hit my risk tolerance with 3 though. Maybe a regional residential REIT is a good idea, they typically turn over rents every 6 to 12 months so can keep up with inflation.

6 Likes

Sherwoodsri,

Reading through the linked article I thought you uncovered a gem. With more reading and checking the TreasuryDirect site, I am not so sure.

Some say the purchase date is all that counts towards the 10K limit. So that would negate the idea of buying 2-3 years in advance to gain the higher interest now. The TD site could claim you were over the 10K limit and nullify the extra purchases. They are behind in paperwork now but they will close the gap.

Watching for the next few months to see where this winds up.

Thanks for the post though.

1 Like

The interest rate resets every 6 months. So even if you can buy now and gift later, it’s same interest rate as if you buy later?

One un-related question: to get the 9% interest rate do I have to wait to buy till May? If I buy the bond now, does my rate locked in at 7% for the next 6 months or it will be changed to the new rate in May?

The interest begins accruing the month the bond is purchased… Whether it’s held for you or kept in the gift box for somebody else.

To begin with the 9.62% rate, you would wait until May to purchase. However a case can be made for buying an April and getting the 7.12% rate for the first six months and then have it changed to 7.62 in October. That gives you a blended rate of 8.37 for a full year. No one knows what the new rate will be in November. I am going to make all my purchases now.

The 10k limit is for everyone (the owner or gift recipient) for the current calendar year. I don’t think you could advance the buying for future year.

<One un-related question: to get the 9% interest rate do I have to wait to buy till May? If I buy the bond now, does my rate locked in at 7% for the next 6 months or it will be changed to the new rate in May>

The interest rate is updated every six month after purchase, using the latest inflation adjusted rate in May or November. If you buy now in April, the interest rate would be 7.x% set last November, and it will be updated in October to 9.x% set in coming May. If you buy in May, the interest rate will be 9.x%, and will be updated in November to then set rate which may be lower or higher to the current rate 7.x%.

3 Likes

I’m thinking of our buying at least enough to be given to one another in 2023 and 2024


Yeah, that is the key, by their very nature you are at best treading water. It is hard to wrap your
head around because you see oooooh 9% awesome, but in reality you are getting 0% after inflation.
So it is better than a savings account where you are getting -8%, but it is not really an investment.

That’s the key.
You won’t make any money.
Why get excited?

At the moment it sounds like a nice substitute for (some fraction of) a shortish term TIPS ladder.
The real yield seems to be higher than the real yield on TIPS, which is negative.
But it’s a nice substitute only if you were about to lose money buying a shortish term TIPS ladder.

As but one obvious alternative, what will a share of Berkshire be worth around 2024 in today’s money?

The BRK team usually seems to manage inflation plus 7-8% per year, on average.
Which is quite a bit more than inflation plus diddly.
Sure, the market price might be high or low precisely two years from now.
But do you really require that capital to turn into a cash pumpkin on that precise day?
Also consider: how bad would the future market multiple have to be for you to have done worse? (p/b < 1.33?)
For any longer time frame it’s probably not even worth considering the comparison.

Jim

14 Likes

“The 10k limit is for everyone (the owner or gift recipient) for the current calendar year. I don’t think you could advance the buying for future year.”

While the $10k limit applies to everyone, that does not limit what goes into the gift box. So, for example, I can buy $10k for myself this year but then buy, say, four blocks of $10k each for my wife and put it in the gift box. The limitation comes into play when the gift is distributed. The sum of purchases and gift received for her cannot exceed $10k in a given year.

So let’s say I buy two blocks of $10k for her this month (and she, out of the kindness of her heart, does the same four me). Worst case scenario for the release of the funds is January 2024 (the first bond being gifted in late 2023), 19 months from now. So 8.37% GUARANTEED for 12 months plus whatever the new blended rate is for seven months (May-Dec 2023) seems pretty hard to beat. Might Berkshire do better? Sure. But a bird in the hand…

I will add that the unstated assumption in our case is that we are using funds that are ALREADY part of our cash/fixed income allocation. Just a better place to park cash.

1 Like

<While the $10k limit applies to everyone, that does not limit what goes into the gift box. So, for example, I can buy $10k for myself this year but then buy, say, four blocks of $10k each for my wife and put it in the gift box. The limitation comes into play when the gift is distributed. The sum of purchases and gift received for her cannot exceed $10k in a given year.>

My understanding is that the limit applied at the time of purchase, not when the gift is distributed.

“My understanding is that the limit applied at the time of purchase, not when the gift is distributed.”

If you buy FOR YOURSELF that counts toward your $10k limit in that year. But you can make UNLIMITED purchases as gifts to others that do NOT count toward YOUR limit. But it counts toward THEIR limit in the year that the gift is delivered.

<That’s the key.
You won’t make any money.
Why get excited?

Comparing to cash, the only risk of I-bond is the first 12-month lock-in at about 8% interest rate. After 12-month, you can cash out anytime except losing 3 months’ interest if it’s done before 5th year, no penalty after that.

<If you buy FOR YOURSELF that counts toward your $10k limit in that year. But you can make UNLIMITED purchases as gifts to others that do NOT count toward YOUR limit. But it counts toward THEIR limit in the year that the gift is delivered.>

No so according to the description in https://www.treasurydirect.gov/indiv/research/indepth/ibonds….

“How much in I bonds can I buy as gifts?
The purchase amount of a gift bond counts toward the annual limit of the recipient, not the giver. So, in a calendar year, you can buy up to $10,000 in electronic bonds and up to $5,000 in paper bonds for each person you buy for.”

There’s a huge thread over on Bogleheads devoted to the topic.

https://www.bogleheads.org/forum/viewtopic.php?t=346091

Clearly quite a number of folks have made multiple purchases in the same for the same recipient and the bonds reside in the gift box. I agree the language is not clear. But here’s one explanation:

Recall that (only) for the purposes of the yearly purchase limit, Gift Box bonds are not considered “purchases” by the purchaser, they are considered “purchases” by the recipient, but the effective date of the “purchase” is deferred until the date of delivery. So if you buy $30k of gift bonds and deliver none of them this year, they count toward no one’s purchase limit this year.

However, for purposes of redemption and interest earning, the date of actual purchase by the gift giver is what counts. It’s important to keep these two definitions straight.

When you buy as gift to others, do you have to state which SSN you are gifting to? If you do, then I would think the system won’t allow you more than 10k per receiving SSN.

If the system allows that, then it might be a loop hole, and there’s a risk they might manually check and found out, and cancel the trade after a few years

Can someone explain why it could make sense to buy now (for a combined rate of 8.x) vs on May 1st? Is it because the rate in Nov is already known to be 9% and rate could fall in Dec?

So if you buy gifts for others, but the effective date is the delivery date, will be gifting bonds bought be earning interest at the current high rate while it’s waiting for delivery?

Or is it actually the case that there’s no interest earning till delivery and the interest rate will be only set based on what it will be at delivery?

Yes, you have to provide SSN of recipient.

No one knows what November rate will be. By buying in April, you are guaranteed a blended rate of 8.37. But I wouldn’t fault someone for guaranteeing 9.62 for six months and then taking one’s changes on the November rate (which will surely still be elevated).

The gifted (but not yet delivered) bonds immediately begin accruing interest at the rate on the day of purchase…that’s why people are loading up.

The gift box is something of a financial limbo…neither the giver nor the recipient has any access. But the bond is performing as though you bought it for yourself.

1 Like