The New 6.89% I bonds Will Beat the Old 9.62% Bonds in Just 4 Years

Investment Analysis Clubs Macro Economic Trends and Risks
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If you missed out on the 9.62% rate on I bonds, this article says you may be in better shape than you might think. According to it, the key is the base rate.

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Fortunately, I-Bonds can be redeemed any time after holding one year. If redeemed between 1 and 5 years they will sacrifice 3 months of interest. (But never principal, regardless of prevailing interest rates.) After 5 years, they may be redeemed any time up to 30 years.

This gives the owner flexibility if Treasury raises the base rate in the future. Redeem the old I-Bond and buy the new one with a higher base rate.

Wendy

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The problem is that sometimes this is a catch-22. If you want to redeem your I-bonds early, let’s say in 3rd or 4th quarter of 2023 when there is a zero or negative inflation rate (so the last 3 months of interest is essentially zero), and then re-invest into new I-bonds at that time, since inflation dropped like a rock, it is quite possible that treasury will change the fixed rate AGAIN (do they ever change it midyear?) back to 0% as they did last time inflation dropped.

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As the comments to the Yahoo article note, the math in the headline is flawed. The writer never gives any clear explanation of where 4 years came from.

Those seeking immediate higher base rates could consider TIPS, with recently issued 5-year TIPS offering a base rate of 1 5/8%. They’re not identical to I bonds - TIPS are marketable and have no penalty, but they don’t offer quite the same protection in deflationary periods that I bonds do. Still, it’s worth a look, especially since TIPS don’t have a $10,000 annual limit on purchases per purchaser.

best,
dan

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At least on this board, the complaint with Ibonds seems to be the $10K/pp annual limit. If you are into Ibonds, you would most likely buy both sets of bonds, not cash one set in to buy the next.

IP

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I have invested in TIPS but they are different from I-Bonds.

  1. If prevailing interest rates rise the market value of TIPS will fall. It’s possible to lose principal if sold before maturity. (This will happen to everyone who bought TIPS when the yield of the TIPS was negative, e.g. in 2021.) The I-Bond will never lose principal, regardless of market interest rates.
  1. During deflation (which is rare and has only lasted a few months in the past half-century) the TIPS principal value will drop but the I-Bond will not.

Wendy

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I’m not at all sure how .04% (four basis points) base rate is covering an even-just-six month gap of 1.37 yield in 4 years (8 periods.) Botched math says something like 16+ years?

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I couldn’t figure out the math either. I hoped someone here could. I think Wendy has the right idea. If they turn out to not be such a good deal, sell them some time after one year and buy others or something else.

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  1. It’s 0.4% … each year for all 30 years. The rate on those recent bonds is now 6.89%.
  2. The 9.62% rate on those bonds purchased last year or earlier this year only lasted for 6 months. Their current rate is 6.48%.

The older bonds will have a rate of 0.4% less for each of the next 29 years.

See all the actual rates here - I bonds interest rates — TreasuryDirect

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