Series I Savings Bonds for Emergency Fund - 3.54% interest rate

[mistymoney]

I'm buying another set of i-bonds this week. At 6.89% for the first 6 months and (3.38% + 0.4% fixed=) 3.78% the following 6 months, I'll be getting a composite rate of 5.33% for the next year. Not having to pay local or state taxes on the interest makes them worth it for me.

I think that I-bonds will be a permanent part of our EF, now that I've already dealt with the TreasuryDirect website and linked our bank account to it. Heck of a lot better than a bunch of cash sitting around in a nearly 0% interest checking account. Once the high interest rates run out, I'll trade our holdings for ones with a higher fixed interest.

Sure, money markets are at 4.75% these days, but that's not going to last once the fed starts cutting rates again. This might be a good time to be buying VBTLX again. Also considering 30y treasuries for our bond portion.

a fund or from treasury direct?

[Holocene]

I was originally thinking of I bonds as a short-term investment, basically for an emergency fund per the title of this thread.  For the last couple years, I bonds were quite a bit better than any other safe short-term options.  When they were paying 9.62%, they were a no-brainer.  That's not really the case anymore.  If you'll likely want to sell in a year, you're probably better off going with T bills or just sticking it in a decent money market fund.  I bought some 3 and 4 month T bills last week at a rate of 5.23%.  The 6 month today went for 5.04%.  If there was no 3 month penalty on I bonds, they'd still be competitive.  But with the penalty, much less so.

But I've started to think about I bonds more as part of my bond portfolio for the long-term instead.  I want bonds for stability of my portfolio where I can draw from when stocks are down.  But they didn't really provide that in this last year.  I had pretty much everything in bond funds that were down almost as much as stocks.  So I decided to allocate a portion of my bond portfolio to T notes and TIPS maturing in a few years when I might need it.  And a small portion to I bonds, which are a nice flexible (after 1 year) investment that will at least keep up with (official) inflation and won't lose value.  If I was earlier in my journey, I'd probably skip them and put that money towards stocks while they're still down a bit.  But I saw how quickly inflation can pop up and how nice it was to have at least something keeping up (my best investment of 2022 by far!).  So I'm not too quick to dump them immediately now that they're not absolutely better than everything else.  I'm not so convinced that inflation is completely under control either, although I really hope it is.

So I'm buying $10k this week.  If the fixed rate increases enough (I've read expectations of around 0.6-0.9%), I might buy another $10k in my trust after May.  But I figure it's best to take the known 6.89% now and the 0.4% fixed rate is better than my 0% fixed bonds.  I'll decide later if it's worth cashing in my 0% fixed bonds for higher fixed rate bonds.  Will probably depend on the next 6 months of inflation and the next fixed rates...

[rantk81]

Oh, I-Bonds are totally better yield than T-Bills and more tax efficient than money markets.. no question about that.

However, when adjusting for the hassle/time of dealing with the TD website, for me at least, isn't worth it.  I'd rather have everything consolidated at Fidelity.  It'll also make it easier on my spouse to manage, if I happen to meet and untimely demise.

[Omy]

If you think that inflation will be a problem in the future it might make sense NOT to sell. My friend who has been buying Ibonds for years was very happy to have a lot of them in her portfolio to take advantage of the rates in the past few years.

[Mariposa]

@mistymoney For 30-year T-bonds, I would buy from Fidelity for ease of selling on the secondary market. But I'm reading that they throw off interest every 6 months, which I would need to deal with, and this would also not be advantageous in a taxable account. So I'm going to stick to VBTLX-like funds in our retirement accounts.

I also have a similar thinking to @Holocene . Ideally, I'd like 3-5 years of our yearly spend in I-bonds when we retire. This could be in 10-20 years, but if DH wants to keep working, it could be 30+ years. Since we have a fairly high yearly spend, and we can only put in $20k of I-bonds a year, it'll take some time to build up that position.

[Holocene]

Oh, I-Bonds are totally better yield than T-Bills and more tax efficient than money markets.. no question about that.

However, when adjusting for the hassle/time of dealing with the TD website, for me at least, isn't worth it.  I'd rather have everything consolidated at Fidelity.  It'll also make it easier on my spouse to manage, if I happen to meet and untimely demise.

It really depends on your timeframe.  With the inverted yield curve of T bills right now, 3-4 months seems to be the peak yields at around 5.2%.  You obviously can't sell I bonds for a year so it's not really comparable.  The 52 week T bill is less appealing at ~4.6%.  But if you sell your I bonds at 1 year, you lose the last 3 months of interest, so that'd be an effective rate of ~4.4%.  The 52 week T bill still wins and is probably easier to deal with and has more flexibility since it can actually be sold before the year is up if you buy at a brokerage.

VUSXX (Vanguard Treasury Money Market) is 4.68% right now.  It's generally been state tax exempt, but it looks like it's only around 60% exempt right now.  So not as good tax-wise.  And the rate is not locked in which could be good or bad.  But there's also a benefit in that it's more liquid if you needed it tomorrow.

So if I was looking at strictly a 1 year investment right now, I'd skip I bonds personally.  I'd do VUSXX or a similar fund and roll 3-4 month T bills.  That's basically what I'm doing for my short-term cash right now, although my timeframe may be less than a year as well.  Not guaranteed to beat I bonds or a 52 week T bill.  But you have some added flexibility and higher short-term yields right now.  If rates keep going up, this is definitely the better way to go.  If rates start dropping, locking in longer terms probably would've been better.  Who knows.  That's why I don't think I bonds are quite a slam dunk for your shorter-term EF anymore, but could still work for that if desired and certainly wouldn't be a bad decision.

I don't find TreasuryDirect to be that bad.  I've never had to jump through any hoops and even changed my bank account without issue (it seems they somewhat recently improved this).  I just don't log in and check it very often.  But it doesn't matter because it just sits there collecting interest.  Not much I need to do other than buy once a year if I desire.  People seem to really hate TD.  Yeah it's old and clunky, but it works for me.  If you needed to deal with the BS getting a signature, then I understand the frustration but that's hopefully a one-time thing.  Once you have the account and can log in, I don't see why keeping it open is a very big deal.  But I can understand wanting to simplify to a single brokerage and I'm a fan of Fidelity as well.

[monarda]

Thanks for all the discussion. The way I see it, if it's a 1% or 1.5% difference in interest rate on a $10K investment, that amounts to $100 or so a year. With that in mind, it's making more sense for me to keep the funds in savings. No penalty that way. But I probably won't sell the I bonds I bought last year very soon, either.

[seattlecyclone]

Looks like the new composite rate for I bonds purchased in the next six months will be 4.3%. This includes a 0.9% fixed rate. That's the highest fixed rate since 2007. If these bonds are a part of your long-term asset allocation it could be a good time to buy.

[Holocene]

Oh I'm surprised they posted the new rates today.  I thought we'd have to wait until Monday.

0.9% fixed is really good.  I almost regret buying this week, but that inflation rate was too good to pass up.  I'll probably be buying another $10k in my trust before November unless the fixed rate is predicted to go even higher.  I might have to redeem some old bonds to make this happen, but we'll see.

Someone on Bogleheads may have cracked the formula for the fixed rate based on real TIPS yields.  They correctly predicted 0.9% this time and were able to make their formula work for all I bonds back to 2015.  Not a whole lot of data points so not a ton of confidence, but they did get it right this time.  So at least it's something that will likely give you a good ballpark from which you can make decisions.

https://www.bogleheads.org/forum/viewtopic.php?p=7231977#p7231977

[seattlecyclone]

Oh I'm surprised they posted the new rates today.  I thought we'd have to wait until Monday.

Well they had a note on their website yesterday that that was the last day to buy at the old rates, and it would be pretty weird to be letting people buy bonds today without knowing what the new rates were, so I guess it makes sense.

[Arbitrage]

Oh I'm surprised they posted the new rates today.  I thought we'd have to wait until Monday.

0.9% fixed is really good.  I almost regret buying this week, but that inflation rate was too good to pass up.  I'll probably be buying another $10k in my trust before November unless the fixed rate is predicted to go even higher.  I might have to redeem some old bonds to make this happen, but we'll see.

Someone on Bogleheads may have cracked the formula for the fixed rate based on real TIPS yields.  They correctly predicted 0.9% this time and were able to make their formula work for all I bonds back to 2015.  Not a whole lot of data points so not a ton of confidence, but they did get it right this time.  So at least it's something that will likely give you a good ballpark from which you can make decisions.

https://www.bogleheads.org/forum/viewtopic.php?p=7231977#p7231977

Yeah, I might spring for them eventually at 0.9% fixed.  Will have to wait and see if I need to redeem some old bonds to make it happen, though I'd prefer not to take the tax hit, especially as it's looking fairly likely we'll be using I bonds for part of our kids' college costs down the road.  Guess I could just buy less. 

[seattlecyclone]

Oh I'm surprised they posted the new rates today.  I thought we'd have to wait until Monday.

0.9% fixed is really good.  I almost regret buying this week, but that inflation rate was too good to pass up.  I'll probably be buying another $10k in my trust before November unless the fixed rate is predicted to go even higher.  I might have to redeem some old bonds to make this happen, but we'll see.

Someone on Bogleheads may have cracked the formula for the fixed rate based on real TIPS yields.  They correctly predicted 0.9% this time and were able to make their formula work for all I bonds back to 2015.  Not a whole lot of data points so not a ton of confidence, but they did get it right this time.  So at least it's something that will likely give you a good ballpark from which you can make decisions.

https://www.bogleheads.org/forum/viewtopic.php?p=7231977#p7231977

Yeah, I might spring for them eventually at 0.9% fixed.  Will have to wait and see if I need to redeem some old bonds to make it happen, though I'd prefer not to take the tax hit, especially as it's looking fairly likely we'll be using I bonds for part of our kids' college costs down the road.  Guess I could just buy less. 

529 contributions count as educational expenses for the purpose of the savings bond interest interest exclusion, if you qualify based on your current income. If you're planning to put that money toward college eventually anyway, you could potentially claim that tax benefit now.

[RedmondStash]

If the new rate would be 4.30% for new bonds, including .9% fixed rate, that means the inflation rate is 3.40%, yes? And for bonds bought in January of this year, with a .4% fixed rate, the six months starting in July will have a rate of 3.80%?

I'm trying to wrap my head around how iBonds interest rates work.

[Holocene]

Oh I'm surprised they posted the new rates today.  I thought we'd have to wait until Monday.

Well they had a note on their website yesterday that that was the last day to buy at the old rates, and it would be pretty weird to be letting people buy bonds today without knowing what the new rates were, so I guess it makes sense.

I think it's always been true though that you need to have your order placed a day before the last business day of the month for the order to go through on time.  Purchases will basically always be made on the next business day after you place the order, unless you schedule it for a date even further in the future.  And as far as I know, they've never announced the new rates before the 1st of the month before.  So I'm not sure why they posted earlier this time.  But yeah, it's not like you could do anything about it.  It was still posted too late to buy an April bond.  So maybe this is their new operating procedure.  I guess we'll see in 6 months!  Not that it really matters anyway other than just satisfying my curiosity a few days earlier.

[Holocene]

If the new rate would be 4.30% for new bonds, including .9% fixed rate, that means the inflation rate is 3.40%, yes? And for bonds bought in January of this year, with a .4% fixed rate, the six months starting in July will have a rate of 3.80%?

I'm trying to wrap my head around how iBonds interest rates work.

The semi-annual inflation rate is 1.69%, so the annual inflation rate is 3.38%.

Per https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
The Composite rate formula is: [Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

For I bonds bought in January with the 0.4% fixed rate, in July they will be:
.004 + .0338 + (.004 * .0169) = 0.0378676.  Which rounds to 3.79%.

So yes, you were basically correct.

[jnw]

What was the highest fixed rate offered w/ i-bonds? I think it was around year 2000 or so?

[Holocene]

What was the highest fixed rate offered w/ i-bonds? I think it was around year 2000 or so?

3.6% in May 2000.  You can find the history of all the I bond rates, both fixed and inflation components, since they were introduced in 1998 on the TreasuryDirect site that seattlecyclone and I both linked earlier.

[jnw]

What was the highest fixed rate offered w/ i-bonds? I think it was around year 2000 or so?

3.6% in May 2000.  You can find the history of all the I bond rates, both fixed and inflation components, since they were introduced in 1998 on the TreasuryDirect site that seattlecyclone and I both linked earlier.

Thanks. Wow 0.9% is pretty paltry compared to 3.6% considering the current federal money market yield of 4.78%.

[Holocene]

What was the highest fixed rate offered w/ i-bonds? I think it was around year 2000 or so?

3.6% in May 2000.  You can find the history of all the I bond rates, both fixed and inflation components, since they were introduced in 1998 on the TreasuryDirect site that seattlecyclone and I both linked earlier.

Thanks. Wow 0.9% is pretty paltry compared to 3.6% considering the current federal money market yield of 4.78%.

I'm not sure that we'll ever get I bonds with a fixed rate above 3% again.  It'll definitely take the fed rate continuing to increase pretty dramatically.  Early I bonds were probably priced differently as they were an entirely new product and they probably wanted a high fixed rate to entice buyers.  And rates were quite a bit higher in 2000.  The Federal Funds Effective rate was ~6.5% then compared to 4.8% now.  So we still have quite a ways to go.

As @seattlecyclone mentioned, 0.9% is the highest fixed rate since 2007, so 16 years.  The highest rate since 2003 was 1.4%.  It's really only those early I bonds that paid more.  I thought even 0.4% was a decent fixed rate, given all the 0s we've had over that past decade+.  So 0.9% is pretty great to me.  But I've only really lived in a world of low interest rates and part of me is assuming we'll end up back there sooner rather than later.

That being said, I think it makes sense to keep an eye on rates over the next 6 months.  If the FFR continues to rise, it's probably a good bet the fixed rate will rise too.  If it falls, lock in the 0.9% while you can!  It might be another 16 years before you see it again...

[FIPurpose]

And you can always wait til Oct to buy in at the May rate. The 0.9 will be there a while for the decision.

[baludon]

Somehow I missed the deadline for the 6.48% rate but glad to see the new .9% fixed rate.  I bought them now as part of my emergency fund.