Procrastinators, Rejoice: The 6.89% I bonds Will Beat the Old 9.62% Bonds in Just 4 Years (2024)
Brian J. O'Connor
·5 min read
With a yield of 9.62%, the recently expired Series I bond was understandably popular. With interest rates rising, bond funds are down this year and banks continue to offer miserly rates on deposit accounts. So it’s no wonder that a surging horde of investors crashed the Treasury.gov site at the end of last month, trying to beat the clock and lock in the highest rate the bonds have paid since they were introduced in 1998.
On the day of the Friday, Oct. 28 deadline to lock in the old rate, the Treasury sold $979 million of I bonds. In a bear market, this investment that offered robust yield and low risk got investors riled up.
But now it turns out that investors should have waited. Those who picked up new I bonds yielding 6.89% in the latest auction will find themselves making more money in a few years than those who rushed in to grab the old, higher rate. How is that possible? Take a deep dive into the intricacies of I Bonds below and consider matching with a financial advisor for free to see if I Bonds make sense in your portfolio.
How Can a 6.89% I Bond Rate Beat a 9.62% Rate?
The reason is that rates on I bonds are made up of two components: a guaranteed base rate and an adjustable inflation rate that changes with every new semi-annual auction. That eye-popping 9.62% rate was guaranteed only for the first six months that investors hold their bonds. After that, the rate will be heading down while the rate on the November 2022 bonds will be steadily staying up.
That’s because bonds purchased between May 1, 2020, and Oct. 31, 2022, came with a base rate of 0%. The new bonds are being issued with a base rate of 0.40%. The new inflation rate of 6.49% means all those previous investors will get just that rate of return, while buyers of the new bonds will get a composite rate that includes the base, giving them 6.89%.
Even better for the new bond buyers is that the base rate is guaranteed for the life of the bonds, which don’t mature for 30 years, giving those bondholders an added boost for as long as they hold on. Even if inflation drops to 0%, they’ll still get a return of 0.40%.
Amid the higher base rate, the buyers who got I bonds at the 6.89% rate should be ahead of buyers who locked in the 9.62% after about four years. It’s always important to ask an advisor about what makes sense for you in terms of growth and cash flow.
A Historical Glance at I Bonds
The first I bonds were issued in September 1998 with a base rate of 3.40%, which rose to 3.60% in May 2000, the highest ever. Since then, the guarantee has steadily declined, hitting 0% several times, including this latest, longest run from May 2020 until October. This means that anyone holding an I bond purchased between May 1, 2000, and Oct. 31, 2000, is enjoying a rate of 10.20% today, although that’s quite a come-down from the last six months when they were getting 13.39%.
Still, last-minute I bond buyers don’t have to feel too bad – they’ll get the 9.62% rate until the end of April, because the bonds pay the composite rate at the time of their auction for six months, starting on the first day of the month they were purchased. The inflation rate is adjusted twice a year at each auction, which takes place on May 1 and November 1.
How Are I Bond Rates Calculated?
If you’re wondering exactly how I bond rates are calculated, it’s the sum of the fixed rate, plus twice the semi-annual inflation rate for the previous six months (in the latest auction, that’s the change in the Consumer Price Index from March to September). That result gets added to the sum of the fixed rate multiplied by the inflation rate. The entire calculation looks like this: [Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)].
Extensive information on I bond rates and how they’re calculated can be found here, while a historical chart of the entire history of each bond is published here.
Bottom Line
In a truth that is quite counter-intuitive, investors who buy I Bonds at the new 6.89% rate may, after four years, come out ahead of investors who locked in the 9.62% rate that expired last month. Amid all the fanfare to try to catch that nearly 10% return, investors would have done well to exercise patience and factor in the base rate to the equation, which rose to 0.40% in this last offering.
Tips on Fixed-Income Securities
A financial advisor can help you pick fixed-income securities that complement your investment goals, timeline and risk profile.Finding a financial advisor doesn’t have to be hard.SmartAsset’s free toolmatches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
Use our no-costinvestment calculatorto get a quick estimate of how your investments could be expected to grow over time.
It’s possible to buy more than the $10,000 individual limit on I Bonds. Here’s how. Senators are also currently fighting to allow you to buy even more in I Bonds.
Can I buy I bonds every calendar year? Yes, you can purchase up to $10,000 in electronic I bonds each calendar year. You can also buy an additional $5,000 in paper I bonds using your federal tax return.
I bonds' rates have since dipped from their headline-grabbing heights—they were as high as 9.62% in May of 2022—to 4.28% for the current crop. That rate may still look attractive, but I bonds' variable rates—combined with their five-year lockup period—may give you pause.
The highest fixed rate of 3.60% was established on May 1, 2000. The highest inflation rate of 4.81% was set on May 1, 2022. Here's how I bond rates have changed over the years.
There's actually a limit on how much you can invest in I-bonds per year. The annual maximum in purchases is $10,000 worth of electronic I-bonds, although in some cases, you may be able to purchase an additional $5,000 worth of paper I-bonds using your tax refund.
The 4.28% composite rate for I bonds issued from May 2024 through October 2024 applies for the first six months after the issue date. The composite rate combines a 1.30% fixed rate of return with the 2.96% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
Bonds often offer higher interest rates than CDs, which may be appealing to those looking for a higher profit potential. Unlike CDs, where interest may accumulate and only be paid at maturity, bonds often provide ongoing interest payments, usually at monthly or quarterly intervals.
Buying in July will get your 12-month clock ticking since you can not cash them in for 12 months. Buying in October will give you more flexibility in that you can wait and see what the next inflation rate is going to be, and you can get a good idea of whether the next fixed rate might be higher or lower.
Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity. When the TIPS matures, if the principal is higher than the original amount, you get the higher amount. If the principal is equal to or lower than the original amount, you get the higher original amount.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
Interest rates reached their highest point in modern history in October 1981 when they peaked at 18.63%, according to the Freddie Mac data. Fixed mortgage rates declined from there, but they finished the decade at around 10%. The 1980s were an expensive time to borrow money.
Choosing between a CD and Treasuries depends on how long of a term you want. For terms of one to six months, as well as 10 years, rates are close enough that Treasuries are the better pick. For terms of one to five years, CDs are currently paying more, and it's a large enough difference to give them the edge.
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
I bonds are paying a 9.62% annual rate through October 2022, the highest yield since being introduced in 1998, the U.S. Department of the Treasury announced Monday. The hike is based on the March consumer price index data, with annual inflation growing by 8.5%, the U.S. Department of Labor reported.
In a calendar year, one Social Security Number or one Employer Identification Number may buy: up to $10,000 in electronic I bonds, and. up to $5,000 in paper I bonds (with your tax refund)
That said, there is a $10,000 limit each year for purchasing them. There are a number of ways around this limit, though, including using your tax refund, having your spouse purchase bonds as well and using a separate legal entity like a trust.
Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity. When the TIPS matures, if the principal is higher than the original amount, you get the higher amount. If the principal is equal to or lower than the original amount, you get the higher original amount.
A given Social Security Number or Employer Identification Number can buy up to these amounts in savings bonds each calendar year: $10,000 in electronic EE bonds. $10,000 in electronic I bonds. $5,000 in paper I bonds that you can buy when you file federal tax forms.
Introduction: My name is Horacio Brakus JD, I am a lively, splendid, jolly, vivacious, vast, cheerful, agreeable person who loves writing and wants to share my knowledge and understanding with you.
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