I Bond rate 5/2021

[njhowie]

4% is not bad at all for solid utility companies right now. As long as her primary interest is in the income stream they throw off as opposed to asset value. Reason being, should we see interest rate hikes, utilities are likely some of the first that will see share price declines. Dividends will be protected and should continue to grow over time, so the income stream will continue. However, she may see the bottom line on the portfolio shed some value over the near/medium term.

 

[Koolau]

Yeah, I agree. Why take any risk at all for such measly pickings.

My mom just sold her house and is sitting on cash in her Fidelity account and asked me what to do with it. She had mostly of her savings in a few utility stocks, where my dad had it before he passed. Those show a yield of 4% right now. She also had a few years of cash after selling a stock position a few years back. Now she's got many years of cash that's getting eaten by inflation. I'm inclined to suggest keeping a few years in cash and putting the rest in the utilities. If worse came to worse, she has 7 kids, and most of them could chip in to prevent her from having to sell low, if that ever came up on the horizon. Inflation is a scourge on people in her position.

I agree that inflation is a scourge - especially if you have a lot of cash. I'm looking on the bright side in my case: At my age, unless inflation really gets bad, I'll die before my stash is even close to being wiped out by inflation. I'm considering some ideas right now - possibly even the "token" idea of I-bonds. I love my old I bonds - the ones that actually pay some real interest, but it will make me cringe to "only" stay even (on paper) with $20K of my cash - and then have to pay taxes some day. What a pain.

 

[njhowie]

You don't need to cite Bogelheads. You can do the calculation for yourself. The CPI reported in April was 264.877. The CPI reported this week was 273.567. That is an increase of 3.28%. And there is one more month in the 6-month cycle. If next month's number is flat to this month, then the inflation based rate on new bonds starting in November would be 6.56% (assuming the fixed rate stays at 0). That's the highest inflation-based rate in the history of I-bonds back to 1998.


It is important to understand how this works. If you bought in September or October, you'd get 3.54% for the first 6 months. Then it will adjust up to 6+% for the next 6 months. But if you wait till November, you will start at 6+%.

Reported this morning:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 5.4 percent over the last 12 months to an index level of 274.310 (1982-84=100).

So, 264.877 to 274.31 is 3.56%, suggesting new I Bond rate beginning November 1 will be 7.12%.

 

[Golden sunsets]

Reported this morning:




So, 264.877 to 274.31 is 3.56%, suggesting new I Bond rate beginning November 1 will be 7.12%.

Wow and for those of us with a fixed rate component (ours are is 1%), the rate will be 8.1154%. I'll take it.

 

[Montecfo]

It's a nice rate. A very nice rate. Just not sure how I would have ever have gotten meaningful position.

I'm kind of on the fence now as to whether to do it.

 

[Golden sunsets]

It's a nice rate. A very nice rate. Just not sure how I would have ever have gotten meaningful position.

I'm kind of on the fence now as to whether to do it.

Yeah. The cap used to be $30K per person per year.

 

[Trailwalker]

Anyone have guidance on whether to buy these before or after November 1st? Tipswatch says before, and I'm not sure I understand why.

 

[njhowie]

Anyone have guidance on whether to buy these before or after November 1st? Tipswatch says before, and I'm not sure I understand why.

I would tend to agree with before. The difference is when you begin to collect the 6 months of 7.12% - either as of Nov 1, or May 1, 2022. Either way, you will get 6 months interest at the 7.12% rate.

The logic saying to buy before Nov 1, is that for the first 6 months you would get the current 3.54% rate, which is well above the long term average I Bond rate. That being the case, 3.54% is a very good rate, which will likely also be above future rates as things settle down. So, by purchasing before Nov 1, you'll get 6 months of the 3.54% immediately followed by 6 months of 7.12%, as opposed to ditching the 3.54%.

Think of it this way - there's no comparable place else to get the 3.54%, not CDs, not savings, etc.

 

[audreyh1]

Anyone have guidance on whether to buy these before or after November 1st? Tipswatch says before, and I'm not sure I understand why.

If you buy before, you will be stuck with the old lower rate for six months before switching to the new higher rate. If you buy afterwards, you’ll get the new higher rate immediately.

So I don’t get the buy before recommendation.

The rate at last 6 months of 30 years would break any tie.

 

[ivinsfan]

If you buy before, you will be stuck with the old lower rate for six months before switching to the new higher rate. If you buy afterwards, you’ll get the new higher rate immediately.

So I don’t get the buy before recommendation.

The rate at last 6 months of 30 years would break any tie.

30 years now that's what they call the long game...

 

[Golden sunsets]

This article https://www.depositaccounts.com/blog/inflation-treasury-series-i-savings-bonds/ on the Deposit Accounts Blog, goes through a mathematical example of what the rate of return would be based on point of entry and exit. It doesn't address your point Audrey, but I'd be willing to bet that the author is thinking that a combination of 6 months of the current rate plus 6 months of the higher rate to come will yield more than 6 months of the new rate and 6 months of whatever the rate will be next May. I'm thinking the assumption is inflation will have tamed by next spring and if so the May rate may not match the current rate??


He also points out that buying near the end of October will lower the net early withdrawal penalty, as interest will be earned for the whole month on 11-1, when the holding has only be owned for a few days.

 

[steelyman]

I’ll be in for $10K first week of November!

 

[Koolau]

Wow and for those of us with a fixed rate component (ours are is 1%), the rate will be 8.1154%. I'll take it.

IIRC mine from the early '00s were around 3% plus inflation. That would mean 10% with the inflation figure on top.

Wait! Why am I celebrating inflation??

 

[Golden sunsets]

IIRC mine from the early '00s were around 3% plus inflation. That would mean 10% with the inflation figure on top.



Wait! Why am I celebrating inflation??

Yep. When you use your verb "were", (past tense) did you mean yours are or do you not own them any longer?


Re inflation, I will attest that our personal inflation rate is no where near the 8%+/- that we'll earn.

 

[Koolau]

Yep. When you say your "were" did you mean yours are or do you not own them any longer?


Re inflation, I will attest that our personal inflation rate is no where near the 8%+/- that we'll earn.

Sorry, I meant when I purchased them, it was around 3%. Yes, I still have them!! I'll hang on until the 30th year unless something unexpected happens - like dying.

 

[LarryMelman]

So, 264.877 to 274.31 is 3.56%, suggesting new I Bond rate beginning November 1 will be 7.12%.

If the fixed rate stays at zero. Which we won't know till 11/1.

 

[njhowie]

If the fixed rate stays at zero. Which we won't know till 11/1.

Do you like betting on the 00? That's about the odds of it going to 0.1%, or anything above 0.0%.

But yes, you are correct technically. We won't know for certain until Nov 1. What we can say right now is that the absolute minimum will be 7.12%.

 

[Golden sunsets]

Sorry, I meant when I purchased them, it was around 3%. Yes, I still have them!! I'll hang on until the 30th year unless something unexpected happens - like dying.

Great deal. Who would have thought that the returns could be so much higher than inflation.

 

[karluk]

What we can say right now is that the absolute minimum will be 7.12%.

How do you know with absolute certainty that the fixed rate won't go negative? The Treasury has never issued an I-bond with a negative fixed rate, but I'm unaware of anything preventing them from doing so.

I see that Vanguard's TIPS fund, VIPSX, has a current yield of -1.85%. If the Feds want to make I-bond yields comparable to TIPS, one would expect a fixed rate of either -1% or -2%

 

[steelyman]

I thought the I bond composite rate is not allowed to go below zero.

 

[karluk]

I thought the I bond composite rate is not allowed to go below zero.

The composite rate combines the fixed rate with the inflation adjustment. The Feds have promised never to allow the composite rate to go below zero, but appear to have remained completely silent on whether the fixed rate could ever go negative.

"

 

[njhowie]

How do you know with absolute certainty that the fixed rate won't go negative? The Treasury has never issued an I-bond with a negative fixed rate, but I'm unaware of anything preventing them from doing so.

I see that Vanguard's TIPS fund, VIPSX, has a current yield of -1.85%. If the Feds want to make I-bond yields comparable to TIPS, one would expect a fixed rate of either -1% or -2%

Think what you like.

 

[LarryMelman]

What we can say right now is that the absolute minimum will be 7.12%.

Perhaps. Probably.
Some people are saying that the fixed part of the rate could be negative. I don't expect that to ever happen. But what do I know.

 

[karluk]

Anyone have guidance on whether to buy these before or after November 1st? Tipswatch says before, and I'm not sure I understand why.

I bought the maximum amount of i-bonds this summer, reasoning that the 3.54% was way above the return on comparable safe investments and even back then it was already looking as if the November inflation adjustment would be well above 5%.

It's not as clear cut now. True, you can buy in October and get the same deal I found attractive this summer, but the problem is that you are committing yourself to a fifteen month holding period. The Treasury will allow you to cash your i-bonds in 12 months, but the penalty would cost you three months interest at 7.12%. To get the full benefit of the 7.12% rate, you need to hold for 15 months, so that the penalty is three months assessed at the May, 2022 inflation adjustment (which will presumably be smaller than 7.12%). Purchases made after November 1 don't have this problem. You can cash them in after 12 months and get a full six months at 7.12%.

One reason to buy now rather than wait until November is that it's a sneaky way to get more money invested at 7.12%. I-bond interest compounds semiannually, so $10,000 invested at 3.54% grows to $10,177 before the 7.12% begins. Wait until November and you have only $10,000 invested.

I mentioned in another post the possibility of the Feds reducing the fixed rate below zero in November. I, like most people, don't expect a negative fixed rate, but this is an expectation, not a guarantee. If you have any concern about a negative fixed rate you should buy in October.

Over the years I have bought i-bonds several times after a spike in interest rates and then cashed them in when CPI subsided. That way the three month interest penalty didn't cost me too much. (One time the penalty was 0% for three months, so I lost no money, just had to hold for an extra three months.) I expect to do so again, but perhaps we are in store for a prolonged period of high inflation. I wouldn't mind at all if i-bonds turn out to be a good long term investment, not just a way to get above market interest for a year.

 

[Koolau]

One reason to buy now rather than wait until November is that it's a sneaky way to get more money invested at 7.12%. I-bond interest compounds semiannually, so $10,000 invested at 3.54% grows to $10,177 before the 7.12% begins. Wait until November and you have only $10,000 invested.

Very good point. It's stealth investing!