What to do with those 0% Fixed-rate I-Bonds?

[walkinwood]

Like many, I bought I-bonds when inflation spiked up & the total interest rates on the bonds were mouth-watering.

To take the example of the i-bond I bought in December 2021 which has a fixed interest rate of 0% and currently has an inflation rate of 1.97%

I know I'll lose the last 3 months of interest if I were to sell them.

If I buy an I-Bond now, I get a fixed interest of 1.3% and a 1.97% inflation rate for the next 4 months.

Doesn't it make sense for me to redeem the 2021 i-bond and buy a Jan 2024 one?

By my calculations, I'll make up the loss of interest rate & fed tax in less than 6 months. (assuming the same 1.97% inflation rate)

The downside is that I could be increasing my i-bond holdings by another $10K instead of keeping the amount the same.

Any other downsides that I'm missing?


The other thought is to abandon the i-bonds and just add that money to my TIPs allocation. (I'd say, let's not go there now, but I know this forum )

 

[Dash man]

Personally, we’re reducing our bonds for now, except older ones with higher fixed rates. CDs and treasuries are doing better. If you think you need the inflation protection, reinvest them.

 

[Jerry1]

Not sure if you saw this. This was posted in the iBond thread. Good reference article about when to sell the zero fixed rate bonds.

https://tipswatch.com/2023/08/06/the-i-bond-exit-ramp-is-now-open-proceed-with-caution/

 

[Gumby]

The interest for I-bonds adjusts on May 1, 2024. If you bought an I-bond in November 2023, it was paying a juicy 5.27% composite annual interest, comprised of 1.3% fixed and 3.97% variable rate inflation adjustment added to it. What many do not realize is that the inflation adjustment also can be subtracted from the fixed rate in the event of deflation, until the composite rate gets to zero.

The calculation for the new variable rate = ((CPI Mar 24/CPI Sep 24) - 1) x 200). CPI in September 22023 was 307.789. By the end of November, it was down to 307.051 (i.e. deflation) and the projections I have seen are that the December number, to be released next week, will be close to 305.9. If the current deflationary trend continues, such that the CPI drops below 305.788 in March, the composite rate will be zero. Math follows:

variable rate = ((CPI Mar 24/CPI Sep 24) - 1) x 200) = ((305.788/307.789) - 1) x 200 = - 1.3%

composite rate = fixed rate +/1 variable rate = 1.3% - 1.3% = ZERO.

In fact, if things just stayed the same from here to March, the composite rate would be only 0.82%


And, of course, if you have older zero fixed rate I-bonds, they are already in the zero return territory for that six month period.

 

[audreyh1]

My 0% fixed rate IBonds have been gone for a while. Last year a got rid of a couple with very low fixed rates.

I keep saying no more IBonds, and I’ll go for years without buying any, and then suddenly an attractive fixed rate appears.

I’m plan to buy one more set this month. Then I hope that’s it for me!

 

[tulak]

I put in order to redeem my last iBonds yesterday. They were 0% fixed. I’m now done with Treasury Direct. I’ll stick with TIPS, which I can buy at Fidelity.

 

[Gumby]

We have one last tranche of I-bonds in the gift box for delivery 1/1/25, when we will redeem them. They were purchased 4/1/2022. So, fortunately for us, the final three months interest we will forfeit will be only those where I currently anticipate the rate will be be zero anyway.

I was thinking of buying an I-bond with a fixed rate of 1.3% this April. But while would get 5.27% composite for the first 6 months, it would likely be 0% for the second 6 months. If they keep the fixed rate high and the current bout of deflation levels out, I may consider buying in November.

 

[walkinwood]

The interest for I-bonds adjusts on May 1, 2024. If you bought an I-bond in November 2023, it was paying a juicy 5.27% composite annual interest, comprised of 1.3% fixed and 3.97% variable rate inflation adjustment added to it. What many do not realize is that the inflation adjustment also can be subtracted from the fixed rate in the event of deflation, until the composite rate gets to zero.

The calculation for the new variable rate = ((CPI Mar 24/CPI Sep 24) - 1) x 200). CPI in September 22023 was 307.789. By the end of November, it was down to 307.051 (i.e. deflation) and the projections I have seen are that the December number, to be released next week, will be close to 305.9. If the current deflationary trend continues, such that the CPI drops below 305.788 in March, the composite rate will be zero. Math follows:

variable rate = ((CPI Mar 24/CPI Sep 24) - 1) x 200) = ((305.788/307.789) - 1) x 200 = - 1.3%

composite rate = fixed rate +/1 variable rate = 1.3% - 1.3% = ZERO.

In fact, if things just stayed the same from here to March, the composite rate would be only 0.82%


And, of course, if you have older zero fixed rate I-bonds, they are already in the zero return territory for that six month period.

Thanks Gumby. New information to me.

 

[Sunset]

We have one last tranche of I-bonds in the gift box for delivery 1/1/25, when we will redeem them. They were purchased 4/1/2022. So, fortunately for us, the final three months interest we will forfeit will be only those where I currently anticipate the rate will be be zero anyway.

I was thinking of buying an I-bond with a fixed rate of 1.3% this April. But while would get 5.27% composite for the first 6 months, it would likely be 0% for the second 6 months. If they keep the fixed rate high and the current bout of deflation levels out, I may consider buying in October.

We also have 1 more round of gifting to do in 2025.

However, I was considering buying another set of 3 or 5 years of gifts to get the fixed rate of 1.3% as the 6 months of 5.27% is nice.

<edit> I wrote this thinking you were saying the combined rate would be 0%, but maybe you were talking about the fixed rate of the I-bonds, but then why not load up on gifts now at the high rate </edit>


I don't see any deflation, I see a reducing inflation rate, so expect interest will decline but no way I see a -1.3% inflation rate which is what would be required to earn 0%.
Worst we have had since 1961 was a -.36% (the only deflation year).

https://www.macrotrends.net/countries/USA/us/inflation-rate-cpi

The lowering rate of inflation is not deflation, I think we will be lucky if we lower down to 2% inflation and that means interest rates will also lower to maybe 2.5->3% and the I-bond will be good at a combined rate of 3.8->4.3%

 

[Gumby]

We also have 1 more round of gifting to do in 2025.

However, I was considering buying another set of 3 or 5 years of gifts to get the fixed rate of 1.3% as the 6 months of 5.27% is nice.

I don't see any deflation, I see a reducing inflation rate, so expect interest will decline but no way I see a -1.3% inflation rate which is what would be required to earn 0%.
Worst we have had since 1961 was a -.36% (the only deflation year).

https://www.macrotrends.net/countries/USA/us/inflation-rate-cpi

The lowering rate of inflation is not deflation, I think we will be lucky if we lower down to 2% inflation and that means interest rates will also lower to maybe 2.5->3% and the I-bond will be good at a combined rate of 3.8->4.3%

Inflation is defined as the rate of upward change in the CPI over some period of time - usually one year. When the rate of inflation drops, it is called "disinflation". But that's not what has happened over the most recent three months. CPI has actually decreased 307.789 >> 307.671 >> 307.051 >>> 305.9 (est.). Prices have dropped. That is actual deflation.

So while we have inflation if measured over a year, we have deflation over the past 3 months, which are the more important months for the next I bond rate change and which are more likely to portend the next 3 months.

And, crucially, prices only have to drop by 0.65% over the six months from September 23 to March 24, because the semi-annual fixed rate is only 0.65%. If you want to compare to the 1.3% APR, then you would need to double the semi-annual inflation adjustment, which would be 2 x .065% or 1.3%. Either way, if the numbers work as seems possible, you'll get zero percent for 6 months

You can confirm that this has occurred in the past - in May 2009 and May 2015 -- by looking at this chart on the Treasury Direct website. https://www.treasurydirect.gov/files/savings-bonds/i-bond-rate-chart.pdf


These charts will help you visualize the situation. One shows the yearly rate of inflation. The other shows what is actually happening with CPI. We need to pay attention to both to understand the full picture.

 

[Al18]

I’m hanging onto my iBonds that I started buying in 2021, because I don’t want to pay taxes on the accumulated interest right now. I will continue to buy iBonds, with the money from CD’s that have matured.

FYI, the iBond historical chart posted at Treasury Direct https://treasurydirect.gov/files/savings-bonds/i-bond-rate-chart.pdf
Shows the 0% interest has happened in May, 2009 and May 2015 and was near 0% in May 2016, if I’m reading the chart correctly. No need to panic yet.

 

[Sunset]

Inflation is defined as the rate of upward change in the CPI over some period of time - usually one year. When the rate of inflation drops, it is called "disinflation". But that's not what has happened over the most recent three months. CPI has actually decreased 307.789 >> 307.671 >> 307.051 >>> 305.9 (est.). Prices have dropped. That is actual deflation.

So while we have inflation if measured over a year, we have deflation over the past 3 months, which are the more important months for the next I bond rate change and which are more likely to portend the next 3 months.

And, crucially, prices only have to drop by 0.65% over the six months from September 23 to March 24, because the semi-annual fixed rate is only 0.65%. If you want to compare to the 1.3% APR, then you would need to double the semi-annual inflation adjustment, which would be 2 x .065% or 1.3%. Either way, if the numbers work as seems possible, you'll get zero percent for 6 months

You can confirm that this has occurred in the past - in May 2009 and May 2015 -- by looking at this chart on the Treasury Direct website. https://www.treasurydirect.gov/files/savings-bonds/i-bond-rate-chart.pdf


These charts will help you visualize the situation. One shows the yearly rate of inflation. The other shows what is actually happening with CPI. We need to pay attention to both to understand the full picture.

Thanks for that great explanation

I certainly was only thinking of annual inflation, and not monthly changes.

Now I have to put a hold on my plans, and re-think some stuff, as basically I'm realizing this 0% result could happen at any point in the next couple of years.

 

[Gumby]

.....
However, I was considering buying another set of 3 or 5 years of gifts to get the fixed rate of 1.3% as the 6 months of 5.27% is nice.

<edit> I wrote this thinking you were saying the combined rate would be 0%, but maybe you were talking about the fixed rate of the I-bonds, but then why not load up on gifts now at the high rate </edit>
....

Yes, if I bought in April, I'd get 5.27% for the first six months, but if things work out as they might, the second 6 months on that bond will likely be at a 0% composite rate. Although they will recover a little after that. If inflation held constant at 2% after that, the composite would be 3.3 %. But that initial hit is a harsh one and if there is a possibility of avoiding it by waiting, I will do that. The risk I take is that the fixed component will be reduced.

 

[walkinwood]

What determines the fixed rate of the I-Bond?


I can't find anything definite except that the Treasure sets it every 6 months. A bogleheads post from years ago suggests that the Treasury may be setting the rate to be competitive, but slightly lower than treasuries. (doesn't say for what term)



Anyone have more info?

 

[Gumby]

What determines the fixed rate of the I-Bond?

Totally discretionary with the Treasury Department.

 

[audreyh1]

The TIPSWatch blog tracks inflation and TIPS real rates and predicts fixed rate on the next IBond issue shortly after the April and October CPI releases.

I’ll see if I can find the article where he predicts the next fixed rate, it was at the low end of his predicted range, yet he was correct about it being the highest in a long while. He follows a lot of Treasury details.

In the meantime here are his thoughts on IBonds for 2023 and 2024: https://tipswatch.com/2023/11/05/random-thoughts-on-i-bonds-in-2023-2024/

Here: https://tipswatch.com/2023/10/27/i-bonds-fixed-rate-an-updated-projection/
with earlier October prediction: https://tipswatch.com/2023/10/08/the-i-bonds-fixed-rate-will-rise-but-by-how-much/

And: https://tipswatch.com/2023/10/31/i-bonds-fixed-rate-rises-to-1-3-highest-in-more-than-16-years/

 

[walkinwood]

Thanks Audreyh1.


I decided that the 0% I-bonds had to go & redeemed them. As he counsels, I'll wait till April to decide what to do with my 2023 purchase.

 

[RunningBum]

Thanks Audreyh1.


I decided that the 0% I-bonds had to go & redeemed them. As he counsels, I'll wait till April to decide what to do with my 2023 purchase.

I did the same thing yesterday, making sure I didn't forfeit a good interest rate when I lost 3 months. A couple I could've sold last year, but I had already overshot my income target and had a small amount of QDivs taxed. Didn't want any more income.

 

[tulak]

The TIPSWatch blog is great. I’m curious to read about his forecast for the 10-year TIPS auction on Jan 18th. My hope is for a 1.5% real yield. This will fill out my rung for 2035 and maybe I should buy enough to cover 2036. That might be the last rung for my TIPS ladder, so it is tempting.

 

[Phroig]

I wondered if the Treasury keeps the fixed rate at an attractive level when the variable rate is low, but, as far as I can tell from the table Gumby posted, that doesn’t seem to have been the case in 2015-2016.

 

[jollystomper]

The interest for I-bonds adjusts on May 1, 2024. If you bought an I-bond in November 2023, it was paying a juicy 5.27% composite annual interest, comprised of 1.3% fixed and 3.97% variable rate inflation adjustment added to it. What many do not realize is that the inflation adjustment also can be subtracted from the fixed rate in the event of deflation, until the composite rate gets to zero.

The calculation for the new variable rate = ((CPI Mar 24/CPI Sep 24) - 1) x 200). CPI in September 22023 was 307.789. By the end of November, it was down to 307.051 (i.e. deflation) and the projections I have seen are that the December number, to be released next week, will be close to 305.9. If the current deflationary trend continues, such that the CPI drops below 305.788 in March, the composite rate will be zero. Math follows:

variable rate = ((CPI Mar 24/CPI Sep 24) - 1) x 200) = ((305.788/307.789) - 1) x 200 = - 1.3%

composite rate = fixed rate +/1 variable rate = 1.3% - 1.3% = ZERO.

In fact, if things just stayed the same from here to March, the composite rate would be only 0.82%


And, of course, if you have older zero fixed rate I-bonds, they are already in the zero return territory for that six month period.

Great, just as I thought it was a no-brainer to replace some of the I-Bonds I sold this month with gift purchases for 2025... time to think about this some more before the end of January .

 

[audreyh1]

I wondered if the Treasury keeps the fixed rate at an attractive level when the variable rate is low, but, as far as I can tell from the table Gumby posted, that doesn’t seem to have been the case in 2015-2016.

No, it’s the opposite. The fixed rate only goes above 0 when interest rates are higher.

If you read the TIPSwatch links the fixed rate tends to follow the real rate on TIPS.

 

[audreyh1]

The TIPSWatch blog is great. I’m curious to read about his forecast for the 10-year TIPS auction on Jan 18th. My hope is for a 1.5% real yield. This will fill out my rung for 2035 and maybe I should buy enough to cover 2036. That might be the last rung for my TIPS ladder, so it is tempting.

He does a great preview overview before those auctions. Very informative!

 

[JDARNELL]

Why would people wait til April to purchase the 2024 I bond allotment?

 

[Gumby]

Why would people wait til April to purchase the 2024 I bond allotment?

To see what the next variable rate will be. Also, if using the gift box strategy that would require 2025 or later delivery, to minimize the time between purchase and delivery/redemption in the event you want to ditch them.