US govt I bonds might be a good investment now.

[Tomconroy]

Last edited Fri Jun 10, 2022, 07:29 AM - Edit history (1)

From today's NY Times:


"There are other options for holding short-term money safely. Briefly put, they include U.S. government I bonds, which yield an amazing 9.62 percent, a rate that is reset every six months. They are very safe but imperfect, especially for short-term purposes. Not only are there limits on the amounts you can buy, but there are also small penalties if you cash them in before five years."


The rate will be reset in a few months. Investment limit is ten grand per annum.

Any investment pros want to weigh in and explain any downside?

[JohnSJ]

1. There are two parts to i-bonds. An inflation part, and a fixed part.

he interest rate combines two separate rates:

A fixed rate of return, which remains the same throughout the life of the I bond, and a variable semiannual inflation rate based on changes in the CPI, which changes every six months.

That 9.62% rate is only available through October, 2022

Maximum purchase:

Electronic: $10,000, total, each calendar year

Paper: $5,000, total, each calendar year


Minimum term of ownership: 1 year
Interest-earning period: 30 years or until you cash them, whichever comes first
Early redemption penalties:
Before 5 years, forfeit interest from the previous 3 months
After 5 years, no penalty
Interest is compounded semiannually

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

Example:

The composite rate for I bonds issued from May 2022 through October 2022 is 9.62%
Here's how we set that composite rate:

Fixed rate

0.00%

Semiannual inflation rate

4.81%

Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]



[0.0000 + (2 x 0.0481) + (0.0000 x 0.0481)]

Composite rate

[0.0000 + 0.0962 + 0.0000000]

Composite rate


0.0962000

Composite rate



0.09620

Composite rate



9.62%

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#now

[JohnSJ]

3. Yes, thanks. I will correct.

Electronic: $10,000, total, each calendar year

Paper: $5,000, total, each calendar year

[Tomconroy]

4. Looks like the 9.6 rate is paid for 6 months

From the date you buy the bond and then it changes to the prevailing rate, if I am reading that right.
Still, something to think about in an inflation era.

[JohnSJ]

5. Yes, and you can buy right now, and up to October get a 9.62% rate. That rate will change in

October.

[doc03]

7. There is a 3 month lag in the interest until they are 5 years old. If you would buy one today

the interest won't be posted until September. Another thing if you buy one even on the 30th of June you
get interest for the entire month of June. If the interest would drop to 0% you wait 3 months and sell you lose
nothing. The interest changes in May and November. It being June doesn't mean if you buy one today you will only get
the 9.62% for 5 months. You get the 9.62% interest for the entire 6 months. The next interest rate change is in November
but in that case your interest will change one month later in December.

[doc03]

6. I bought one in June last year at 3.54% and another in January this year at 7.12% now 9.62%.

There is a 3-month penalty if you sell before 5 years. Why would you sell them unless there was some
emergency and you needed the cash? Otherwise if say the interest rate suddenly dropped from 9.62%
to 1% you wait 3 months then sell, all you lose is 3 months at 1%. My bank pays .1% on a MM account and .3%
on a checking. Yes they pay more on a checking account than a MM account. I asked a bank officer why that was
and he said they are promoting their checking account. Banks charge around 20% on credit card interest and pay
.1% on a money market account, where does 19.9% go? Anyway that is different subject. A friend of mine told me
what he is going to do is buy the $10000 I bond and overpay his taxes in his quarterly tax payments by $5000
therefore he can get a $5000 paper I bond. Between him and his wife he can put $30000 a year in them. I am thinking
there is a penalty for over paying or underpaying your estimated tax, I would check on that first.

[progree]

8. Never a penalty on overpaying estimated income tax. Except one is giving the Treasury

an interest-free loan. So there is an opportunity cost in that one could invest it instead.

But if it allows one to buy an extra $5,000 in I-bonds at 9.62%, then its a good way to go.

[doc03]

9. It sure is, I wasnt sure about overpaying estimated tax.

[bif]

10. Can my wife and I both buy a $10,000 bond?

[JohnSJ]

11. Yes

[Rebl2]

12. I am

in my mid sixties. Is it worth buying I-bonds at my age. Can’t afford to put a lot in though, so is it worth it? I would probably only put in $2000 at most.

[progree]

13. If its worth the fuss to you of setting up an account at Treasurydirect.gov

to earn 9.62% rate for 6 months (so per $1,000 it earns 9.62%/2 = 4.81% * 1000 = $48.10). The next 6 months will be a different interest rate, could be higher and lower. If its 9.62% again then its another $48.10 per thousand).

Historically, I-bonds have had interest rates lower than other Treasury options, and I expect that to be the case in say 3 years. But you only have to hold I-bonds for 1 year. After that, its a quarter's interest penalty if you hold them for less than a total of 5 years.

So say you only hold them for 2 years, and interest rates stay the same 9.62%. Per $1000, You would earn 2*9.62% which comes to $192. Actually $207 with compounding taken into consideration. So the nest egg is now $1,207. Then you pay a penalty of about $29 interest on withdrawal, so you are left with a mere $1,178, or $178 earned. Per $1000 investment.

So on $2,000 it would be $356 earned in 2 years after paying the withdrawal penalty.

I'm a few years older than you and I don't expect to tip over within the next few years.

If you know of a better guaranteed investment (remembering the interest rates change every 6 months), than that would be the way to go. Let me know if you find one.