See update to this with the final numbers in this dedicated post.
May-October I Bond Rate
The final inflation numbers are in, and the new I-Bonds rate for purchases May through October is expected to have a variable rate of 3.38%. There’s also likely to be a fixed rate as well, perhaps around .70%. That would bring us a total annualized interest rate of 4.08% for new bond purchases from May through October.
You’ll get that rate for 6 months. Afterward, you’ll get the fixed rate + whatever the newly announced rate which will be based on future inflation numbers.
For comparison, the current rate for purchases until the end of April is 6.89% which is comprised of 6.48% variable rate + .40% fixed rate.
Existing I Bonds purchases in the past – or any time until the end of April – will get just the 3.38% rate once your prior of 6.48%/6.89% ends. (For a lot of us that 6.48% rate will continue still for a number of months before transitioning to the 3.38% rate.)
If/When To Buy
Each year you can buy up to $10,000 in I Bonds. And so everyone will have to decide whether they want to buy now in April, wait for the May rate, or not buy at all.
The advantage to hold off buying until May 1st is that you are likely to get a higher fixed rate, perhaps it will be .70% instead of the current .40%. And so if you plan on holding the I Bonds for longer than 5 years it could make sense to buy in May. However, someone thinking more short term will probably do better buying now to lock in the higher 6.89% rate for the first six months.
Perhaps a better question is whether to buy at all. Given that it’s easy enough to get around 5% or more with a regular high-yield savings account or CD, the I Bonds return isn’t necessarily better.
There is a state and local tax savings element to consider. But you also have to remember that you’ll lose the last 3 months of interest if the bond is cashed out in less than 5 years.
Final Thoughts
In the end, I don’t really see a scenario where buying I Bonds right now is a big win: someone who wants I Bonds as part of a long term investment strategy will hold off buying until May 1st. Someone who is looking for a short term play might skip buying altogether.
I can still see buying in April as an option for someone in a city and state with high taxes. It’s also not a bad option for someone who finds it easier to buy additional I Bonds rather than opening up a relationship with a new bank to get a high rated CD.
Buying I Bonds also gives you the option of keeping it longer term should interest rates drop and inflation rates remain high.
For those new to I Bonds, please read some of our previous post:
- U.S. Treasury I Bonds FAQ (When To Buy $10,000 I Bonds, April or May? And More…)
- Gifting US Treasury Bonds To Lock In Current Rates Beyond $10,000 Limit (I Bonds)
- Wow! US Treasury Bonds Rate Set To 9.62% (I Bonds)
- New U.S. Treasury I Bonds 6.49% Rate, FAQ (When To Buy $10,000 I Bonds? 6.48%? 9.62%? And More…)
- Treasury Direct Announces 6.89% I Bonds Rate
- Pondering US Treasury Series EE Bonds (3.5% APY Return With 20 Year Lockup)
For those looking to pull out of I Bonds, check out this article from Tipswatch on when you should pull out. See also this comment.
0.9% has been announced as the fixed rate for a total of 4.3%. https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
This three month interest penalty is wrong. One only loses 2 months of interest if one buys at the end of the month (and who would buy on 4/1 vs 4/30 when all purchases in April reflect the 4/1 date. So holding for 14 months (April 30, 2023 – Jul1, 2024) gives the full 12 month rate.
This new variable rate means the average combined rate for a newly issued I-bond purchased before the end of the month will be an average of 6.893% and 3.807%, or 5.35% for the first year only if held beyond 5 years. Although I think inflation will come down in the next few years, making a longer hold a poor choice. If redeemed at one year, losing the last three months of the 3.807% combined rate, these I-bonds would yield 4.43%. Not as terrible as I had imagined due to that MoM 0.5% print a few months ago, but still not enough yield to beat other available options.
If you are thinking of doing a 15 month hold, the yield would be reduced to 4.28%. Don’t be tricked by the initial 6 months of 6.893%. Think of the minimum holding term of 12 months, the 5 year minimum holding term to avoid losing the last three months of interest, and softening future inflation expectations. The only reason I can think of to buy these bonds is to make a bet on an unlikely ramp up in inflation in the next 6 months to a year.
Nick, its possible, the Fed will begin to drop rates precipitously, or slowly. Because of the damage that the rate hikes have done. If they shoot liquidity into the system, which i think is likely, won’t inflation regenerate?
Right now, the Fed is still hiking, and saying they plan to hold rates higher for longer. I tend to agree with you that at some point in the future they will need to drop rates, but at what point do they start? They could choose to start rate cuts right away or pause and hold rates constant for a period of time, then start rate cuts. Based on what they are doing and still saying, I think the latter is more likely at this point.
Either way, I think the new purchase with the higher 0.9% fixed component could be more valuable for any longer term outlook like this, since it will benefit more from any future upswing in inflation from those liquidity injections.
Hi Nick, thanks for the response, and agree with all you say.
1) its a dilemma. I think that IBonds are a good long term choice, as i believe inflation will increase, over time. And the .9 rate is sweet.
2) although, it appears, that the Fed wants to be steadfast in licking inflation —— Congressionals, only get re-elected when their constituency is pleased. And i am thinking, that once the adverse effects of the interest rate rise do occur, after going thru the system, a lot of people will be very unhappy. My guess, is pressure will make the Fed reverse. And that will boost inflation again. And they have no one to blame but themselves, for instituting Zirp for so long. That is my 2cents
It’s fun to watch interest-rate speculation by using the CME FedWatch Tool:
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
This three month interest penalty is wrong. One only loses 2 months of interest if one buys at the end of the month (and who would buy on 4/1 vs 4/30 when all purchases in April reflect the 4/1 date. So holding for 14 months (April 30, 2023 – Jul1, 2024) gives the full 12 month rate.
Rate Change Deadline: To receive the current 6.89% rate for I Bonds in TreasuryDirect, you must complete your purchase by 11:59 p.m. Eastern Time on Thursday, April 27. Learn More.
Where are you seeing that? Do they clarify what “complete your purchase” means?
Do we need to simply initiate the purchase on TD’s site by that time or do the funds need to get there by then (meaning we would need to initiate the purchase tomorrow)?
its on the front page. just need to initiate it by that time
If I don’t plan on holding the I-bond for 5 years, is there any reason I should buy I-bond in April vs. a 12-month CD with a rate at 5+%?
depends on your marginal state tax rate
buying 4/27/23 and redeeming 4/1/24 gives about 4.75% divided by (100 – your state tax %), which for me would push it up to the equivalent of an 11 month CD at 5.15%
Thank you!
My simple brain still doesnt comprehend how the ones we bought in 01-01-22 are worth more then the ones we bought in 10-01-21. Looking at the chart it seems I should also cash out the newer ones out 1st too. Its been a fun strange ride.
yeah, it seems paradoxical, but the older bonds spent 6 months earning only 3.5% whereas the newer ones started at 7.1%.
Just want to add another perspective I don’t see mentioned much. Comping to treasures bills is sort assuming you redeem early. Nothing wrong with that. Another way to look at these is to compare them to tips particularly if you plan on holding longer term. 30 yr tips have a real yield of about 1.4% now, so for 100 bps sacrifice in yield you get the put (redemption) and tax deferral which are both very valuable. The put seems pretty great to me in this rate volatility. There is a ton of real interest rate risk in a 30 yr. Though if you think rates are going back down you might want that duration and prefer the tips. On tax deferral, you get total control of when to recognize the income. You can choose to redeem in a lower income year. There are certainly some other differences but over a longer term period many are less impactful.
You get full interest for the month you invest, but no interest for the month you redeem.
Interest earned each month is posted on the first day of the following month. Interest earned in April 2023 will be posted to your I-Bond account on May 1, 2023.
So buy late in a month; redeem early in a month.
So, if you buy at the end of a month and redeem on the first of a month, you basically get almost 1 month of extra interest. That would effectively reduce the 3 months of no interest to 2 months. Am I right?
That means, if you buy at the end of April and redeem on 7/1/2024 you hold the bonds for little over 14 months and get 6.89% for 6 months (Apr-Sep), around 4% for another 6 months (Oct-Mar), and 0% for 3 months (Apr-Jun), which equals to ((6.89/2 + 4/2)/14)*12 = 4.67% annual rate. Any flaws in my calculations?
Correct, you should redeem on the 1st or 2nd day of the 3rd month after it switches to low rate. You’ll pay 3-mo of lower rate penalty, but only have money tied up for 2.04 months, and have a chance to get a full month of higher rates elsewhere.
Based on your comment, Alex should redeem on 6/1/2024, not 7/1/2024, right?
Actually, here is an improvement to my calculations. You don’t have to hold it for little over 14 months, you can hold it for little over 11 months. So, if you buy at the end of April and redeem on 4/1/2024, then you get 6.89% for 6 months (Apr-Sep), around 4% for 3 months (Oct-Dec), and 0% for another 3 months (Jan-Mar), and your annual rate will be ((6.89/2 + 4/4)/11)*12 = 4.85%.
I believe you have to hold it for at least 1 year, though I’m not sure if the holding time is counted in the same way.
https://www.treasurydirect.gov/savings-bonds/cashing-a-bond/
all bonds have the 1st of the month as the issue date so 4/1/24 would be the first day it could be redeemed
If I sell on May 1st, do I get April interest? or should I sell on May 2nd so the interest posts on the 1st?
the current value should update on the 1st with the previous month’s interest
1 year treasury bill is better guaranteed yield than buying an I bond and redeeming after 12 months due to the 3 month interest penalty
Hi
I read through this, but I want to make sure my math is correct
I bought
Oct 1st, 2021 – now earning 6.48% – i should sell Jan 2024 (because Oct 1st is the rate reset)
Jan 1st, 2022 – now earning 6.48% – i should sell Oct 2023 (because Jul 1st is the rate reset)
Jan 1st, 2023 – now earning 6.89% – i should sell Oct 2023 (because Jul 1st is the rate reset)
am I correct?
This was posted earlier by
Gadget - Bank Bonus Geek 🔗 , gives the best timeline.
https://tipswatch.com/2023/03/29/want-to-exit-your-i-bond-investment-youd-better-have-a-plan/
But the last one on your list, purchased 1/1/23 won’t be eligible for redemption until 1/1/24.
B, I laughed when reading your comment because there are LOTS of us out here who made similar purchases during the exact same timeframe and are now beginning to consider the best time to sell. Speaking only for myself I never intended to hold these ibonds for even 5 years, much less 30. The upcoming (roughly) 4% rate may not be all that painful since we’ll all eventually incur a 3 month penalty. Therefore, I’m more interested in the NEXT updated Ibond rate (meaning the one in November). At that point we’ll have a better idea of what opportunities the then current competing rates provide. And whatever the choice it’s clear that the first day of the month is the time to cash in.