I bonds

[Smilinggirl]

A friend was telling me that I should consider putting some of my emergency fund in I bonds. She said they’ve got a guaranteed return of 7.something percent. I tend to keep a rather large EF, so could tie up a chunk of it pretty easily for a few years. I’ve just started doing some research, but thought I’d ask here since I tend to get good information explained in a way I can understand here. Can you tell me what you know? Thanks.

[disneysteve]

I bonds have 2 components to the interest rate, a fixed rate and an inflation rate. The fixed rate stays the same for the life of the bond. The inflation rate gets updated every 6 months. Currently, the fixed rate is 0.00%. The current inflation rate is 3.56% for 6 months. That gives you an annualized rate currently of 7.12%. The rate adjusts at the beginning of May and November.

You must hold an I bond for at least 1 year. After that, you can redeem it at any time but if you do so before 5 years, you pay a penalty of 3 months of interest.

There are a lot more details that you can read about here: https://www.treasurydirect.gov/indiv...res_ibonds.htm

[MonkeyMama]

I also like MyMoneyBlog's sum up of I Bonds. Just a lot of good info.

https://www.mymoneyblog.com/savings-i-bonds-november-2021-interest-rate.html

[jeffmem]

For those of you who do not know EE bonds will double in value after 20 years. regardless of what the interest rate says.. The government will make up the difference. They are 30 year bonds, and of course if the interest rate is good, you would leave them in for the 30 years. But.... at current bad interest rates it's not. But... I think 10,000 interest on a 10,000 bond in 20 years amounts to what around 3% or so? Still not bad...

I also bought some I bonds after November, but wondering should I buy more before April or not? What are your thoughts? The interest rate hides will bring down the I bond rates or make them go up more? We are limited to 10k a year in I bond and another 10k on EE bonds per person so I have to play my cards right. Thoughts?

[Thrif-t]

For those of you who do not know EE bonds will double in value after 20 years. regardless of what the interest rate says.. The government will make up the difference. They are 30 year bonds, and of course if the interest rate is good, you would leave them in for the 30 years. But.... at current bad interest rates it's not. But... I think 10,000 interest on a 10,000 bond in 20 years amounts to what around 3% or so? Still not bad...

I also bought some I bonds after November, but wondering should I buy more before April or not? What are your thoughts? The interest rate hides will bring down the I bond rates or make them go up more? We are limited to 10k a year in I bond and another 10k on EE bonds per person so I have to play my cards right. Thoughts?

From what I understand as to how the interest works, if you buy I bonds now, you will get the 7.12% rate for 6 months after you buy your I bonds, then you will get whatever the rate changes to in May for 6 mos after that, rinse and repeat. So there isn't really any reason to wait, I don't think.

[kork13]

From what I understand as to how the interest works, if you buy I bonds now, you will get the 7.12% rate for 6 months after you buy your I bonds, then you will get whatever the rate changes to in May for 6 mos after that, rinse and repeat. So there isn't really any reason to wait, I don't think.

The main reason to wait would be to capture a higher fixed rate, which remains a permanent fixture of the I-bond as defined on the date of issue. With the Fed finally starting to raise interest rates, it's entirely possible (if not likely) that the I-Bonds issued after May will include a non-zero fixed interest rate (unlike the current 0% fixed rate).

However, you are correct about the inflation component of I-Bonds. Regardless of when you purchase, you get a rolling 6 month period of each interest rate, in sequence.

[jeffmem]

The main reason to wait would be to capture a higher fixed rate, which remains a permanent fixture of the I-bond as defined on the date of issue. With the Fed finally starting to raise interest rates, it's entirely possible (if not likely) that the I-Bonds issued after May will include a non-zero fixed interest rate (unlike the current 0% fixed rate).

However, you are correct about the inflation component of I-Bonds. Regardless of when you purchase, you get a rolling 6 month period of each interest rate, in sequence.

You got my point... That is what I am asking. I know that I-bond is variable + fixed, but yes, I want to capitalize on the higher interest rate, so what I am asking is what is the prediction for the new rates in May? Is it going to go up past that 7.12% or is it going to go down? If the prediction is down I will buy now before May, but if they might rise I am going to wait to buy. But what do you mean by non-zero fixed interest rate? Do you mean general interest rates for savings and bank accounts are going to go up, which would mean bond rates are going to go down right?

I have both EE and I as a hedge for inflation and a safer investment as I get older. Though the majority of my money is in stocks, I am moving some new investments to bonds, as they will start to mature in my 60s and 70s and will give some additional annual cash to play with when I am no longer working.

[kork13]

You got my point... That is what I am asking. I know that I-bond is variable + fixed, but yes, I want to capitalize on the higher interest rate, so what I am asking is what is the prediction for the new rates in May? Is it going to go up past that 7.12% or is it going to go down? If the prediction is down I will buy now before May, but if they might rise I am going to wait to buy. But what do you mean by non-zero fixed interest rate? Do you mean general interest rates for savings and bank accounts are going to go up, which would mean bond rates are going to go down right?

I have both EE and I as a hedge for inflation and a safer investment as I get older. Though the majority of my money is in stocks, I am moving some new investments to bonds, as they will start to mature in my 60s and 70s and will give some additional annual cash to play with when I am no longer working.

By "non-zero fixed interest", I was referring specifically to the I-Bond's fixed interest component. Currently, it's 0%. My expectation is that, with the Fed increasing rates, the I-Bond's fixed interest rate will go up to at least .1-.2%. As for the inflation component, unless something dramatic happens in the next 2 months, I expect it to remain in the 6-7% range (or potentially even higher). If it were me, and I hadn't already bought a $10k I-Bond in Jan'22, I'd be waiting to buy in May. However, as the Fed (presumably/hopefully?) continues to increase interest rates (and all of the other driving forces such as logistical backlogs die down), inflation should cool off, which will start to reduce the I-Bonds' inflation component in your earned interest rate calculation.

As for bank accounts, they likely may VERY slowly start to creep upward, but I don't think they'll see any noteworthy changes until the Fed starts targeting at least 1% interest rates.

I think you're misunderstanding the correlation between interest rates and bonds. As prevailing interest rates increase, bond values will go down. The interest rates on existing bonds will remain unchanged (they remain the same throughout the life of any marketable bond). However, the average interest rates paid on new bonds will increase -- which is the reason that the market value of existing, lower-interest bonds goes down (because who wants to buy an old bond paying 2% interest when there's plenty of new bonds available that are now paying 3%).

In general terms, you can also expect that as Fed interest rates increase, the stock market will cool off as well. The blindingly cheap interest rates have enabled companies to take on high levels of debt in order to accelerate growth, R&D, and other investments. That has led to high flying stock market performance, and rising interest rates will make that debt more costly, and in turn drag down company growth rates (and thus reduce overall stock market returns).

[jeffmem]

By "non-zero fixed interest", I was referring specifically to the I-Bond's fixed interest component. Currently, it's 0%. My expectation is that, with the Fed increasing rates, the I-Bond's fixed interest rate will go up to at least .1-.2%. As for the inflation component, unless something dramatic happens in the next 2 months, I expect it to remain in the 6-7% range (or potentially even higher). If it were me, and I hadn't already bought a $10k I-Bond in Jan'22, I'd be waiting to buy in May. However, as the Fed (presumably/hopefully?) continues to increase interest rates (and all of the other driving forces such as logistical backlogs die down), inflation should cool off, which will start to reduce the I-Bonds' inflation component in your earned interest rate calculation.

As for bank accounts, they likely may VERY slowly start to creep upward, but I don't think they'll see any noteworthy changes until the Fed starts targeting at least 1% interest rates.

I think you're misunderstanding the correlation between interest rates and bonds. As prevailing interest rates increase, bond values will go down. The interest rates on existing bonds will remain unchanged (they remain the same throughout the life of any marketable bond). However, the average interest rates paid on new bonds will increase -- which is the reason that the market value of existing, lower-interest bonds goes down (because who wants to buy an old bond paying 2% interest when there's plenty of new bonds available that are now paying 3%).

In general terms, you can also expect that as Fed interest rates increase, the stock market will cool off as well. The blindingly cheap interest rates have enabled companies to take on high levels of debt in order to accelerate growth, R&D, and other investments. That has led to high flying stock market performance, and rising interest rates will make that debt more costly, and in turn drag down company growth rates (and thus reduce overall stock market returns).

I am not misunderstanding the correlation, it is exactly what I thought. When normal interest rates go up, bond rates/values go down.

What concerns me is markets also going down, as if they have not already gone down enough... I am down 100% from high gain already.... I am in the red overall now.

I do think the fed rates are going to increase, but I also think that inflation is going to keep going up, so the market should be fine, long term of course, but.. this year, seems like a loss, but anything can change.

As for Ibonds... I think I am going to hold off until May then.. And I will buy 5k only and wait until November for more updates.

[disneysteve]

I am not misunderstanding the correlation, it is exactly what I thought. When normal interest rates go up, bond rates/values go down.

No. Rates and values are two different things. When interest rates rise, bond values go down.

I am down 100%

That would mean you have lost all of your money. I'm guessing that isn't what you meant to say.

[disneysteve]

As for Ibonds... I think I am going to hold off until May then.. And I will buy 5k only and wait until November for more updates.

What will you be doing with the other 5K in the meantime? Surely it won't be earning anywhere near as good a return as the I bonds. What's the benefit of waiting?

[jeffmem]

No. Rates and values are two different things. When interest rates rise, bond values go down.

Values cannot go down. What changes is the rates, which causes the earnings to be lower. We are talking here about savings bonds not other sorts of bonds. So if interest rates on the bonds go lower then of course values are going to be lower, no? Am I missing something here.....

That would mean you have lost all of your money. I'm guessing that isn't what you meant to say.

I was up over 75% before this correction, and now it is nearly 20-25% in the red, thus it is 100% non-realized loss. My portfolio is now half it's at all time high value. Perhaps I should have spent more time explaining that...

[jeffmem]

What will you be doing with the other 5K in the meantime? Surely it won't be earning anywhere near as good a return as the I bonds. What's the benefit of waiting?

I will be holding it in cash. Because the market is not doing well and I really do not want to put anymore money in the market at present. The benefit is that if Ibond rates increase then I will be getting a better interest rate longer term... And there is money set aside specifically to buy bonds during the year. Remember these are 20-30 year investments.....

[kork13]

When the Fed drives interest rates up, I-bond interest rates typically also rise. Not necessarily in lock step, but as a correlating factor, the two are comparable.

Your are correct that I-Bonds never go down in value. They earn interest every month, and sometimes that interest will be great, other times it'll be a pittance. However, because they are not marketable bonds (you can't buy/sell them except with the Treasury itself), their value (the absolute dollar figure you can sell them for in any given day) doesn't fluctuate based on interest rates or any other factors. The only thing that changes is how much interest will accrue in a given month.

[LivingAlmostLarge]

it's turned into my EF and since I'm starting now it will turn into my SORR (3 year cash holding). Plan is have to have $300k each in 30 years. And even in another 15 years it'll be $300k we can tap against SORR so we may not carry as much cash on hand.