Refresher on I BondsMay 4, 2023 3:53 pm
This week the Treasury announced the new rate for I bonds, and if you haven’t heard the new rate is 4.3%, a drop from the previous 6.89% announced in November 2022. We thought in light of this announcement and the fact that many of you purchased I bonds in the past, we thought that we’d give a refresher on how these bonds work, and if you own them how this new rate will affect you.
How they work
I bonds are issued directly by the US treasury and can only be purchased on their website. Unlike other bonds where the yield is stated to the investor when they buy them, I bonds interest rate changes with the US CPI, every 6 months. When you buy an I bond, you know the rate you will receive for the next 6 months, but after that period you will have to wait and see what inflation is doing, and what the new rate will be.
On the first of May and then again November, the US Treasury will announce what the “current” interest rate is for the I bonds, and that was the news we saw Monday morning. However, there is a huge distinction on what the rate does for folks who buy new I bonds, and those who already own I bonds. As a reminder, the yield they announce is stated as an annual rate, however since it’s only in effect for 6 months until a new rate is applied, you must divide it by two to get what you would receive as an investor in I bonds.
Buying New I bonds
The impact of an announcement of a new I bond yield is fairly straightforward. For example, anyone buying new I bonds between now and October 30th will receive today’s rate for the next 6 months. This last part if key, in that if say you buy new I bonds in June, you will earn today’s rate for June through November. Even though the Treasury will announce a new rate on November 1st, that rate will not kick in until the investors 6 month purchase date anniversary is complete. Lastly, for simplicity reasons US treasury treats all purchases made in the middle of a month as if they occurred on the 1st of that month.
So in closing, today’s rate is available for 6 months, starting today and ending on October 31st. When the new rate is announced on November 1st, that new rate will apply to you on your 6 month purchase date anniversary.
If You Own Existing I bonds
You really need to know what month you originally purchased your I bonds in, because that month sets your 6-month anniversary date. Recall that November’s rate was 6.89%, and it’s possible you might still be earning that yield if you purchased your bonds in any other month than May. That’s because of this: imagine you originally bought your I bonds in the month of January. This means rate changes apply to you in January and July, and as such, you didn’t start to earn the 6.89% announced in November UNTIL January and you still have 2 more months of this higher rate until your rate falls on July 1st.
The other reason it’s so important to know what month you purchased them is to keep track of what your penalty is, should you want to sell them. Recall that I bonds must be held for a minimum of 12 months, and then if they are sold prior to your 5 year anniversary there is a penalty of 3 months of interest. Seeing the rate drop today to 4.3%, if an investor was disappointed, one may think to themselves “I’ll sell in August sometime and move my money elsewhere” without realizing they may still be earning the higher rate until their 6 month anniversary.
The Fed has been on a mission to bring inflation down, and while inflation is proving to be stickier than perhaps originally thought, it is coming down. The announced I bond rate today of 4.3% is still strong, but many investors have seen money markets and CDs paying a similar or higher rate. If the Fed continues to make progress on bringing inflation down, this may be the last decent rate paid on I bonds, as the November yield may disappoint.
Derek Amey serves as Managing Partner and Co-CIO at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at email@example.com.
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