Only 4 Days Left To Buy I Bonds Paying 8.5%

Correction: Since April 30 is a Saturday to receive the 7.12% rate I bonds need to be bought by Friday, April 29. Otherwise the purchase date will be Monday, May 2, and will start with the 9.62% annualized rate.

Inflation has reared its ugly head worldwide due to multiple factors including the surge in demand for products and services as people increase spending post lockdowns, supply chain disruptions caused by the pandemic and the latest being Putin’s Ukrainian war increasing food and energy prices.

While stock markets are exhibiting a lot of volatility, and currently testing their 2022 lows, along with bonds still paying low interest rates, there is one investment (U.S. Treasury Series I bonds) that will pay over 8.5% the next 12 months. If you have up to $10,000 (or $20,000 for a couple, each with their own $10,000 investment) that you don’t need for one year, it is worth your time to research these.

However, the initial investment to lock in the current 7.12% rate will need to be done in the next four days or by April 30. To understand the pros and cons of the Series I bonds read this article before you decide to buy them.

An 8.54% return is guaranteed by the U.S. Treasury

Fortunately, the U.S. Treasury Series I bond can come close to or beat the inflation rate. These bonds are 30-year instruments whose interest rate is reset every six months. The rate is a combination of an inflation calculation over a six-month timeframe and a fixed rate determined by the U.S. Treasury Secretary. With inflation increasing to multi-decade highs the inflation calculation for I bonds bought until April 30, pays an annualized rate of 7.12% for six months.

It is possible to determine what the I bonds reset interest rate will be on May 1 since the U.S. Labor Department announced March’s inflation rate, completing the six months needed to calculate it. Based on the result I bonds bought between May and November will pay a 9.62% annualized rate.

When combined with the 7.12% rate, I bonds bought in April will be paid a full year interest rate of 8.54%, which is exactly what the CPI rate has been for the past 12 months. While this only keeps pace with the March inflation reading, if inflation decreases the I bonds return will be higher than inflation.

One aspect about I bonds to keep in mind is that if they are redeemed within five years of being bought there is a three-month interest penalty, applied to the last three months of interest. If bonds are bought in April and redeemed after one year the penalty would result in an effective rate of 6.05%. Still much better than any other fixed income investment with such low risk.

The reason not to wait until May

While investors who buy in May will receive the 9.62% rate from May to November, the big unknown is what rates will be when it comes time for the rate to reset. With many economists believing March will be the peak in inflation and most are projecting that rates should decline, betting on a rate that will be as high as the current 7.12% over April to September this year for the next six month rate reset looks like a losing proposition.

The graph below is from Andrew Hunter, Capital Economics Chief Economist, which projects the headline inflation rate (which is what the I bonds interest rate is based on) peaked in March and falls off substantially the rest of this year. If his forecast is anywhere close to correct the November 1 I bond interest rate will be below 7.12%.

Investors have discovered Series I bonds

Before the May 2021 six month I bonds tranche paid 3.54%, these bonds interest rate had ranged from 1.06% to 2.53% since May 2008, a period of 13 years. With its rate skyrocketing to 7.12% investors have gone on a buying spree. Below are the number of transactions, the dollar amount bought and the average purchase for fiscal 2020 and 2021 and the first six months of fiscal 2022.

Fiscal 2020

• # Transactions: 487,836
• $ Bought: $313 million
• Average purchase: $643

Fiscal 2021

• # Transactions: 668,876
• $ Bought: $810 million
• Average purchase: $1,211

First six months of fiscal 2022

• # Transactions: 1,577,291
• $ Bought: $9.1 billion
• Average purchase: $5,810

Observations from the data

• There were almost as many transactions in January 2022 at 469,779 than all of fiscal 2020’s 487,836
• Except for the month of October 2022, the next five months dollar amounts exceeded all of fiscal 2021’s $810 million
• January 2022 had $3.2 billion of purchases
• While the number of transactions in the first six months of fiscal 2022 were 2.4 times greater than all of fiscal 2021’s, the dollar amount is 11.3 times
• The average transaction increased from $643 in fiscal 2020 to $1,211 in fiscal 2021 to $5,810 in the first six months of fiscal 2022
• Keep in mind that the largest amount that can be bought in a single transaction is $10,000

Check out TreasuryDirect.gov for more info

Below are three U.S. Treasury sites to provide more information and how to create an account.

This site provides a good overview of Series I Savings Bonds.

This site provides more in-depth information and historical interest rates.

This site is where one can open an account.