Are I-Bonds Still a Buy?

They were a great income opportunity last year.

But are they a great income opportunity today? 

I-Bonds were all the rage toward the end of 2022. 

Investors couldn’t get enough of them.

Billions of dollars worth of them were sold in late October. A record $1 billion of I-Bonds were sold in one day.

And the attraction?

The opportunity to lock in a luscious 9.62% interest rate on a risk-free U.S. Treasury security. 

Investors were motivated to act and to act immediately.     

An investor had to buy his I-Bond by October 28 to lock in that 9.62% interest rate. Anyone who was a day late could lock in an interest rate no better than 6.48%.

I-Bonds: The Real Story

They are a curious debt security – a security I suspect that many investors fail to fully understand.

I-Bonds are 30-year Treasury securities. They sell for $25 each. Each investor is limited to purchasing only $10,000 worth of I-Bonds per year. 

I-Bond interest is earned monthly and compounds semiannually until the bond hits the 30-year maturity date or until the investor sells it back to the Treasury.

There are no periodic (semi-annual) interest payments. Interest is reinvested in the bond and then it compounds. 

The interest the I-Bonds pay is based on two interest rates – one fixed, the other variable.

The fixed rate is immaterial. The variable rate captures the attention. The rate is set based on changes in the consumer price index (CPI) over the previous six months. 

I suspect that many investors failed to appreciate the six-month resetting characteristic.

That 9.62% annualized interest rate was guaranteed only through April 2023. 

Had you waited until the first day of November 2022 to buy, your interest rate would have been 6.48% instead. 

The U.S. Treasury announces interest rate changes in May and November, but the date when the rate changes for the bond purchaser is six months from date the investor bought the bond. 

Far be it for the federal government to make anything straightforward. 

And once you bought an I-Bond, you were committed for at least a year.

There is no secondary market. You’re required to hold your I-Bond for at least one year before you can sell it back to the U.S. Treasury.  

You can sell after a year, but if you sell before five years, you will forfeit three months of interest. (You can sell any time after five years and incur no penalty.) 

A Buy Then, But a Buy Now?

But what about the present?

Are I-Bonds still a buy today?

Alas, the answer is no.

An I-Bond purchase today ensures you only a 4.3% interest rate for the next six months.

What’s more, the CPI for the May through October period is likely to be lower than the CPI for the previous six months.

I-Bonds had their moment in the sun, but the sun has set on the opportunity.

Better income opportunities are found elsewhere.

Good Fortunes,

Steve Mauzy