iSavings bonds yielding 7.12% currently

[Guest]

I do wonder if we'll look back at this in a few years and think "I can't believe I thought buying ibonds at 7% was such a great deal."

 

 

 

 

[ValueMaven]

It's a cash alternative - I dont see the downside like you imply.  If you have a life crisis (over the next 12M) and need every penny you can get ASAP - then yes, this wont help.  If inflation tanks, these current i bond series wont be of much interest either as the reset rate goes lower and lower.  Even still - these beat keeping idle cash in a savings account - which is how everyone is positioning these.  That is really the whole point.  I'll be adding another slug on 1/1/22.  

[Guest]

7 minutes ago, ValueMaven said:

It's a cash alternative - I dont see the downside like you imply.  If you have a life crisis (over the next 12M) and need every penny you can get ASAP - then yes, this wont help.  If inflation tanks, these current i bond series wont be of much interest either as the reset rate goes lower and lower.  Even still - these beat keeping idle cash in a savings account - which is how everyone is positioning these.  That is really the whole point.  I'll be adding another slug on 1/1/22.  

 

 

I'm not sure if this is referring to me or not. If so, I don't see any downside (beyond inflation increasing by more than what the government declares). These are great options, in my opinion, for a cash alternative. I also think they're significantly better than the vast, vast majority of the bond universe (and most of the equity universe as well). 

 

My comment was more of a "can't believe I thought that" kind of thing. In the same vein of "I can't believe I thought a 4% money market sucked". Or along the lines of "I remember when I thought these were awesome but now they're paying 12%". Even if that's the case you don't have any real interest rate risk with these. 

 

 

[crs223]

5 hours ago, ValueMaven said:

If you have a life crisis (over the next 12M) and need every penny you can get ASAP - then yes, this wont help.

 

I don't understand this part.  With my paper savings bond, I could just want into any bank and liquidate the bond "ASAP".  Are you saying that these Series I bonds cannot be converted to cash "ASAP"?

[Guest]

1 hour ago, crs223 said:

 

I don't understand this part.  With my paper savings bond, I could just want into any bank and liquidate the bond "ASAP".  Are you saying that these Series I bonds cannot be converted to cash "ASAP"?

 

You're locked in a year in most cases I believe.

[ValueMaven]

You are LOCKED for 12M.  Period.  The US Federal Govt has to determine that your area was hit by an emergency (Flood, Wild Fire etc) to warrant a pre-12M redemption.  Who cares - these i Bonds are way better investments then basically most bond funds etc.  

 

I have a friend, very successful wall street guy - has 5 kids.  They put in $70K ($10K for each kid, and then husband and wife) in Dec and will do another $70K in Jan.  $140K @ 7.12% - not bad.  He had no idea about these.  That is the real unique part - you are basically double-dipping into year-end, at the elevated CPI U rate.  Plus, if inflation persists then these things really payoff.    

[TW4945]

On 12/18/2021 at 7:22 PM, ValueMaven said:

You are LOCKED for 12M.  Period.  The US Federal Govt has to determine that your area was hit by an emergency (Flood, Wild Fire etc) to warrant a pre-12M redemption.  Who cares - these i Bonds are way better investments then basically most bond funds etc.  

 

I have a friend, very successful wall street guy - has 5 kids.  They put in $70K ($10K for each kid, and then husband and wife) in Dec and will do another $70K in Jan.  $140K @ 7.12% - not bad.  He had no idea about these.  That is the real unique part - you are basically double-dipping into year-end, at the elevated CPI U rate.  Plus, if inflation persists then these things really payoff.    

I think the key is if you are willing to gift the amounts to your children are not. If so, then plow as much into as possible. If not, then $20k this year, $20 next has to suffice. 

[hasilp89]

I’ve been going back and forth on this. I get the theoretical appeal of 7% risk free but for $30k for a family of three I’m dragging my feet. I’m leaning towards one slug this year to hold our cash emergency fund, but might be holding off after that.

[Blugolds]

8 hours ago, hasilp89 said:

I’ve been going back and forth on this. I get the theoretical appeal of 7% risk free but for $30k for a family of three I’m dragging my feet. I’m leaning towards one slug this year to hold our cash emergency fund, but might be holding off after that.

 

Same, I like the idea and would certainly take advantage of it...but in my situation I would only be able to park $10k this year and $10k in January so at most $20k...and even if we assume that I would get the 7% the next time it re-rates...it isnt enough to move the needle much so I dont know if I will do it. Right now Im leaning no...now if I was in a situation where I could park 6 figures into i-bonds then yeah, I'd get excited. Right now setting up the account, waiting at least 12-mo and potentially taking penalty then what I would get net taxes etc...its nothing that gets me excited really. Maybe I make a grand net on $20k for tying it up for a year? Thats a month or two worth of groceries...Combine that with the fact that IMO 2022 has potential for things to come to a head one way or another and there could be more buying opportunities in the market and I like the optionality of cash without having to wait the 12mo..I have plenty of other cash to deploy but I've never really been one to have an "emergency" fund, I honestly cant think of any scenarios where I would need more than what I have sitting around in a checking/savings account or by moving money around, access to capital is generally pretty easy, if I had other obligations maybe the cliché 6-12 mo expenses would be more prudent but for me personally I have never been in a situation where I need it, if I did, might be a good place to park it, assuming you didnt "need" it within 12mo.  

 

 

[hasilp89]

Cheers wanted to make sure I wasn’t way off base. The emergency account is  a function of my wife. This seems to be a good alternative for that. Otherwise I’m not getting the allure when I can just park my cash in msge for a year or more.

[CorpRaider]

That's how I've always used them.  Liquid(ish) funds and a bit more tax deferred space.  I liked them a lot more when they were offering real rates of return above zero.  I had some that were previously accumulated with zero real return that I liquidated and reinvested back when the real rates improved in 2018 and 2019.  Just took a small tax hit and restarted the liquidity/penalty clock.

 

But I don't have a huge household income like some of you guys and have access to a lot of tax advantaged buckets to fill (haven't quite got there yet).  I prioritize those since I'm saving like 40-50 cents on the dollar and I don't believe in having a big emergency fund.  

Edited December 22, 2021 by CorpRaider

[thepupil]

I have $150K unused HELOC capacity. I'm using $40K of that to buy i-bonds this month/next month (i thought about doing $60K, but decided not to give $20K to my kid, for now, even if i could just never tell him about it and get it later).

 

I don't really love the prospect of 0% real return (- federal tax), but am getting em now while borrowing rates are very low and they pay a risk free nominal 7%. I can always re-evaluate. my HELOC cost ~3%

 

the biggest risk is there's some huge opportunity for that $40k w/i the next 12 months, but i have much more than that in spare IBKR margin and will still have a lot of HELOC unused. I don't want to tie up my equity in i-bonds but i'm happy to tie up my unmonetized home equity. 

 

But honestly, I thought about just buying some starter positions in midstream MLP's EPD/MMP instead...will probably make the divvy 8-9% w/o huge depreciation and would be better use, but I'm kind of reloading the gun (only 103% long and unused HELOC)...have even thought of...gasp...holding a little cash

 

it's odd that I can borrow from a bank with a 2nd mortgage and lend to the US government and make a nice NIM

Edited December 22, 2021 by thepupil

[CorpRaider]

haha, that is odd.  No way US gets like Japan and some of Europe with negative rates.  We would all be trying to buy Greenland to drill for oil or trying to corner the treasury market. 

 

I would definitely pull out more of my equity at a fixed rate if all I had to do was stroke a pen.  I would have to go through application and appraisal process and am too lazy.  Probably got sub $100K I could pull out. 

 

What sucks is I would 100% tell my folks to max these out every year, but I don't think they could handle the craptacular website.  If they were still sold in paper form, would be no problem.

Edited December 22, 2021 by CorpRaider

[rohitc99]

More of a procedural question - if you want to invest 10K for yourself and another 10K for spouse, does that require opening two accounts in treasury direct ?

[crs223]

1 hour ago, rohitc99 said:

More of a procedural question - if you want to invest 10K for yourself and another 10K for spouse, does that require opening two accounts in treasury direct ?

 

I just did this over the weekend.  A Treasury Direct "account" is tied to a SSN.  So you will need two accounts for two people.

[ValueMaven]

https://www.freep.com/story/money/personal-finance/susan-tompor/2021/12/21/savers-can-rush-make-year-end-move-put-more-money-bonds/6500031001/
 

Really interesting insight

 

There are four more monthly rates to go — December, January, February and March. The Consumer Price Index for All Urban Consumers is published every month and the I Bond rate reflects that index. 

Pederson said if the last four monthly rates for the CPI-U average 0.5% then the May 1 rate would be at about 7.2%. If rates average higher than that — say 0.9% -- the next I Bond inflation rate would be more than 10%, he said. 

Right now, it appears as if the May 1 rate could be similar to the current rate or maybe higher, which would help savers lock up a decent rate for one year at least

[thepupil]

On 12/22/2021 at 11:02 AM, thepupil said:

I have $150K unused HELOC capacity. I'm using $40K of that to buy i-bonds this month/next month (i thought about doing $60K, but decided not to give $20K to my kid, for now, even if i could just never tell him about it and get it later).

Just couldn’t resist, bought $10k for my kid today, bringing total December purchases to $30k, will do $30k more in late January.

 

At the risk of making a macro prediction, it wouldn’t surprise me if CPI > short term rates for a long time and this remains a nice “arbitrage” for a while 

[longterminvestor]

On 12/22/2021 at 7:43 PM, ValueMaven said:

https://www.freep.com/story/money/personal-finance/susan-tompor/2021/12/21/savers-can-rush-make-year-end-move-put-more-money-bonds/6500031001/
 

Really interesting insight

 

There are four more monthly rates to go — December, January, February and March. The Consumer Price Index for All Urban Consumers is published every month and the I Bond rate reflects that index. 

Pederson said if the last four monthly rates for the CPI-U average 0.5% then the May 1 rate would be at about 7.2%. If rates average higher than that — say 0.9% -- the next I Bond inflation rate would be more than 10%, he said. 

Right now, it appears as if the May 1 rate could be similar to the current rate or maybe higher, which would help savers lock up a decent rate for one year at least

I'm with you ValueMaven.  When discussing this instrument, everyone is like - well its not fixed and the rate will go down over time.  What I have been thinking about lately is "what happens if the CPI-U actually INCREASES?"  and the rate goes from 7.12% to 8%-8.5% (even higher???).  Could be my confirmation bias creeping in.  But I think its actually possible, even likely.  

[ValueMaven]

1 hour ago, longterminvestor said:

I'm with you ValueMaven.  When discussing this instrument, everyone is like - well its not fixed and the rate will go down over time.  What I have been thinking about lately is "what happens if the CPI-U actually INCREASES?"  and the rate goes from 7.12% to 8%-8.5% (even higher???).  Could be my confirmation bias creeping in.  But I think its actually possible, even likely.  

@longterminvestor agreed.  I wonder how they are modeling out future CPI U based in that article however.  
 

also I can’t seem to find a good source for CPI U.  

[TwoCitiesCapital]

2 hours ago, longterminvestor said:

I'm with you ValueMaven.  When discussing this instrument, everyone is like - well its not fixed and the rate will go down over time.  What I have been thinking about lately is "what happens if the CPI-U actually INCREASES?"  and the rate goes from 7.12% to 8%-8.5% (even higher???).  Could be my confirmation bias creeping in.  But I think its actually possible, even likely.  

 

What happens if the rates go down? Then you own a bond with a 1-year max duration redeemable at par at any time afterwards. 

 

Even if rates and inflation dropped to 0% at the next reset, you're doing better than buying a 10-year treasury bond and taking no principal risk. 

 

Doesn't seem like you can lose. May not win, but there's no losing. 

 

 

[ValueMaven]

2 hours ago, TwoCitiesCapital said:

 

What happens if the rates go down? Then you own a bond with a 1-year max duration redeemable at par at any time afterwards. 

 

Even if rates and inflation dropped to 0% at the next reset, you're doing better than buying a 10-year treasury bond and taking no principal risk. 

 

Doesn't seem like you can lose. May not win, but there's no losing. 

 

 

exactly 

[longterminvestor]

First off, I should be looking for great businesses to buy.  But since I can't find any, I am here, chasing down CPI-U index in the US Bureau of Labor Statistics.  To say that I am annoyed I have not cracked the code on how the interest rate sets is an understatement.  I pride myself on cracking the code when problem solving.  Been looking at all the CPI data I can find, using percentage changes YOY on numbers however can't seem to get the math to check out.  My work has been mainly focused on the below paragraph:

 

We set the inflation rate every six months (on the first business day of May and on the first business day of November), based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.  

 

weblink: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm 

 

My thoughts as of now....and hoping someone can take this a step further or help me with what I am missing.  Looking for the blinding flash of the obvious.  

 

1. The "we" is the Treasury? - dont know exactly who the "we" is

2. the key word above is "BASED ON" - could be arbitrary, may not be science.  maybe they just base it on CPI-U and make a call on where to set rate

3. the "non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy" leaves a ton to un-pack. The best I can find is "All Items" with a footnote saying not seasonally adjusted.

4. First business day in May and Nov means to me they would have to use data from the previous month that is posted in current month to use for the following first business day.  For example, The Sept numbers for 2021 were posted on Oct 13, 2021 for use on the "first business day in November"  

The closest number I could find is 5.4% increase from Sept 20 to Sept 21 defined as "all items".

https://www.bls.gov/news.release/archives/cpi_10132021.htm

5.  I am not concerned with when the interest rate starts ticking on the bonds I bought, I am 100% focused on trying to find the number that tracks the interest rate.   

 

I am probably gonna call some 1-800 number I find and get directed to the department of agriculture who re-routes me to the bunker in Nevada where there's a couple guys who are like "um...I can't help you however I am looking for my stapler....."

 

[ValueMaven]

2 hours ago, longterminvestor said:

First off, I should be looking for great businesses to buy.  But since I can't find any, I am here, chasing down CPI-U index in the US Bureau of Labor Statistics.  To say that I am annoyed I have not cracked the code on how the interest rate sets is an understatement.  I pride myself on cracking the code when problem solving.  Been looking at all the CPI data I can find, using percentage changes YOY on numbers however can't seem to get the math to check out.  My work has been mainly focused on the below paragraph:

 

We set the inflation rate every six months (on the first business day of May and on the first business day of November), based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.  

 

weblink: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm 

 

My thoughts as of now....and hoping someone can take this a step further or help me with what I am missing.  Looking for the blinding flash of the obvious.  

 

1. The "we" is the Treasury? - dont know exactly who the "we" is

2. the key word above is "BASED ON" - could be arbitrary, may not be science.  maybe they just base it on CPI-U and make a call on where to set rate

3. the "non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy" leaves a ton to un-pack. The best I can find is "All Items" with a footnote saying not seasonally adjusted.

4. First business day in May and Nov means to me they would have to use data from the previous month that is posted in current month to use for the following first business day.  For example, The Sept numbers for 2021 were posted on Oct 13, 2021 for use on the "first business day in November"  

The closest number I could find is 5.4% increase from Sept 20 to Sept 21 defined as "all items".

https://www.bls.gov/news.release/archives/cpi_10132021.htm

5.  I am not concerned with when the interest rate starts ticking on the bonds I bought, I am 100% focused on trying to find the number that tracks the interest rate.   

 

I am probably gonna call some 1-800 number I find and get directed to the department of agriculture who re-routes me to the bunker in Nevada where there's a couple guys who are like "um...I can't help you however I am looking for my stapler....."

 

wow - very well said!!  I’m glad it just wasn’t me who has had this trouble.  The other idea is to just use CPI as a gauge and compare to what the rate is when it resets.  Although that’s not an ideal scenario.

[gfp]

4 hours ago, longterminvestor said:

First off, I should be looking for great businesses to buy.  But since I can't find any, I am here, chasing down CPI-U index in the US Bureau of Labor Statistics.  To say that I am annoyed I have not cracked the code on how the interest rate sets is an understatement.  I pride myself on cracking the code when problem solving.  Been looking at all the CPI data I can find, using percentage changes YOY on numbers however can't seem to get the math to check out.  My work has been mainly focused on the below paragraph:

 

We set the inflation rate every six months (on the first business day of May and on the first business day of November), based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.  

 

weblink: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm 

 

My thoughts as of now....and hoping someone can take this a step further or help me with what I am missing.  Looking for the blinding flash of the obvious.  

 

1. The "we" is the Treasury? - dont know exactly who the "we" is

2. the key word above is "BASED ON" - could be arbitrary, may not be science.  maybe they just base it on CPI-U and make a call on where to set rate

3. the "non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy" leaves a ton to un-pack. The best I can find is "All Items" with a footnote saying not seasonally adjusted.

4. First business day in May and Nov means to me they would have to use data from the previous month that is posted in current month to use for the following first business day.  For example, The Sept numbers for 2021 were posted on Oct 13, 2021 for use on the "first business day in November"  

The closest number I could find is 5.4% increase from Sept 20 to Sept 21 defined as "all items".

https://www.bls.gov/news.release/archives/cpi_10132021.htm

5.  I am not concerned with when the interest rate starts ticking on the bonds I bought, I am 100% focused on trying to find the number that tracks the interest rate.   

 

I am probably gonna call some 1-800 number I find and get directed to the department of agriculture who re-routes me to the bunker in Nevada where there's a couple guys who are like "um...I can't help you however I am looking for my stapler....."

 

 

 

I'm not following this super closely, but I think you derive the 7.12% by taking the 6 month change from the data dates you state above and double it to annualize it  -

 

274.31 minus 264.877 is 9.433, which is a 3.56127561% increase over 6 months.  Double that and it is 7.12255%

 

[ValueMaven]

@gfpvery helpful.  Thanks.  Why are you taking March and Sept rates when the rate resets in Nov and May?  Why the 2 month lag.  
 

also what is the source of that table?  I can’t seem to find that specific one on the BLS website 

Edited December 28, 2021 by ValueMaven