Timing of iBond purchase with interest rate increase

[99mkw]

David Enna at TIPSwatch.com had a recent post discussing fixed rate increases on ibonds. In it he goes into some depth explaining how the break-even point for waiting for a higher fixed rate can be more than a decade away. It was before the May rate was announced, but I imagine the same sorts of things apply to November. Furthermore, if the fixed rate does increase in November it will still be available to you for several months in 2023 when your 10k allotment resets.

[shantster]

Thank you to everyone for the discussion. This is helpful. I'll be curious if we actually see a fixed rate above 0% with the next rate adjustment.

As for the comment by PhysicianonFIRE that we asked about 2 weeks too late - we had recently completed a big job change that involved moving many states away and with new house purchase. We were finally at the point where I felt comfortable locking up some of the liquid cash we had in the EFund.

[99mkw]

I conceptualize it the same way you do. If you don't anticipate wanting to cash them anytime soon you can just hold them and get 6 months at each rate. If you'd rather give up 3 months of interest and direct the cash elsewhere in 12-15 months, that could change your thinking on timing. Consider recent rates from treasury direct (note that these "six month" rates are half of the annual rates mentioned above):

May 1, 2022	4.81%
November 1, 2021	3.56%
May 1, 2021	1.77%

In October 2021 the November rate was announced. You could either buy that month and get six months of 1.77(3.54)% followed by 3.56(7.12%) or wait two weeks and start at the higher rate. Even in October I think most people suspected the May 2022 rate would be higher than the May 2021 rate, so many people who hadn't already filled their 10k allotment waited until November to buy. If inflation falls significantly and you decide to cash them in and put the money to work elsewhere in 15 months your blended rate would have been 5.33% for the October purchase versus 8.37% for the November purchase.

[Turf Doc]

Even if the blended rate for 1yr is higher if you bought in May, who cares about a 1 year rate? I imagine most will hold their i bonds until inflation lowers again, unless of course they’re keeping them for the long run in cases of future inflation.

but for the people who were enticed by high yields only, buying in April was surely the smarter move because they’ll get whatever the May purchasers get in interest + 6 months of ~7%.

it seems to me that the only way a May purchaser would win in the long run is if inflation stays above the April rate for the next 30 years and both cohorts keep their i bonds for as long as possible

[CaffeineNepenthe]

Redo the math.

I'm not quite sure what you mean. My point is more of an ibonds mechanics issue than a math one.

If you bought in April you will get 6months of 7.62% and then 6months of every future rate, including the current 9.6% rate which would start in October 2022 instead of May 2022 in this case.

As long as inflation keeps going up, the person who bought in May will earn more than the person who bought in April over the same time period. However, when inflation drops back down to 1-2%, the person who bought in April will see that drop later than the person who bought in May--the April buyer would have effectively gotten 6m of a 7.62% rate that the person who bought in May didn't.

That extra 6m of 7.62% represents the unrecoverable loss in value of the timid May buyer's $10,000 cash over Nov 2021 - April 2022 while it languished in a Chase savings account.


I'm happy to be wrong but this is how I conceptualize it.

[spiritrider]

Redo the math.

[CaffeineNepenthe]

It is not that simple. While the safe bet was to buy I Bonds in April to get a safe high one-year blended rate. However, there is nothing to say the I Bond inflation rate won't still be high for Nov21 - May22.

This could still work out for those who missed buying in April. Sure they missed out on April's interest. However, their one-year blended rate could be close to or even > those who bought in April.

Only time will tell.

Wait a second, if you bought in April you'll get 6m of 7.6% before getting a full 6m of 9.6%. It's just staggered. You're right to say that beyond that nobody knows what the next rate will be; Nov22-May23 could be 15% in which case people who bought in May22 would get a higher blended rate their first year. But even if that's the case, people who bought in April22 will still get 6m of the 15%, albeit 5 months later than those who bought in May 2022.

My point was just that buying in April would have effectively let you correct for the prior 6 months of inflation your cash experienced Nov21-May22. Once we hit May the damage is done and you're only correcting for inflation for the May22-Nov22 period and beyond.

[spiritrider]

It is not that simple. While the safe bet was to buy I Bonds in April to get a safe high one-year blended rate. However, there is nothing to say the I Bond inflation rate won't still be high for Nov21 - May22.

This could still work out for those who missed buying in April. Sure they missed out on April's interest. However, their one-year blended rate could be close to or even > those who bought in April.

Only time will tell.

[CaffeineNepenthe]

I appreciate jacoavlu and jz-'s contributions to ibond threads last month. They helped me realize I could get 6m of the 7.62% and still get all 6m of the 9.62%. My wife and I maxed out in April.

Correct me if I'm wrong here but from what I understand there really isn't any point to dollar cost averaging ibonds throughout the year. If you have the extra cash & variable rates are attractive, just buy the ibonds early. Timing the market isn't an issue because there is no market. If you bought Nov '21-April '22 you would have locked in a rate that would offset inflation for that period of time. Because the OP waited until the rate changed in May, he basically lost the ability to recoup the prior 6-months worth of inflation damage on his cash. His $10K inflated 3.8% with the rest our cash in the bank while those who invested in ibonds before May will earn a corrective %7.62/y for 6M before switching to the %9.62/y rate.

[PhysicianOnFIRE]

You asked about 2 weeks too late. You had the chance to lock in 12 months at 8.54% (average) buying before the end of April.

Buy now through October and you'll get 9.62% for the first 6 months, and a TBD rate for the following 6 months. We'll know that rate mid-October and it's based on the CPI-U from March to September.

https://www.physicianonfire.com/buy-i-bonds/

[jacoavlu]

The fixed rate never changes; it is locked in for 30 years.
Your adjusted rate changes on the 6 mo. anniversary of each of your "bonds".
The adjusted rate is so high now, that the fixed rate is irrelevant.
Reminder: Ibonds are not bonds. they are inflation-protected cash.

to clarify, and I realize my reply could be misinterpreted, the fixed rate of ibonds already issued never changes. but the fixed rate for new issued bonds might be changed 5/1 and 11/1. David Enna is usually spot on with predictions as to whether the fixed rate is likely to change or not, which can influence people's buying decisons.

[The White Coat Investor]

Bought in January. Bought some more in April Will buy more this month. Will buy more next January.

Beginning investors worry about timing the market. Advanced investors know time in the market is more important.

You think anyone really cares what day they bought their investments in 2012? Nope. Anything bought in 2012 was a great investment.

[jz-]

The fixed rate never changes; it is locked in for 30 years.
Your adjusted rate changes on the 6 mo. anniversary of each of your "bonds".
The adjusted rate is so high now, that the fixed rate is irrelevant.
Reminder: Ibonds are not bonds. they are inflation-protected cash.

[shantster]

Thank you for the clarification. It looks like we won't see any impact of the recent rate increase on the fixed rate until November 1. Since we are starting to move part of the EFund to I-Bonds, I made my $10K purchase today and will do the same for my husband's $10K limit so that we can start the clock on the 1 year funds lock. We do have plenty of liquid money that the 1 year lock on funds is not going to be a problem.

Hopefully we'll see a fixed rate greater than 0% to start 2023.

[jacoavlu]

David Enna at tipswatch.com is all you need

the fixed rate changes 5/1 and 11/1. Most of us bought our limit last month or earlier in the year