What happens to I-bonds if rates plummet again

[Maddy]

I can't help noticing how many people on this forum are parking a portion of their cash in i-bonds. These are 20-year bonds, right?

I'm trying to think through what would happen to an i-bond purchased today at a relatively high rate of interest if rates suddenly plummeted and the Fed went back into QE mode. You'd have the right to redeem your bond at the price you paid for it, wouldn't you? Am I correct in thinking that the worst possible outcome in this scenario that you'd forfeit the last three months of interest?

[Xan]

I can't help noticing how many people on this forum are parking a portion of their cash in i-bonds. These are 20-year bonds, right?

I'm trying to think through what would happen to an i-bond purchased today at a relatively high rate of interest if rates suddenly plummeted and the Fed went back into QE mode. You'd have the right to redeem your bond at the price you paid for it, wouldn't you? Am I correct in thinking that the worst possible outcome in this scenario that you'd forfeit the last three months of interest?

Not at the price you paid for it, but at the price you paid plus all the interest that has accumulated. If you've had it less than five years you forfeit three months' worth of interest. I'm not 100% clear on which three months that is. And of course you don't have the option to cash it out at all until you've held it one year.

These are called "bonds" but they're really much more like cash. The value does not go up and down with interest rates as bonds do.

[boglerdude]

For example, If they cut the rate to 0 (and your fixed rate is 0) wait three more months and when you sell you'd lose 0. Correct me if I'm wrong

[Maddy]

For example, If they cut the rate to 0 (and your fixed rate is 0) wait three more months and when you sell you'd lose 0. Correct me if I'm wrong

That's actually very clever. I keep looking for the catch.

[Dieter]

For example, If they cut the rate to 0 (and your fixed rate is 0) wait three more months and when you sell you'd lose 0. Correct me if I'm wrong

That's actually very clever. I keep looking for the catch.

Ditto — ones I can think of:

* maybe the opportunity cost vs what the could get when take out? (Might have to do math! )

* can only put 10k in per year (yes, exceptions)

So, if inflation goes up again, can’t get much money in quickly


It will be interesting to see what happens with the fixed rate portion over time as short term rates keep going up

[boglerdude]

Its pretty easy to create an EIN and make a 2nd account. also fyi

"Treasury does not actually post the interest accrued into the account, even if only for viewing purposes, due to the ‘3 month penalty’ rule for holding the security for less than 5 years. According to the Rep, this is on a rolling calendar basis and the most current 3 months of interest will NEVER show in the account, until the ‘held for 5 years’ criteria is met."
https://obliviousinvestor.com/investing ... confusion/

[barrett]

I can't help noticing how many people on this forum are parking a portion of their cash in i-bonds. These are 20-year bonds, right?

I'm trying to think through what would happen to an i-bond purchased today at a relatively high rate of interest if rates suddenly plummeted and the Fed went back into QE mode. You'd have the right to redeem your bond at the price you paid for it, wouldn't you? Am I correct in thinking that the worst possible outcome in this scenario that you'd forfeit the last three months of interest?

1) You have to hold for at least one year but I-bonds keep earning interest (assuming the fixed rate and inflation component are not both 0%) for a full 30 years, not 20.

2) No one really knows what the next fixed rate will be on 5/1/23 but the composite rate is likely to be quite a bit lower than the current 6.48% simply because inflation has been so low since July. The 5/1/23 inflation component will be based on what total inflation is from 10/1/22 to 3/31/23 based on the CPI-U. See this chart:

https://www.bls.gov/regions/mid-atlanti ... _table.htm

3) If you buy anytime before the 5/1/23 reset, you'll earn that 6.48% annualized yield for months 4-9 and then a different - probably lower - rate for months 10-12. You could then cash them out or continue to hold if you choose to do so. Important to note that you'd see zero interest for the first three months.

4) Many investors were flocking to I-Bonds in 2021 and the first 10 months of 2022 because they were a screaming deal compared to any other safe investment. There was a six-month period when they were yielding 9.62% and that really got people's attention. As of this morning I see that one-year Treasuries are yielding 4.9% so there's at least one obvious option to I-Bonds that doesn't require going further down the risk scale. Just keep in mind that I-Bonds will NEVER go down in price while the price of one-year Treasuries will bounce around from minute to minute during trading hours. So, for a fair comparison between I-Bonds & Treasuries, you have to assume that the Treasuries would be held to maturity.

If I've gotten anything wrong, someone will correct what I've written.

[welderwannabe]

Nothing wrong with the above, except I'd add that ibonds are tax deferred which also adds to their benefits.

[Xan]

Nothing wrong with the above, except I'd add that ibonds are tax deferred which also adds to their benefits.

Plus they can be used, tax-free, to pay for higher education. Like a 529 but more flexible. There is an income limit on that, though, IIRC.

[sophie]

Maddy, a few more corrections to your understanding of Series I bonds....

First, they are 30 year bonds in which all interest is tax-deferred until either you cash in the bond, or the bond matures (at 30 years). That itself is incredibly useful, as it's effectively an extension of a traditional IRA to which you make non-deductible contributions and use the proceeds to invest in cash. And, there are no RMDs.

Unlike tips or long treasuries, the value of the bond can never drop, because the interest rate can't fall below zero. So it's entirely safe. Yes, you can lose the last 3 months of interest if you sell the bond before 5 years, but if you have been steadily buying them you should always have a bond more than 5 years old to sell. I would preferentially sell the ones with the lowest fixed rates. Good trick to pick a time when the composite interest rates for the past 3 months are low (or zero).

There are only two catches. First, your money is locked up for the first year, and there is no escape hatch. Second, your purchases are limited to $15,000 a year ($10K via Treasury Direct, another $5K from your tax refund to buy paper bonds.) You can reduce the lockup time a bit by buying near the end of a month, i.e. if you buy on January 30th your bond will be considered to have been purchased on January 1 - giving you almost an extra month of free interest.

These really are the best free lunch there is in investing.

[vnatale]

One important item to add here is that buying the $10,000 limit direct from Treasury Direct is a given.

However, buying that other $5,000 via your tax refund can be highly problematical.

I'm only one for three in successfully doing that. The other two times the IRS sent me back $5,000 refunds rather than buying the iBonds.

I believe that others here have stated similar problems to what I've experienced.

[Xan]

One important item to add here is that buying the $10,000 limit direct from Treasury Direct is a given.

However, buying that other $5,000 via your tax refund can be highly problematical.

I'm only one for three in successfully doing that. The other two times the IRS sent me back $5,000 refunds rather than buying the iBonds.

I believe that others here have stated similar problems to what I've experienced.

I'm 0-for-3. The first two times were my mistake (sort of), and that illustrates that things can be finicky. The last time was the IRS just screwing up. There was no recourse.

[vnatale]

One important item to add here is that buying the $10,000 limit direct from Treasury Direct is a given.

However, buying that other $5,000 via your tax refund can be highly problematical.

I'm only one for three in successfully doing that. The other two times the IRS sent me back $5,000 refunds rather than buying the iBonds.

I believe that others here have stated similar problems to what I've experienced.

I'm 0-for-3. The first two times were my mistake (sort of), and that illustrates that things can be finicky. The last time was the IRS just screwing up. There was no recourse.

Yes, first time seemed to be my error as when I was completing the form the second around and reviewing the first time I thought I'd saw where I'd made an error on that form.

I thought it'd be smooth sailing for the third time around since I'd been successful on the second try and I replicated on the third attempt what I'd done on the second (successful) try.

Ended up being shocked when instead of buying $5,000 of iBonds I again received that $5,000 refund.