Highest I bond rate ever: 7.12%

Discussion of the Cash portion of the Permanent Portfolio

Moderator: Global Moderator

User avatar
jhogue
Executive Member
Executive Member
Posts: 721
Joined: Wed Jun 28, 2017 10:47 am

Highest I bond rate ever: 7.12%

Post by jhogue » Wed Oct 13, 2021 12:16 pm

Tipswatch has announced that the new variable component of I-bonds will reset to a whopping 7.12% on November 1, 2021. This is the highest interest rate ever recorded since I bonds were created in 1998.

Given this high rate, it seems unlikely that the Treasury will announce a fixed component rate above 0.00% on November 1. But whether you buy I bonds before or after November 1, the new variable rate ensures you will easily beat any Treasury bond or any FDIC-insured CD now available.

Those investors who have been accumulating a ladder of I-bonds will be well-rewarded for following a careful and patient strategy for risk-free fixed income.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
Kbg
Executive Member
Executive Member
Posts: 2506
Joined: Fri May 23, 2014 4:18 pm

Re: Highest I bond rate ever: 7.12%

Post by Kbg » Thu Oct 14, 2021 8:51 am

Ugg, salt in the wound.

We had a slug of these and used them to by down our mortgage and refinance to a 15 year. Given the mortgage is 2.25% and my home has tripled in value, no complaints. However, we humans are never happy are we? :-)
User avatar
jhogue
Executive Member
Executive Member
Posts: 721
Joined: Wed Jun 28, 2017 10:47 am

Re: Highest I bond rate ever: 7.12%

Post by jhogue » Thu Oct 14, 2021 9:40 am

Much as I like I-bonds, I like the freedom that comes with being debt free even more. I don't think I would be accumulating I-bonds if I had not paid off my mortgage already.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
Kbg
Executive Member
Executive Member
Posts: 2506
Joined: Fri May 23, 2014 4:18 pm

Re: Highest I bond rate ever: 7.12%

Post by Kbg » Thu Oct 14, 2021 9:54 am

jhogue wrote:
Thu Oct 14, 2021 9:40 am
Much as I like I-bonds, I like the freedom that comes with being debt free even more. I don't think I would be accumulating I-bonds if I had not paid off my mortgage already.
I debate myself over this all the time. The purely economic rational thing to do is go with interest rate differentials, but then everything important in life isn't economic.
User avatar
sophie
Executive Member
Executive Member
Posts: 1898
Joined: Mon Apr 23, 2012 7:15 pm

Re: Highest I bond rate ever: 7.12%

Post by sophie » Thu Oct 14, 2021 12:05 pm

I am absolutely incredulous that banks and T bills are still paying near zero interest. A spread of 7% between inflation and nominal interest rates is absolutely unprecedented.

I don't know what it might imply about monetary stability, but it's for sure not good. This kind of situation is what should make gold take off like a rocket. Gold can sometimes take time (e.g. months) to react, so I guess we'll have to wait and see.
Kbg
Executive Member
Executive Member
Posts: 2506
Joined: Fri May 23, 2014 4:18 pm

Re: Highest I bond rate ever: 7.12%

Post by Kbg » Thu Oct 14, 2021 2:02 pm

sophie wrote:
Thu Oct 14, 2021 12:05 pm
I am absolutely incredulous that banks and T bills are still paying near zero interest. A spread of 7% between inflation and nominal interest rates is absolutely unprecedented.
There's no incentive for them to do so and a lot of things are tied to various base rates.

On the flip side, one could ask the same about mortgages and other secured loans which are also dirt cheap.

The above tells you what is being incentivized (debt over savings).
pp4me
Executive Member
Executive Member
Posts: 1190
Joined: Wed Apr 29, 2020 4:12 pm

Re: Highest I bond rate ever: 7.12%

Post by pp4me » Fri Oct 15, 2021 12:13 pm

Gee, I'm going to have to open a TD account and start moving the money I have in STIP there. Already did that for my wife but they tell me there
is already an account with my SS (I had one a long time but it's closed). Hard to believe someone else would use your SS to open up a TD account
but I guess you never know.

Unfortunately, they didn't give me a customer service number to call but let me send an message. Wonder if I will ever hear back from them.
With those rates they may be busy.

Update: Haven't heard anything back so I'm waiting to see if I ever will. If not that will confirm my worse suspicions about TD and why I closed
my accounts years ago.
Last edited by pp4me on Sat Oct 16, 2021 5:56 pm, edited 1 time in total.
pp4me
Executive Member
Executive Member
Posts: 1190
Joined: Wed Apr 29, 2020 4:12 pm

Re: Highest I bond rate ever: 7.12%

Post by pp4me » Sat Oct 16, 2021 5:54 pm

On a related note, I just heard heard the SS COLA will be 5.9%. Would have preferred 7.12% but it amounts to about $217 /month to me.

As a retiree with fixed income and a fixed budget, inflation doesn't really hit that hard unless it gets to the "hyper" phase. My parents retired in the late 70's and I would say it was a net benefit to them over a long period of time. They were able to sell their home with a huge profit and downsize to a nice mobile home park in Florida. Plus, with the CD rates so high they were able to double their nest egg every few years. I don't remember what
the COLA on SS was but I wouldn't be surprised if it also doubled their payments in the early years before things settled down.

Worked so well for them that they were able to stay completely in cash for the entire time of their retirement, starting out with only $75k. Wasn't a smart thing to do in hindsight but that's the way they thought. Ended up with about the same amount they started with after spending so much on medical and assisted living.
User avatar
jhogue
Executive Member
Executive Member
Posts: 721
Joined: Wed Jun 28, 2017 10:47 am

Re: Highest I bond rate ever: 7.12%

Post by jhogue » Tue Oct 19, 2021 5:08 pm

It may still possible to retire on a cash-only investment portfolio, but I would not recommend it.

My father-in-law never invested in anything riskier than savings bonds or 1 year bank CDs. He started buying war bonds when the Army sent him to the South Pacific in 1944. When he died in 2008, all of his E Series bonds had been redeemed, but he still had EE bonds marked “POD” in his safe deposit box for his children and grandchildren. That was a successful long term strategy, but I doubt it would work today because of inflation and taxes.

Few middle class families paid income taxes at the end of World War II. Today, I doubt that anyone on this forum has entirely avoided the clutches of the IRS. Just as relentless has been the effects of inflation, which silently eats away at the purchasing power of our investments. I bonds are the only investment I know guaranteed to preserve purchasing power over the long term.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
jhogue
Executive Member
Executive Member
Posts: 721
Joined: Wed Jun 28, 2017 10:47 am

Re: Highest I bond rate ever: 7.12%

Post by jhogue » Mon Nov 01, 2021 11:42 am

As expected, TreasuryDirect announced this morning that the fixed rate component of I-bonds will be 0.00% for bonds purchased November 2021-April 2022. When combined with the variable rate, the new composite rate for I bonds will be 7.12% for the same period. Even if the subsequent rate falls to zero, holding a new I-bond for 15 months means you will get an annualized rate of 3.56%, easily beating rates on all Treasury-backed fixed securities along the yield curve.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
whatchamacallit
Executive Member
Executive Member
Posts: 615
Joined: Mon Oct 01, 2012 7:32 pm

Re: Highest I bond rate ever: 7.12%

Post by whatchamacallit » Mon Nov 01, 2021 9:01 pm

Glad I decided to buy in October after all since fixed rate is 0.

I really can't begin to predict what rate will be in another year.

Probably back to the normal 1% though.
D1984
Executive Member
Executive Member
Posts: 672
Joined: Tue Aug 16, 2011 7:23 pm

Re: Highest I bond rate ever: 7.12%

Post by D1984 » Mon Nov 01, 2021 9:33 pm

whatchamacallit wrote:
Mon Nov 01, 2021 9:01 pm
Glad I decided to buy in October after all since fixed rate is 0.

I really can't begin to predict what rate will be in another year.

Probably back to the normal 1% though.
The fixed rate portion will be back to 1%....or the inflation rate portion will be back to 1%?

IIRC, the fixed rate was only 0.5% back in 2018 and 2019 when the Fed had interest rates at their highest (around 2.25 to 2.50%) point of the 2009-2019 cycle. Even those who think the Fed will be super aggressive with rate hikes are only predicting two or (maybe but not likely) three 0.25 percent hikes in 2022; a 0.50 or 0.75% Fed Funds rate and risk-free T-Bill rate might yield an I-Bond fixed rate of 0.10% at most (although I wouldn't even count on that much).

As to what the inflation component of the I-Bond rate will be then I cannot say. Sometimes PCE does led the regular CPI rate and over the last few months it has declined to around 2.5 or 2.6% PCE inflation on an annualized basis. I don't know if CPI will be back down to 1 or 2% this time next year, though.
whatchamacallit
Executive Member
Executive Member
Posts: 615
Joined: Mon Oct 01, 2012 7:32 pm

Re: Highest I bond rate ever: 7.12%

Post by whatchamacallit » Tue Nov 02, 2021 1:59 am

I guess I just meant earnings overall. I don't expect it to stay high and it might be scary if it does.

Here is easy to look earnings for recent 6 month periods.

http://kirklindstrom.com/Articles/I_Bon ... story.html
boglerdude
Executive Member
Executive Member
Posts: 950
Joined: Wed Aug 10, 2016 1:40 am
Contact:

Re: Highest I bond rate ever: 7.12%

Post by boglerdude » Tue Nov 02, 2021 2:44 am

If I use the EIN (Employer Identification Number) from my side-gig to buy an extra 10k, is that against the letter or spirit of the rules?
User avatar
jhogue
Executive Member
Executive Member
Posts: 721
Joined: Wed Jun 28, 2017 10:47 am

Re: Highest I bond rate ever: 7.12%

Post by jhogue » Tue Nov 02, 2021 9:43 am

TreasuryDirect establishes accounts with individuals based on SSN/EIN. I have never opened or contributed to an EIN-linked account, but as long as you observe the $10,000 limit, I do not see why you should encounter any difficulties using your SSN for one account and your EIN for another.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
Cortopassi
Executive Member
Executive Member
Posts: 3249
Joined: Mon Feb 24, 2014 2:28 pm
Location: https://www.jwst.nasa.gov/content/webbL ... sWebb.html

Re: Highest I bond rate ever: 7.12%

Post by Cortopassi » Thu Nov 04, 2021 12:01 pm

Opened TD accounts for me and my wife yesterday and funded both. Thanks for making me aware of these. At least some cash I have is now making more than 0.5%
Hal French
Junior Member
Junior Member
Posts: 8
Joined: Thu Aug 09, 2018 11:46 pm

Re: Highest I bond rate ever: 7.12%

Post by Hal French » Thu Nov 04, 2021 8:35 pm

Yup, took the plunge in late October myself. The NEXT, obvious question is when, and how much to invest in I Bonds in 2022? Plunk that $10k down in January to take full advantage of that sweet, sweet 7.12% rate? Do it in April or even later once the next period's rate is known? Or split two- $5k investments, one for each period?
User avatar
Cortopassi
Executive Member
Executive Member
Posts: 3249
Joined: Mon Feb 24, 2014 2:28 pm
Location: https://www.jwst.nasa.gov/content/webbL ... sWebb.html

Re: Highest I bond rate ever: 7.12%

Post by Cortopassi » Thu Nov 04, 2021 10:30 pm

Hal French wrote:
Thu Nov 04, 2021 8:35 pm
Yup, took the plunge in late October myself. The NEXT, obvious question is when, and how much to invest in I Bonds in 2022? Plunk that $10k down in January to take full advantage of that sweet, sweet 7.12% rate? Do it in April or even later once the next period's rate is known? Or split two- $5k investments, one for each period?
I'm not understanding. Right now, I will get 7.12% (annual rate) on the money for 6 months, correct?

If I put in another 10k each in Jan 2022, that will at least get 7.12% through April, right?

Why would you wait until the next period, only because it could possibly be more than 7.12%? Doesn't any earlier buy in roll to whatever the latest 6 month rate is?
barrett
Executive Member
Executive Member
Posts: 1833
Joined: Sat Jan 04, 2014 2:54 pm

Re: Highest I bond rate ever: 7.12%

Post by barrett » Fri Nov 05, 2021 6:54 am

Cortopassi wrote:
Thu Nov 04, 2021 10:30 pm
Hal French wrote:
Thu Nov 04, 2021 8:35 pm
Yup, took the plunge in late October myself. The NEXT, obvious question is when, and how much to invest in I Bonds in 2022? Plunk that $10k down in January to take full advantage of that sweet, sweet 7.12% rate? Do it in April or even later once the next period's rate is known? Or split two- $5k investments, one for each period?
I'm not understanding. Right now, I will get 7.12% (annual rate) on the money for 6 months, correct?

If I put in another 10k each in Jan 2022, that will at least get 7.12% through April, right?

Why would you wait until the next period, only because it could possibly be more than 7.12%? Doesn't any earlier buy in roll to whatever the latest 6 month rate is?
jhogue will hopefully correct me if I am wrong about this. Cortopassi, you have it mostly correct, I believe. Buying again in January should actually lock in that 7.12% for six months, not just until April.
User avatar
jhogue
Executive Member
Executive Member
Posts: 721
Joined: Wed Jun 28, 2017 10:47 am

Re: Highest I bond rate ever: 7.12%

Post by jhogue » Fri Nov 05, 2021 9:36 am

1. Barrett is correct. The current composite I-bond rate of 7.12% is good for the next six months after purchase.

2. For 2022, how you time your I bond purchase should be guided by where you think the interest rate will be on 1 May 2022 and 1 November 2022. I doubt that rates will be higher than 7.12% on 1 May, so I expect I will make my next I bond purchase in January 2022. I think this is reasonable since 7.12% is the highest I-bond variable rate ever recorded.

3. Since we have seen a flood of new investors into I bonds lately, I would add a caution: New I bond purchases cannot be redeemed for one year after purchase. In practical terms, that means you should have other funds (eg., a Treasury money market fund) readily available as "dry powder" when you buy I bonds.
Last edited by jhogue on Fri Nov 05, 2021 3:02 pm, edited 5 times in total.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
Cortopassi
Executive Member
Executive Member
Posts: 3249
Joined: Mon Feb 24, 2014 2:28 pm
Location: https://www.jwst.nasa.gov/content/webbL ... sWebb.html

Re: Highest I bond rate ever: 7.12%

Post by Cortopassi » Fri Nov 05, 2021 9:46 am

Thanks.

I also just shifted some cash in IRAs to VTIP. At least it will get some level of dividends for a while vs. nothing.
barrett
Executive Member
Executive Member
Posts: 1833
Joined: Sat Jan 04, 2014 2:54 pm

Re: Highest I bond rate ever: 7.12%

Post by barrett » Fri Nov 05, 2021 10:50 am

Cortopassi wrote:
Fri Nov 05, 2021 9:46 am
Thanks.

I also just shifted some cash in IRAs to VTIP. At least it will get some level of dividends for a while vs. nothing.
I seriously need to educate myself on TIPS, but doesn't this expose you to some interest rate risk? I mean, it may work out great but it doesn't seem like an equivalent way of holding cash (again, coming from someone who needs to read up on TIPS).
User avatar
Cortopassi
Executive Member
Executive Member
Posts: 3249
Joined: Mon Feb 24, 2014 2:28 pm
Location: https://www.jwst.nasa.gov/content/webbL ... sWebb.html

Re: Highest I bond rate ever: 7.12%

Post by Cortopassi » Fri Nov 05, 2021 12:24 pm

barrett wrote:
Fri Nov 05, 2021 10:50 am
Cortopassi wrote:
Fri Nov 05, 2021 9:46 am
Thanks.

I also just shifted some cash in IRAs to VTIP. At least it will get some level of dividends for a while vs. nothing.
I seriously need to educate myself on TIPS, but doesn't this expose you to some interest rate risk? I mean, it may work out great but it doesn't seem like an equivalent way of holding cash (again, coming from someone who needs to read up on TIPS).
I believe you are correct, so technically I am stepping out of the true PP holding of cash. But I have such a large barbell of TLT on one end, and cash on the other, VTIP's current 2.7 years average maturity doesn't bother me too much.

My other cash is mainly in an Ally savings account at 0.5% interest.
User avatar
jhogue
Executive Member
Executive Member
Posts: 721
Joined: Wed Jun 28, 2017 10:47 am

Re: Highest I bond rate ever: 7.12%

Post by jhogue » Fri Nov 05, 2021 1:29 pm

Corto,

TIPS have two principal issues, which I think makes them unsuitable for PP investors:

1. Interest rate risk.
Unlike I-bonds, where the interest rate is known and guaranteed at the time of purchase, TIPS can turn negative, wiping out your gains from interest or capital gains (or both). I take my risk in equities, not cash.

2. Tax treatment.
I-bonds are tax-deferred for an incredible 30 year span. Interest and capital gains from TIPS are taxable every year. Plus, if you put TIPS in your IRA you are taking up space better used to shield the three volatile assets.

If you have a lot of spare cash beyond annual I-bonds, a better alternative strategy is to ladder your own 1-5 year T-bills in a taxable or tax-deferred account. A 5-year T-bill is currently 1.06%; more than twice the yield of your Ally savings account. You can buy T-bills on the secondary market free at Fidelity; not sure about Vanguard.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
User avatar
Xan
Administrator
Administrator
Posts: 4039
Joined: Tue Mar 13, 2012 1:51 pm

Re: Highest I bond rate ever: 7.12%

Post by Xan » Fri Nov 05, 2021 1:45 pm

Don't forget the other tax benefit: you can use I-Bonds tax-free to pay for college. (Except for colleges like Hillsdale that don't participate in the federal student loan program, which is a bogus rule.)
Post Reply