re: I bonds jump to 7.12%

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So I Bonds are backed by the treasury?

What kind of back door QE is this at 7.12% yield?! That’s insanely high, even relative to junk bonds. Hmm…


The 'I' in I bonds stands for inflation and is linked to CPI. Maybe you've noticed things have cost more the last several months. It's the same reason that Social Security COLA is jumping by 5.9% in January which is the biggest increase in 40 years.


If inflation is low then so is the payout and vice versa. I bonds/TIPs aren't going to make you rich, but will maintain the purchasing power of your cash.

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Is this the coupon rate or the YTW rate? Are you buying these are PAR?? Surely not.

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I'm on the treasury direct website and can only find 3.5%. Question - What's the convexity look like on these? If CPI starts dropping below the fixed rate at purchase what will the price of the bond be?

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They probably won't show the new rate till it becomes effective on Nov 1 but it's based on the official CPI-U numbers that came out the other week. Also the fixed rate will probably be 0%. It's the variable rate that will be 7.12%. I Bonds have a composite rate (fixed + variable).

Just to be clear, the 7.12% is an annualized rate. After 6 months, the variable rate will change and could be higher or lower. So if you buy before Nov 1; you'll get the 3.54% for 6 months then the 7.12% for 6 months. After a year, you'd have an effective interest rate of ~5.3%.

Many of you are thinking I Bonds are like normal bonds which they are not.

I Bonds have no risk including interest rate risk.

You can't lose money with an I Bond. They aren't traded on the secondary markets so there is no up/down in value. When you redeem, you get 100% of the face value even if you redeem before 30 years. Unlike TIPs, I Bond composite rate cannot go below 0%.

The negatives with I bonds are:
1) Must hold for at least 1 year before redeeming
2) If you redeem before 5 years, you forfeit the last 3 months of interest
3) 10k yearly purchase limits

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gpburdell

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Legend. Thank you

So anyone buying I bonds now after Nov 1st; 7.12%?

If you buy and hold for 1 year, it seems youre effectively getting like 5.4% with the penalty. Seems like a "why not" to max out if you have liquidity right now.

ETA: now seeing someone laid it out clearly a few posts before me

I got 20K worth on both of our names. Will add in Jan again to lock up the rate for 6 more months.

Thank you OP for bringing it up.

Started shifting my emergency funds there in July by throwing $10k in.

Looks like (If I'm compounding my interest right) if I withdrew (for some reason) as soon possible next year I'd be looking at $539 in interest on that initial $10k. Not bad for an emergency fund.

Figure do this for 2-3 years until a full emergency fund becomes liquid than drop cash reserves in any sub-1% savings/money market account to a bare minimum (assuming 1 week or so to cash in the eligible I-bonds).

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buy the bonds directly or TIP (ticker)or SCHP. ?

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you buy them directly from treasurydirect.gov

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need to hold for 1 year
penalties for withdrawing before 5 years

who in their right mind does shite like this

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It's better than a savings account. Optimal use is for emergency funds. You do have to hold for 1 year, however for that (small) risk of needing to use the funds within that year, you get what's in effect a FDIC backed savings account that is both inflation protected and compounding at about 10x-20x the interest rate (now) of a savings account.

The sub 5-year penalty is that the last 3 months of interest doesn't accrue. So if you put in now at 7.19% and were forced to withdraw say, $5,000 for a hospital bill in May of 2023, you'll only be out the interest on that $5,000 for March, April, and May of 2023.

Do not use it for investment, as it is only a hedge against inflation.

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rocket31

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who in their right mind does shite like this.

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Shocker, I know, but not everyone has the risk tolerance for crypto.