All good things come to an end.
Series I savings bonds, also known as I bonds, have paid a record high interest rate in recent months, but time is running out to lock in that rate.
The composite interest rate on the new fashionable I bonds hit 9.62% in May, an all-time high for the government bond, created in 1998 to protect Americans’ savings against inflation. Financial experts often hail bonds as one of the safest and wisest investments for middle-income Americans, especially in times of high inflation: when the inflation rate rises, the interest rate on bonds I also increases.
“You can’t lose money. The composite rate can never go below 0%,” according to I Bond Manifesto, an ode to bonds I co-written by a group of Nobel Prize-winning financial planners and economists. “I bonds will never yield less in nominal terms than what you have invested in them, even if the country enters an extended period of deflation.”
I bonds have caveats, of course. They cannot be cashed within one year of purchase, except in an emergency. If it is cashed within five years, the last three months of interest are lost. The process of purchasing I bonds through the Treasury Department can also be tedious. But for many, a guaranteed payout – which is currently unmatched by any stock or savings account – is worth it.
Although the economy is far from entering a prolonged period of deflation (or, in other words, negative inflation), inflation has cooled, albeit moderately. For this reason, the new I bond rate should fall from the currently very high rate. The Treasury Department will announce the new rate on November 1.
Buy 9.62% I Bonds
The good news: if you’re looking to take advantage of the 9.62% rate, you still have a window to buy I bonds.
I Bonds that are purchased before the last business day of October will still earn six full months of interest at an annualized rate of 9.62%.
Because of the way interest accrues with I bonds, the exact date of purchase in October is less important. Those wishing to lock in the 9.62% rate for six months should do so before the end of the month.
“Interest is earned on the last day of each month and posted to your account on the first day of the following month”, I Bond Manifesto authors wrote. “So if you own your I Bonds on the last day of any month, you’ll earn that full month’s interest.”
In other words, it doesn’t matter if you bought your I bonds on October 1 or want to wait until October 31, you’ll still get a full month’s worth of interest. And after six months, the interest you earn will be added to the principal value of your bond and your rate will automatically change to the rate announced on November 1.
What will the new I Bond rate be?
The composite rate of an I bond is made up of two rates: a “fixed rate” and a “variable rate”.
Every May and November, the Treasury Department calculates the new composite rate using inflation data from the previous six months to set the variable rate. It also announces a fixed rate, which has been frozen at zero since May 2020. These rates are then combined to form the overall composite rate for an I-bond.
Although there is no way to confirm in advance what the composite rate will be, there is a way to find out what minimum rate will be before it is announced by calculating the variable rate.
David Enna, co-author of I Bond Manifesto and founder of the financial website TIPS Watch (short for Treasury Inflation Protected Securities), has a proven track record of accurately predicting I bond rates, including the current rate of 9.62%. As Enna recently explained to Money, these aren’t crystal ball predictions.
“When last month’s inflation report – either April or October – comes out,” Enna said, “you can tell what [variable] the rate is going to take weeks before they announce it.
We are currently only one month short of inflation data: September. The Department of Labor releases the final piece of the puzzle on October 13, and this can be used to estimate the next Bond I rate before it is announced on November 1.
Based on currently available inflation data, the compound rate for I bonds will likely be around 6% assuming the fixed rate remains in place. That’s a very high rate for I bonds compared to pre-pandemic years, but we’ll get a much clearer picture when the Department of Labor releases the inflation rate for September.
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