Have you Heard About How Much I bonds are Paying?
You may have seen or heard that I bonds (AKA inflation bonds or series I savings bonds) are currently paying 7.12%. That is true, but as with most headlines these days, it’s important to read into the situation and dig a little deeper.
Shameless plug: if you’d prefer a shorter video version of this blog, I did a Meridian Market Minute on this same topic here.
As the name suggests, I bonds pay an interest rate that is calculated based on the current rate of inflation plus a pre-determined fixed rate (generally based on current interest rates). What probably won’t surprise you (if you’ve looked at CD rates lately) is that the current fixed rate is 0.00%. However, the reason for the headline-grabbing current I bond rate is the semiannual inflation rate of 3.56%. Here is the current example calculation from the Treasury website:
| The composite rate for I bonds issued from November 2021 through April 2022 is 7.12% | |
| Here’s how we set that composite rate: | |
| Fixed rate | 0.00% |
| Semiannual inflation rate | 3.56% |
| Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)] | [0.0000 + (2 x 0.0356) + (0.0000 x 0.0356)] |
| Composite rate | [0.0000 + 0.0712 + 0.0000000] |
| Composite rate | 0.0712000 |
| Composite rate | 0.0712 |
| Composite rate | 7.12% |
The next rate renewal will occur on the first business day of May, and it will adjust based on the most recent “non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.” Suffice it to say that the interest rate is likely to come down over time, and in the end, you are only guaranteeing that your investment will keep up with the rate of inflation over time.
The other important thing to note is the relatively small amount of these that are allowed to be purchased each year. You are allowed to purchase $10,000 per individual per year, plus up to $5,000 in paper bonds using your federal tax refund. So, if you are married filing jointly, that’s an annual maximum of $25,000. I bonds do earn interest for 30 years, but if you cash them in before they are 5 years old, you will lose 3 months of interest.
For long term investors looking to outpace inflation, I bonds might not be the best idea despite the attractive short term interest rate.
I hope that you and yours had a wonderful Thanksgiving. We were fortunate to be able to visit family in Arizona and explored a cavern at Kartchner Caverns Sate Park. Among many other interesting facts, the caverns host some 1,000 – 2,000 bats that migrate in and out each year. Our kids enjoyed trying on the “bat ears” in the museum that led into the cave.
