Series I Bonds
June 28, 2022 1:51 PM   Subscribe

U.S. Government I Bonds are currently paying 9.62% due to inflation. A family of four can purchase up to $40k of these bonds every year. Outside of thinking I could yield higher than 9.62% in a index fund or real estate, if I have $40k in cash sitting around, why would I not want to invest in these? Even if I sell after one year, I only lose 3 months of interest. What am I missing?
posted by jasondigitized to Work & Money (23 answers total) 24 users marked this as a favorite
Liquidity? You’re betting against needing to access that money easily in an emergency.
posted by chesty_a_arthur at 1:54 PM on June 28 [5 favorites]

It’s a very safe place to park money you might need in the next few years and it’s guaranteed to at least match inflation. With the economy being in rough shape you probably don’t want to put money you need in the short term in a volatile investment. I bonds do better than a high yield savings account and are just as safe.
posted by SpaceWarp13 at 1:56 PM on June 28 [3 favorites]

Unless I am also missing something, you're not missing anything. I Bonds are great, I did a bunch of research and got some money into them back in November.

The downsides are, yes, liquidity, but also that the money just isn't doing anything and could be invested better.

But in times like this, your money not doing anything is kind of an incredible thing. It's not growing, sure ok. But it's not losing. Cash in your wallet is actively losing. Your I Bonds are not.
posted by phunniemee at 1:58 PM on June 28 [8 favorites]

It is inflation-linked so the real return on I-bonds, adjusting for inflation, is zero and less than zero when considering taxes. That being said they are very popular for retirees who want fixed rate savings and they have been very popular in a high-inflation environment for short-term savings. But they should be considered as part of a whole portfolio. We have been buying i-bonds with some of our nest egg intended for a house down payment.
posted by muddgirl at 1:59 PM on June 28 [1 favorite]

If you expect that there is a reasonable probability of the US government collapsing, they probably aren't a terribly hot investment. (but trying to hedge against this is super super hard for a bunch of reasons, obviously, so this is not a great reason not to go for them unless you're actually seriously trying to invest in things that might survive that sort of collapse)
posted by wesleyac at 2:24 PM on June 28 [1 favorite]

They’re okay. The forfeiture penalty is a pain. In an inflationary environment, more risky investments like stocks and tradeable bonds are still going to outperform overall.
posted by michaelh at 2:34 PM on June 28

Bonds aren't a bad idea. But for liquidity, I'd stagger purchases so that some mature every year. Ie, invest 1/5th this year, 1/5th next year, etc, so that, eventually, you'll have a set of bonds maturing every year. This gives you the option at that time to liquidate those bonds, or let 'em roll for another year.
posted by SPrintF at 2:42 PM on June 28 [2 favorites]

Liquidity is the main one, along with the floating rate.

We're in a weird phase where the return on savings and money market accounts is still drastically low as against inflation. In a more normal environment, you'd expect the premium you're being paid for the illiquidity versus those options to be much lower. But here we are. That premium will probably diminish over time, and then they would become relatively less attractive for short- to medium-term savings--in 2018, they were returning something like 1.7%, so like only about 1% less than you could get in a "high-yield" savings account. But ultimately you're talking about a weird government instrument priced based on a public set of calculations and whose price can't be affected by secondary trading versus what the banks think they can get away with offering depositors. If they were tradable in the secondary market, you'd already be seeing all kinds of arbitrage.
posted by praemunire at 3:54 PM on June 28 [2 favorites]

I-bonds are great, but one thing you might or might not be missing is that the rate they pay changes every six months with inflation, so presumably they won’t be paying 9+% forever. This makes them not the best place for you to stash most of your savings long-term, because you’re basically guaranteed to just maintain the value of your investment.

And Hatashran, as somebody who formerly worked for the government calculating inflation (the services portion of the producer price index, actually) I can assure you that your assumptions about the politicization and biases of the process are entirely untrue :)
posted by exutima at 3:58 PM on June 28 [5 favorites]

You're missing something pretty important if the family of four contains minors:
If you’re only thinking of “borrowing” your child’s Social Security Number to buy more I Bonds, and you’ll cash out the bonds for your own spending and investments before they become an adult, don’t. When you open an account in the name of your child, you represent to the government you’re giving an irrevocable gift to your child. When you cash out the bonds, you represent to the government you’ll spend the money specifically for the child’s benefit.
In other words, the thing you're missing is that you're planning to lie to the federal government. Whether there are likely to be consequences for that, I don't know.

Trust accounts involve more paperwork, but don't involve lying.

You're not missing anything substantive on the $20k you'd invest for the two parents not already covered above. (One minor thing is that the Treasury Direct website is indescribably bad, and honestly feels like a phishing/scam site, but you only have to deal with it twice, so it is indeed minor.)
posted by caek at 4:01 PM on June 28 [2 favorites]

I happened to have recently saved a link to a Washington Post article on the mechanics of buying Series I bonds and it does seem rather daunting. I realize caek says it's relatively minor, just thought I'd post the link FWIW.
posted by forthright at 4:18 PM on June 28

Best answer: The interest on I Bonds is taxable. It is tax-deferred (until you withdraw from the bond), but it's eventually payable. Hence, the yield on the I Bonds is reduced by your marginal tax rate. That may or may not matter to you.

If you invest in bonds, right now, I Bonds are essentially the best possible bond you can invest in. TIPS are the closest thing around, and you can currently get 0.5%-1.0% real yield on them with a 5-30 year TIPS. However, their interest is not tax-deferred, and their value can go down (or up) if interest rates change. I am fine with losing 0.5%-1.0% yield to get full liquidity and tax deferral.

If you hold a significant amount of cash, I Bonds are essentially a "better cash, once one year expires". I Bonds are fully liquid after one year (with potentially some interest rate penalty - but only on interest, not on principle), and the value of them can't go down. Hence, if you hold cash, and can swing not having access to it for a year, I Bonds make a lot of sense.

If you don't invest in bonds and you don't hold a significant amount of cash, I don't think I Bonds are a compelling reason to start. In the end, their expected return is 0% real yield right now. Historically, all equities have, over a long period (>10 years, most of the time, >20 years, all the time), achieved >0% real yield. Further, equity investment is "mostly" tax-deferred (excluding dividends). If your investment horizon is >10 years, I would suggest putting that money to equities. 0% real yield is not an exceptionally strong investment.
posted by saeculorum at 4:21 PM on June 28 [10 favorites]

The interest on I Bonds is taxable.

NB: only federally.
posted by praemunire at 4:28 PM on June 28 [4 favorites]

Inflation is by definition a historical measure; it can only be constructed by looking backwards. So when we go to a store and see that prices are up, we're not having inflation -- we've already done had inflation. One of the biggest contributors to the current inflation is increases in gasoline prices; remember that inflation is based on what the price was a year ago. So two years ago, gas was two bucks a gallon, because a pandemic had radically cut transportation use. A year ago, gas was up to three bucks a gallon, because people were driving again, so that's 50% year-over-year inflation in gas prices. Today, it's five bucks a gallon, because of Russia's invasion of Ukraine; another 67% year-over-year inflation. A year from now, what will a gallon of gas cost? If it's down a little to $4.50 because people are doing what they can to pump more oil, then the inflation in gas prices will be -10%. Even if it's still 5 bucks a gallon a year from now, that's no inflation. Gas would have to go to $7 or $8 a gallon to produce another year of 50-60% inflation. Which is possible -- I'm tired of this timeline, too -- but seems unlikely.

Obviously, there are many more things that go into inflation, but most analysis shows that a big chunk of the recent spike in inflation has been a result of a relatively small set of sectors -- gasoline and auto production in particular. If auto production unfucks itself, which it might be in the process of doing, then inflation will drop down in the future. Not to the 1 or 2 percent that it was a few years ago, but a year from now it could be half of the 9% you're looking at today.
posted by Superilla at 4:48 PM on June 28

According to Bloomberg, TIPS are paying 0.91% (not 9%) and the rate is subject to federal income taxes. You might do better building a ladder of municipal bonds (buy one each of 1 year, 2 year, 3 year, 4 year 5 year and then when they come due, buy new 5 year bonds) this gives you some inflation protection since when inflation goes up you can buy new bonds at the higher rate every year and when it goes down you will be earning more than current rates on the ones you still own. You get somewhere between 1.68% and 2.3% - even higher when you account for the fact that they are tax free, with a slightly higher risk of default and a higher risk that they won't fully keep up with inflation if it continues to rise.
posted by metahawk at 5:08 PM on June 28

Best answer: That Bloomberg page is not showing I bonds, which are indeed paying 9.62%. This is a comparison of TIPS and I Bonds from the TreasuryDirect page of the U.S. Department of the Treasury.
posted by needled at 6:07 PM on June 28 [2 favorites]

Something I read in r/personalfinance's constant I bonds conversations is that anything the government limits like this is probably as good as it sounds. You can also get your tax refund in I bonds.
posted by soelo at 8:25 PM on June 28 [2 favorites]

One downside nobody has mentioned is that the web interface is kinda execrable, where you have to type your login info with a circa 2003 grade onscreen keyboard. I couldn't really cope with that
posted by wotsac at 9:00 PM on June 28

Hatashran, the president does not control the calculation of the inflation rate. For I-Bonds, the inflation rate used is the Consumer Price Index for all Urban Consumers (CPI-U). There are many different inflation rates to choose from, so policy makers can choose which one to use, but once one is picked they don't have control over what the official rate is.
posted by catquas at 9:23 PM on June 28

Mod note: One deleted; misinformation.
posted by taz (staff) at 9:37 PM on June 28

According to Bloomberg, TIPS are paying 0.91% (not 9%)

TIPS yield is real yield, not nominal yield. Right now, all TIPS pay a bit more yield than I Bonds. To compare I Bonds to TIPS, look at the real yield of I Bonds (currently 0%).

This isn't me advocating for TIPS.
posted by saeculorum at 4:18 AM on June 29

You can also buy I-bonds as gifts. It's a two-step process, purchase and delivery, and the term and interest start when they are purchased, but they count against the recipient's $10k limit in the year they are delivered. You can hold on them without delivering as long as you want. So a combo of 40k bought today can all be available as soon as 6/1/2023:

Person A 2022 purchase
Person B 2022 purchase
Person A gift to B, delivered in 2023
Person B gift to A, delivered in 2023

In this case, the gift recipients can't make their own 2023 purchases, but you can buy additional gifts in 2023 to be delivered in 2024 or later. You can even buy additional gifts for each other (or others) this year (10k limit per purchase, but unlimited purchases), but only 10k per year per recipient can be delivered.

This page has a guide to purchasing gifts with screenshots - if you go this route, you'll want to follow the guide because as many have mentioned, the site is not great.
posted by amarynth at 5:45 AM on June 29

anything the government limits like this is probably as good as it sounds

I wouldn't say this is always true, but it's certainly a good rule of thumb. If the government only lets you put $X in a certain type of financial vehicle, it's probably worth looking hard at it (and maybe maxing out that $X if you can). The big example would be Roth IRAs.

But I Bonds do seem like a fairly good deal if the alternative is just having money sitting in a checking or money market account, say for a big purchase you might make in the next few years (e.g. down payment on a house, new car, etc.). It will keep the money from being eaten by inflation and isn't as risky as putting it in equities.

Back in the day (the last time we had high interest rates), Certificates of Deposit (CDs) used to be the vehicle of choice for "12-18 month money", but right now they aren't paying crap. I expect them to creep up over time — as others have pointed out, the delta between I Bonds / TIPS and bank deposits is really big right now — but for now, the I Bonds (or TIPS) are a good way to go for cash you want to protect the buying power of.
posted by Kadin2048 at 8:21 AM on June 29 [1 favorite]

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