I-bond Rate May 2020

[jhogue]

Today is the last chance to buy I-bonds with the old composite rate of 2.22%. With 1 year T-bills presently yielding just 0.14%, every indication is that the Treasury’s new fixed rate for May 1, 2020 will drop to 0.00%, for a new composite rate (fixed + variable) of about 1.05%. An I-bond bought today beats bankrate’s best-of-class bank CD by about +0.60%. Get ‘em while they’re hot; tomorrow’s rate will be stone cold and may stay that way for several years.

Why is that ? Federal Reserve policy mandates short-term low rates going forward (full-blown ZIRP). That requires little market timing to profit from. Because of this near-certainty, I engaged in a bit of I-bond trickery for 2020:

I bought our full MFJ allocation (2 x $10K/SSN + $5K/tax refund= $25K) for 2020. But this year, I also purchased next year’s full allocation at the current rate by designating an additional $10K I-bond each as gifts between two spouses (2 x $10K), to be delivered in 2021, for a total I-bond purchase in 2020 of $45,000.

Here is the sweetener: TreasuryDirect’s gifting option observes the annual $10K cap/ SSN/for 2020 and and 2021 each, while allowing us to get today’s higher fixed I-bond rate (+0.2%) on those 2021 gift bonds, a rate that is guaranteed for the next 30 years. This is the only way I know of getting next year’s I-bond fixed rate guaranteed today. As usual, those I-bonds will be federal tax deferred, state and local tax exempt, interest compounded and inflation-adjusted semi-annually.

[Xan]

jhogue,

Wouldn't the bonds purchase today have their interest rates reduced tomorrow anyway? The fixed part of today's bonds is pretty small already, is it not?

[jhogue]

Xan,

1. No. The fixed rate on the date of issue stays with the I-bond from its date of purchase until it expires after 30 years. That is true even if you buy a gift I-bond in 2020 but don't deliver it until 2021. This is, in effect, a work-around on TreasuryDirect's limit on annual I-bond purchases.

2. That I-bond fixed rate IS small, but because it is guaranteed to outpace inflation for every year for 30 years, tax deferred every year for 30 years, and payments are compounded semi-annually for 30 years, it does add up. Investors who buy 1 year CDs for their Cash get whacked EVERY YEAR for taxes, which lowers the effect of compounded payments.

Think of it this way: Taxes and inflation are your portfolio's worst enemies. Time is your I-bond's best friend.

[sophie]

Great trick jhogue. Do you have any idea if you can gift them to yourself?

Xan: The I bond variable rate will reset based on the CPI, and it remains to be seen what that will be. Zero interest rate does not have to mean zero CPI. Oil/gasoline prices are down, but prices for virtually everything else have gone up, and probably will go up more in the near future. My grocery/food spending, for example, has almost doubled.

It may be that I bonds right now are the buy of the century.

[Kriegsspiel]

I just bought some I bonds. They don't really generate any excitement, but they're not going to kill you either. They're basically vegetables.

[jhogue]

Great trick jhogue. Do you have any idea if you can gift them to yourself?

Xan: The I bond variable rate will reset based on the CPI, and it remains to be seen what that will be. Zero interest rate does not have to mean zero CPI. Oil/gasoline prices are down, but prices for virtually everything else have gone up, and probably will go up more in the near future. My grocery/food spending, for example, has almost doubled.

It may be that I bonds right now are the buy of the century.

sophie,

Sorry, but TreasuryDirect tracks your account by your SSN, so you can't give a gift to yourself. However, you can give to multiple people, and you can receive multiple gifts, as long as both parties have an SSN and TreasuryDirect accounts and you don't exceed the $10K annual cap.

This I-bond interest rate reset is admittedly unusual because of the near certainty that the I-bond fixed rate is headed to zero. You are right about price volatility of CPI going forward: all kinds of strange anomalies, like negative prices for oil futures. Could we have CPI inflation numbers 6 months from now in the midst of a recession/depression?

[jhogue]

I just bought some I bonds. They don't really generate any excitement, but they're not going to kill you either. They're basically vegetables.

You can't eat gold, but maybe you can eat well on an income stream generated by I-bonds.

[Xan]

Xan,

1. No. The fixed rate on the date of issue stays with the I-bond from its date of purchase until it expires after 30 years. That is true even if you buy a gift I-bond in 2020 but don't deliver it until 2021. This is, in effect, a work-around on TreasuryDirect's limit on annual I-bond purchases.

Okay, but the fixed rate currently is 0.1%. Buying tomorrow versus today can't make more of a difference than that 0.1%, can it?

[jhogue]

Xan,
The fixed rate is +0.20% x $45,000 x compounded 30 years = $2,781.21 gain.
http://www.moneychimp.com/calculator/co ... ulator.htm

You get the fixed rate of +0.20% if you buy before 1 May.
If you wait one day and buy after May 1 (tomorrow), then your fixed rate will probably drop to 0.00%. (We find out the new fixed rate tomorrow)
Therefore you will get $2,781.21 LESS gain over the life of the I-bonds than if you bought before May 1.


NOTE: 1. The above does not include effect of state and local tax exemption.
NOTE: 2. The above does not include effect of federal, state and local tax exemption if you use your I-bonds for higher education.
NOTE: 3. The gain above is in real (after inflation) terms.

[Dieter]

Darn, got sucked into work stuff and TreasuryDirect says purchase date is tomorrow.

I wasn't going to put all that much in anyways, but bummer.

Thanks for the heads up anyways!

[jhogue]

Dieter,

Sorry you missed the deadline.

I should probably send out I-bond alerts further in advance of the reset date.

[jhogue]

As expected, the U.S. Treasury announced this morning that the I-bond fixed rate will be 0.00% from 1 May until 1 Nov. 2020. In addition to the variable rate, already announced as 1.06%, the composite rate of I-bonds purchased over the next 6 months will be 1.06%. While this rate will not set the world on fire, it should be noted that this new (and lower) I-bond rate still handily beats the current 1 year T-bill yield of 0.14%, commonly used in Treasury money market funds portfolios and popular with PP investors as well as legions of bogleheads suddenly rushing into safer and more liquid Treasury-issued securities.
https://www.treasurydirect.gov/news/pre ... di0520.htm

The EE bond rate remains unchanged at 0.10% annually with a 20 year doubling rate of 3.53%, also unchanged. Ho-hum. Nothing new here. Many investors have long been turned off by the low annual rate for EE bonds. However..., younger and more adventurous HBPP investors might now want to take a second look at the long term role that EE bonds could strategically play in their Deep Bonds or Deeper Cash. Buying EE bonds now effectively amounts to a hedge against the possibility of a longterm Japan-like deflation.

[ochotona]

Everyone

Sign up for email alerts at https://tipswatch.com/

That way you will know well in advance about rate changes and deadlines

[jhogue]

+1

tipswatch is a great source of information on TIPS and US savings bonds. David Enna, the author, has been tracking them for years and is a reliable source of information on interest rate re-sets, for I-bonds especially.

I do not, however, agree with his advocacy of TIPS, which are inferior to I-bonds in their tax treatment, and also can go negative in deflationary economic environments (like right now). I-bonds are guaranteed to return 100% of invested principal, which gives them protection against deflation as well as inflation.

[sophie]

As expected, the U.S. Treasury announced this morning that the I-bond fixed rate will be 0.00% from 1 May until 1 Nov. 2020. In addition to the variable rate, already announced as 1.06%, the composite rate of I-bonds purchased over the next 6 months will be 1.06%. While this rate will not set the world on fire, it should be noted that this new (and lower) I-bond rate still handily beats the current 1 year T-bill yield of 0.14%, commonly used in Treasury money market funds portfolios and popular with PP investors as well as legions of bogleheads suddenly rushing into safer and more liquid Treasury-issued securities.
https://www.treasurydirect.gov/news/pre ... di0520.htm

Yep, the CPI in March fell solely because of lower energy costs. I would guess the energy cost drop is a one-trick pony, since they can't drop much further even if oil prices continue to fall into negative territory. Consumer prices rose 1.5% and I expect this rise will be higher next month. We might see a deflation down the line, but my guess is that we will see a stagflation. Like the 1970s.

[ochotona]

Like the 70s except the music was way better then

[vnatale]

Like the 70s except the music was way better then

As long as we ignore the "disco" aspect of music back then!

I loved the sticker I once saw a musician's amplifier: "Help Stamp Out Disco In Our Lifetime".

Vinny

[jhogue]

As expected, the U.S. Treasury announced this morning that the I-bond fixed rate will be 0.00% from 1 May until 1 Nov. 2020. In addition to the variable rate, already announced as 1.06%, the composite rate of I-bonds purchased over the next 6 months will be 1.06%. While this rate will not set the world on fire, it should be noted that this new (and lower) I-bond rate still handily beats the current 1 year T-bill yield of 0.14%, commonly used in Treasury money market funds portfolios and popular with PP investors as well as legions of bogleheads suddenly rushing into safer and more liquid Treasury-issued securities.
https://www.treasurydirect.gov/news/pre ... di0520.htm

Yep, the CPI in March fell solely because of lower energy costs. I would guess the energy cost drop is a one-trick pony, since they can't drop much further even if oil prices continue to fall into negative territory. Consumer prices rose 1.5% and I expect this rise will be higher next month. We might see a deflation down the line, but my guess is that we will see a stagflation. Like the 1970s.

It is times like these that make me really glad to have discovered the Permanent Portfolio.

I really have no idea whether we are headed into long term inflation or deflation. I am pretty sure no one else does either. Who could have imagined that oil could sell for -$25 per barrel? Carl Icahn bought some of those futures to fill up his refinery, but even he said that it was a bizarre and non-repeatable event because oil producers had learned to cap their wells next time rather than be forced to pay to get rid of the stuff.

At exactly the same time that oil took an unprecedented negative turn, major disruptions in packing plants and logistical chains have sent meat at the grocery prices rocketing upward. Should we call it inflation-- or something else? A repeat of 1970s-like stagflation?? While I just bought a just bought a chunk of I-bonds based upon my understanding of where government-generated CPI-U is headed in the short term, there is so much demand destruction and supply destruction churning the markets that I think it is simply impossible to know where the economy is heading. Market agnosticism is the only rational strategy right now.

[pmward]

I really have no idea whether we are headed into long term inflation or deflation. I am pretty sure no one else does either. Who could have imagined that oil could sell for -$25 per barrel? Carl Icahn bought some of those futures to fill up his refinery, but even he said that it was a bizarre and non-repeatable event because oil producers had learned to cap their wells next time rather than be forced to pay to get rid of the stuff.

Icahn's point there is wrong (maybe intentionally so, as a pump and dump)... or at the very least out of context. The oil producers lost no money on the May futures contract going negative. They sold those futures contracts months or even years ago for much higher. Producers do not sell front month contracts. It is only the paper traders that lost money on the May contract. I mean the people accepting delivery could have bought cheaper if they waited to the last day, but they still did not take a loss. The oil producers have 0 motivation to decrease production or "cap their wells" until the prices in the contracts months and years down the line where they actually do their selling go down. They've already sold all their oil production for the next months to years. Those futures contracts are out there, someone is already contractually obligated to take delivery whether there is storage space for it or not, and as such they have already locked in their profit. So far, the latter parts of the curve are holding up, so producers are still selling for a profitable price. Oil producers have 0 motivation to slow production at the moment because of this. This is precisely what makes this so dangerous. As long as they can sell their late month futures contracts at a profit, they are unaffected by the crisis, and in essence adding fuel to the fire, pun intended.

[jhogue]

pmward,

I re-read your post several times and still do not understand it.

I am still not sure whether we are headed for inflation or deflation? Are you?

[pmward]

pmward,

I re-read your post several times and still do not understand it.

I am still not sure whether we are headed for inflation or deflation? Are you?

It's clear we are in a deflation at the moment. My main point above is that oil producers are likely to make that deflation worse in the near term because they have no consequence yet to motivate them to curb production. Are we going to have inflation after? It depends. We need to generate enough "inflation" to counter the deflation and bring the system back to homeostasis. We are in a pretty severe deflation right now, so it requires pretty severe measures. The question to ask, are they going to provide just enough, like they did in 08/09, to counter the deflation but not spark inflation? Or are they going to overdo it? Only time will tell. I don't think anybody can say for certain right now whether the actions they are taking are enough, not enough, or more than enough. I don't think anyone can truly even understand the scope of the crisis until after it's all said and done.

[ochotona]

So when the I-bond fixed rate is stuck at 0%, then the strategy is just buy in future periods in that calendar year because, hey it might go up?

Jan 1 - Apr 30, May 1 - Oct 31, Nov 1 - Dec 31 are the three periods.