Ibonds: Time To Buy More

• The current annualized rate on ibonds is 7.12% and the next reset will set it to 9.62%.
• Investors may want to make their purchases before the end of April 28th, 2022 to lock in the first interest rate.
• The risk/reward on these bonds is excellent. Because they can be converted to cash after one year, they can supplement emergency funds after that period.
• The annual limit is $10,000 per person. I spent that for myself and my wife in November 2021 and plan to do so again in April 2022.
• We treat the ibonds as a tool for managing cash, so they are not included as part of The REIT Forum Portfolio.

In November, we prepared a guide for readers on how to invest in ibonds. If you don't have an account for buying ibonds yet, the guide will give you a complete walk-through with images for every single page in the process.

The guide is split up into two parts. If you’ve never created a TreasuryDirect account, start with part 1. If you’ve already purchased ibonds, start with “Step 11” in part 2.

In this follow-up article, we're providing the current outlook for ibonds.

Note: You may also find these bonds listed as I bonds. I prefer using ibonds as one word because we already have a definition for "I" within our language.

Yield

The rate paid on these bonds is updated every 6 months, but we identify the rate in annualized terms (but without compounding). The annualized rate was 7.12% for the current period (end of April). To my understanding, that means anyone who bought from November 2021 through April 28th, 2022 would be earning 7.12% across their first 6-month period. That's great for ultra-low-risk investments.

After those first 6-months, it will reset to the next annualized rate. That rate is set to be 9.62%. That's even better.

Some investors might think it would be better to wait until May to be earning 9.62% right away. However, I think locking in early is better. My prediction is that within 3 to 5 years we will see the yield drop off significantly. Inflation won't be this high forever. As we demonstrated in Higher Interest Rates and Popular Lies, the groundwork is in place for the rate of inflation to naturally fall in a few years. That doesn't mean it will fall in May 2022. In 2023 and/or 2024, I would expect the rate of inflation to decline.

If the interest rate eventually drops off to 2% or 3%, the investor who locked in their first period at 7.12% would be better off. It's not a huge difference, but it's a nice benefit.

My Plan

I picked up $20,000 in ibonds in November 2021. That's $10,000 for me and another $10,000 for my wife.

Note: There is a limit of $10,000 per person per year.

As I stated in the guide (linked above), I don't include the ibonds within The REIT Forum Portfolio. It would be extra work to track them there and I think of ibonds as a cash management technique.

I purchased another $10,000 of ibonds for myself and my wife ($20,000 total) in April, 2022.

I also just finished filing my personal taxes (had an extension) and used the option to pick up another $5,000 of paper ibonds. The limit is equal to the lesser of:

1. $5,000 per return
2. The amount of your federal tax refund

Those purchases bring my total up to $45,000 in principal (before any interest).

Emergency Funds

All adults would be wise to have an emergency fund on hand. Some investors will think of their stock account as providing that coverage. However, pulling cash out in March 2020 would've been terrible.

The minimum holding period for ibonds is 12 months. If they are held for less than 5 years, they forfeit the final 3 months of interest accrual. That's an acceptable cost if the investor needs to convert their bonds to cash. By holding ibonds (after the first year), the investor has a tool that can be converted to cash rapidly if they need it. The maximum interest-bearing life of the bonds is 30 years.

Theoretically, if someone wanted to keep $80,000 on hand for their emergency fund, they could keep $20,000 in savings with another $60,000 in ibonds. The investor benefits from being able to defer the tax on the ibonds until they are cashed. More importantly, the investor benefits from earning an interest rate that is dramatically better than the rate paid on cash. It wouldn't be material for investing $1,000, but by the time you reach $40,000 in ibonds the superior interest rate translates into a few thousand per year in additional wealth created.

Why Not April 29th?

Treasury Direct won’t post your purchase until the next business day. So if you bought on Friday, April 29th, 2022 it wouldn’t go through until May 2022.