Are I Bonds Still A Good Investment In January 2023?

CDmanFL | Dec 22, 2022 | 286 posts since 2019

Friends,

As we know, I Bonds were excellent investments in 2021 and 2022. Entering 2023, I’m debating if it makes as much sense to purchase the 6.89% in January not knowing what the next 6 month rate (and future rates) will be. I suppose even if the next 6 months is only 2% for example, it still makes sense because the annual return would be 8.89%. I just don’t want to be in these I Bonds should they go back to peanuts at some point. Just wondering what others will be doing in 2023. Does it makes sense to buy another $10K in January? Or put that $10K in a long term CD as close to 5% as possible?

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Answers

lou | Dec 22, 2022 | 1,004 posts since 2010

If you get 6.89% for the first 6 months and 2% for the next 6 months, isn't your annual return 4.45% instead of 8.89%?

CDmanFL | Dec 22, 2022 | 286 posts since 2019

Brother Lou,
Math is not my strong suit but if I get 6.89% for 6 months and then 2% for another 6 months, wouldn’t that mean I got 8.89% for the year? Why are you dividing that in half? Thanks in advance for the math lesson.

alan1 | Dec 22, 2022 | 877 posts since 2015

CDmanFL-- If the annualized rate of a financial instrument is 6.89%, the owner of that instrument will receive 3.445% in a six-month period. If the annualized rate of a financial instrument is 2%, the owner of that instrument will receive 1% in a six-month period.

Leaving aside compounding of Series I savings bonds, the owner would receive a one-year return of 4.445%.

CDmanFL | Dec 22, 2022 | 286 posts since 2019

Thanks. I was under the wrong impression that these are not annualized rates. I thought they were 6 month rates. My bad. So my math isn’t a problem. It was my understanding of how I Bonds work. Thank you for clarifying. They seem to be less of an attractive investment for 2023 than I thought.

MAKNYC | Dec 22, 2022 | 323 posts since 2015

FYI, this same question was presented on this board in November. My view then, as well as now….there are no solid reasons to invest in I-Bonds in January 2023. If looking to invest in them, leave money in liquid savings account/N.P. CD until mid-April at which point you will know with certainty what your total return will be for the 11+ month minimum holding period of the I-bond and then decide if it makes sense to go forward. If you invest in January you will still earn that exact same return as waiting until mid-April, just without knowing in advance what that return will be and the accruals will be shifted earlier. It’s hard to see how shifting it earlier results in any likely advantage, and you forgo the opportunity to invest at todays inflated liquid account rates which will not be available to you when you decide to redeem the I-Bonds because at that point inflation and interest rates have likely plummeted.

w00d00w | Dec 22, 2022 | 360 posts since 2012

for those who view I Bond as a short term tactical investment, the main advantage that i see for buying in January vs later in the year is to start the clock a bit earlier on the minimum holding period. for the longer term investor, getting a higher fixed rate on the I bond, which could occur in May and/or November, matters more.

MAKNYC | Dec 22, 2022 | 323 posts since 2015

Unless you are investing in these now with a known future date when you will need to redeem them I see no realistic scenario where ‘starting the clock’ early makes sense. In fact it still works against you. The poster is concerned that at some point in the future inflation/rates will be declining to unattractive levels. We can opine when that will be, but it doesn’t matter. Two scenarios:
1) Invest in January and hold until that unattractive threshold is reached. Then liquidate. That date is X. At X you will be forced to accept nominal interest rates on all fixed income investments, like the majority of the last 15 years.
2) Invest in current liquid accounts @ 3.5+% until late April. Assuming I-bond remains attractive when rate reset is announced invest at that point. When date X (from #1) approaches you still have 4 months where you are earning the attractive rate vs. the unattractive rate in #1.

To compare the 2 scenarios you were invested in the i-bonds for the same number of months in each and earned the exact same returns on those. But you swapped the unattractive investment scenario at the tail end of scenario #1 for the currently attractive pre-investment scenario (3.5%+) in scenario #2. Measure your overall returns under both scenarios for investment until date X+4 months. Starting the clock early only matters if you are assuming in late 2023 the poster will have an opportunity to sell the I-bonds and invest in something immediately with an even higher yield then they currently/will pay and above the 3.5+% level. Not likely at all in my book.

w00d00w | Dec 23, 2022 | 360 posts since 2012

that's a good point. assuming the shortest I bond holding period, the January investor (compared to the April investor) is trading 3 months of liquidity up front for 3 months liquidity later.

GreenDream | Dec 22, 2022 | 358 posts since 2019

Is there are reason you have to decide in January? If you are worried about what the next rate will be, wait until mid-April (when all the CPI data for determining the variable rate portion of the bond is in), then you can decide to buy or not knowing the current composite rate (6.89%) and the next variable rate (the next fixed rate portion won't be known until the treasury sets it on May 1st by which time you can no longer buy the 6.89% rate ibonds)

Rickny | Dec 22, 2022 | 1,296 posts since 2017

The 20k max (unless you use some of word arounds) so small dosen't really make much of a difference in your overall investments. Also, you pay no state income taxes on I bonds.

NFO | Dec 22, 2022 | 66 posts since 2022

Your math is off given your assumption of 6.89% for the first six and 2% for the second. If the second 6 months is only 2%, the obvious answer is "no". However, what's more likely is a 12-month average return north of 5%. While inflation will no doubt abate, the assumption that it's going down fast between now and April is probably a bit optimistic. If you don't want your money locked up for a year, you can find short-term savings at 4%+. Assuming a $10K investment, the actual dollar difference between that and what you probably get from I-bonds isn't much more than $100 for the year. If you live in a tax state, there's a minor break there.

Choice | Dec 22, 2022 | 937 posts since 2020

In January I’m aiming to deliver out of the gift box 20k which covers 2023 individual deliveries. I anticipate that May reset will be lower rate and then wait 3 months and redeem with 3 mo. penalty some ibonds in anticipation of what income will (want to) be in 2023. I’m considering buying for business and trust accounts in late January to start the one year hold time and redeem early 2024……Thus net of no change for year……So it’s not just one aspect for these simple ibonds! My other consideration is ease in CD account management and consolidate all accounts in a geographic area too. Not just interest is of interest

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