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Whatever seems too good to be true has proved to be just that, at least in my life. I'm looking for the flaw here. So far the only flaw I see is that the composite rate ( [fixed rate + (2 x semiannual inflation rate + fixed rate x semiannual inflation rate) of 4.81% is guaranteed for 6 months and no more. Theoretically it is "annualized" at 9.62% but the semiannual inflation rate may become lower and the fixed rate has been zero for a good while now. Am I missing something?
Think of I-Bond rates as floating-rates that reset every 6 months. But floating-rates are still quoted as annualized rates for consistent comparison with other instruments.
The formula used by Treasury is an approximation of annualization, a carryover from ancient times when calculators were not readily available.
You are not missing anything, but keep in mind that electronic I-Bonds can be bought only from Treasury Direct and the maximum amount is $10K/yr/person.
To me, these seem more interesting to purchase after their fixed-rates have already gone up, which investors may have the opportunity to do very shortly.
I am less hopeful on fixed rate going up anytime soon. There is no formula or procedure prescribed for the fixed rate (as there is for the inflation-adjusted portion) and it is entirely at Treasury's discretion. When I-Bonds were introduced in 1998, the fixed rate was set high to entice people to this new products (BTW, the US TIPS were introduced in 1997). Also, in times of low inflation, Treasury "may" set the fixed rate to make the annualized rate competitive (or not). But now, with I-Bonds paying an incredible 9.62% for this 6 month period (guaranteed by Uncle Sam), Treasury didn't feel the need to make the rate even more attractive. So long as inflation remains high, my guess is that the fixed rate won't go up.
The way I look at it, you’ll get at least 75% of the current inflation rate investing in I-Bonds, assuming you cash out before holding five years. I bought bonds when the rate was 7.1%, and it will go up to 9.6% for the next six months. So I’m guaranteed at least 6% return, even if inflation plummets later this year. If inflation stays high, I’ll stay invested and appreciate the gains. If it drops, I’ll lose three months interest but still gain more than currently possible with any guaranteed investment.
The way I look at it, you’ll get at least 75% of the current inflation rate investing in I-Bonds, assuming you cash out before holding five years.
You may want to take a closer look. Here's a simple example: - 0% inflation for the period 6-12 months ago - 6% annualized inflation over the past six months (i.e. prices went up 3%)
If you buy an I-bond "now" and cash out in a year, you'll get 0% for six months, 3% for the next six months, and then forfeit 1.5% (the interest over the last three months). That's a net 1.5% for the twelve months you hold the savings bond - just half of the amount that prices increased over the past six (or twelve) months.
If one is cashing out before the end of five years, what one wants to do is cash out three months after the rates dip. That way, one forfeits the interest during three low-rate months. The example I gave was the opposite, where you'd be forfeiting the three highest paying months - a disproportionately high penalty.
I-Bonds purchased by end of April 2022 are guaranteed a rate of 8.37% for the next 12 months. If you purchase at end of month and redeem at start of the month the 3 month penalty effectively becomes a 1 month penalty. So factoring in the penalty the net rate for the 12 month period starting May is 7.6% which is significantly better than any fixed income instrument out there with comparable risk.
Ally Bank 12 month FD is 0.85%. For a hypothetical family of 4, a 40K Ally CD will yield $340 compared to the same investment in I-Bonds which will yield $3,040.
@stayCalm, good point. While only future 6-mo returns are assured for I-Bonds, there is about 3-wk window ahead of May 1 and November 1 rate announcements (when the inflation-adjustment is known but small changes in the fixed rate may be speculated) when 12-mo returns for I-Bonds can also be projected. The media used this in mid/late-April this time around.
New rates on 11/1/22 should be lower. Variable inflation has moderated but fixed rate may be raised above 0%. Estimates are 6.278-7.825%.
That is still higher than long term treasuries without taking on sovereignty and credit risk with emerging market bonds. We will but more iBond in 2024.
I set up my account on TD, linking to my Schwab Bank account, and put in an order for an I-Bond. Two days later I was informed by TD that the transaction failed. Now I cannot do anything with my account because I can't add a different bank or delete the Schwab account without calling someone and jumping through hoops. Schwab says they have no evidence that TD tried to debit the account. Snowball said the web site was "regettable;" I'd use a stronger term.
"To add a new bank or edit an existing bank account, simply select the ManageDirect tab, then select Update my Bank Information under Manage My Account. Click the Add or Edit button on the ManageDirect Bank Information page. This will take you to the the Bank Change Form Request page where you will be directed to complete and mail a Bank Change Request FS Form 5512 to add a new bank or edit an existing bank. Note: The bank selected as your primary bank appears first on the bank information list and in the drop-down boxes throughout TreasuryDirect. To designate a different bank listed in your existing bank information as the primary bank, e-mail us by clicking the Contact Us link or call us at (844) 284-2676."
Sounds like TD is really clumpy. Here is what is stated on TD for changing banking information:
To edit an existing bank account, click the "radio button" for the bank you wish to edit and click the "Edit" button. The ManageDirect >> Bank Change Form Request page will appear. A page will display with a link to a Bank Change Request FS Form 5512 to edit an existing bank in your TreasuryDirect Account. You must sign the paper form in the presence of an authorized certifying official available at a bank, trust company, or credit union and mail it to us for processing. Certification by a Notary Public is not acceptable. Your request will not be processed until we receive and approve your form with any necessary supporting documentation. We will notify you by e-mail when your transaction has been completed.
You may be able to do this by phone. To find out, call (844) 284-2676, choose option 4 at the first menu, and choose option 1 at the second. Or, if you prefer, you can send us FS Form 5512 as described below.
If you provided the routing and checking account numbers of Schwab bank account, TD should not have any issue. The routing number identifies the banking institution.
@yogibearbull and @Sven: thanks for those directions. As soon as the TD site informed me my trade did not occur, it froze my bank information to the extent that I can't do anything, either re-enter the info, delete it, or add another bank. When I referred above to jumping through hoops, I meant that I despaired of trying and left it for another day. Signature guarantee? Spare me.
FWIIW, the IRS had no difficulty yesterday in accepting my tardy 3rd quarter estimated taxes debited from the same Schwab account. I missed the 9/15 deadline because we're dealing with a death in the family. I've been filling out forms for the funeral director and my patience and tolerance are at ebb tide.
@BenWP, I suspect that some bank a/c# or routing# info got messed up in your or TD data entry. One suggestion is to just write a letter to TD explaining the issue, provide the required info again and ask TD to try again. Worth a try before giving up.
@BenWP, my deepest condolences to your loss. I didn’t mean to make thing harder for you. @yogibb got a reasonable approach to correct the matter with a letter.
September CPI was +8.2% y-o-y Updating calculations for unadjusted CPI, New fixed rate (November 1) 0-1.5% est New I-Bond Rate (November 1) 6.47-8.02% est
Bloomberg headline today mentions that the I-Bond rate could essentially fall as low as 6.47% on November 1 (as Yogi mentions), down from 9.62%. Even if they tack on another 1% or so for the fixed rate portion (so, closer to 7.5%), Series I Savings bond investors seem to be getting the short end of the stick here.
Inflation rages, but the govt reporting is simply inaccurate. Same as (un)employment and every other metric they issue to the public.
7.5% would not be a terrible return, but their calculation of the inflation rate is questionable at best.
@JD_co, for the variable part, guessing has ended today as Mar-Sep CPI data are in. The fixed part is entirely up to Treasury (Yellen) & it tracks 5-yr real rates (TIPS yields) with some lag - it was negative in Mar but is positive now (+1.8%). So, my est are for fixed range 0-1.5%.
Given that the price of a barrel of oil (WTI) dropped 22.3% in the six months from March through Sept, and that overall energy prices dropped slightly (0.3%) in the same period of time, an overall positive increase in prices over the same six months does seem questionable. Perhaps it takes the impact of energy prices a bit of time to propagate through the entire economy, especially to sectors where it is a secondary or tertiary factor?
It's not as though the government doesn't have its thumb on the scales. While the CPI went up just 0.2% between August (296.171) to September (296.808), the headline number it pushed out was double that, 0.4%, month over month. It "seasonally adjusted" the figures and made inflation look worse.
Given that the price of a barrel of oil (WTI) dropped 22.3% in the six months from March through Sept, and that overall energy prices dropped slightly (0.3%) in the same period of time,
So during that 6 month stretch, the average Retail price of a gallon of gasoline was much higher than the 9/30 close. Consumers were heavily tagged this past summer, and people were crying about paying well over $100 to fill up. Does that not factor in?
The current I-bond rate of 4.81% (for six months) was calculated using the two endpoints: September 2021 and March 2022. It didn't matter that most of that inflation occurred in the last three months (0.8% in Jan, 0.9% in Feb, and 1.1% in March).
That is correct. For I-Bonds, Treasury Direct uses March, September, March (end) points for 6-mo inflation adjustments for seasonally unadjusted CPI. These are the most recent CPI reports available for May 1 and November 1 I-Bond rate announcements. For annualized rate, TD uses the formula,:
Annualized Rate = fixed rate + 2 x 6mo inflation adjustment + fixed rate x 6mo inflation adjustment
BTW, Social Security used Q3 averages, so July-August-September average now vs year ago, so it does capture a bit more history (Q3). Index used is CPI-W.
Schwab ( and probably TD) "banks" are weird. They may be banks but I have had lots of trouble moving money between Schwab and other brokerages using their banks. moving money to and from a bank doesn't seem to be a problem.
B+M banks seem easier to deal with Treasury Direct
I would use a B+M bank to connect with Treasury Direct. While it is roundabout, move money from Schwab, or TD ( that always seems easy) to the B+M account then Treasury Direct
@sma3: Thanks for the encouragement to use a different bank. I am able to do bank-to-bank transfers from Schwab to our BOA checking account, so it makes sense to try that. At present, my TD account is inoperative, so I can't just add a bank until I clear up the glitch.
Many brokerages provide cash management services as if they were real banks. For example, Fidelity accounts offer checking ant debit card services. But those services are provided by UMB Bank (routing number 101205681is associated with UMB Bank, KS). Fidelity says that its "accounts are considered a checking account for direct debit purposes."
A few institutions will link only to real banks, not to these pseudo "bank" accounts. I don't have any problems linking Treasury Direct to such accounts. So it doesn't look like Treasury Direct is one of those few picky institutions.
On the other end of the spectrum are real brick and mortar banks with lots of branches. Such as Chase, or TD Bank that is "one of the 10 largest banks in the U.S" and "a subsidiary of The Toronto-Dominion Bank of Toronto, Canada". They are FDIC insured, unlike brokerage accounts masquerading as checking accounts. https://www.tdbank.com/aboutus/investor_relations.html
When it comes to Schwab, Schwab Bank is a real, FDIC-insured bank, separate from but affiliated with the broker-dealer Charles Schwab & Co. "Affiliated" here means that they are both owned by the same parent company, The Charles Schwab Corporation. https://www.schwab.com/savings
But the Schwab One brokerage account (as opposed to the HY checking account) appears to operate as a pseudo "bank" account. The account disclosure says that "Checking account and Debit Card services provided by the Bank". And it defines "Bank" to be "BNY Mellon Investment Servicing Trust (IST) Company and/or its affiliates, the entity responsible for administering the Bank Services." https://www.schwab.com/legal/schwab-one-account-agreement
Then there are internet-only banks (e.g. Ally Bank). In theory that shouldn't make any difference in the context of electronic transfers as opposed to walk-in services. One doesn't walk into a bank to set up a domestic EFT link.
Comments
The formula used by Treasury is an approximation of annualization, a carryover from ancient times when calculators were not readily available.
You are not missing anything, but keep in mind that electronic I-Bonds can be bought only from Treasury Direct and the maximum amount is $10K/yr/person.
You may want to take a closer look. Here's a simple example:
- 0% inflation for the period 6-12 months ago
- 6% annualized inflation over the past six months (i.e. prices went up 3%)
If you buy an I-bond "now" and cash out in a year, you'll get 0% for six months, 3% for the next six months, and then forfeit 1.5% (the interest over the last three months). That's a net 1.5% for the twelve months you hold the savings bond - just half of the amount that prices increased over the past six (or twelve) months.
If one is cashing out before the end of five years, what one wants to do is cash out three months after the rates dip. That way, one forfeits the interest during three low-rate months. The example I gave was the opposite, where you'd be forfeiting the three highest paying months - a disproportionately high penalty.
Ally Bank 12 month FD is 0.85%. For a hypothetical family of 4, a 40K Ally CD will yield $340 compared to the same investment in I-Bonds which will yield $3,040.
New rates on 11/1/22 should be lower. Variable inflation has moderated but fixed rate may be raised above 0%. Estimates are 6.278-7.825%.
https://ybbpersonalfinance.proboards.com/thread/209/savings-bonds-6-months-nov?page=3&scrollTo=803
My TD account (Trust) did take about 6 weeks to activate after sending the requested Signature Guarantee paper.
This may help,
https://treasurydirect.gov/indiv/help/treasurydirect-help/faq/#id-managing-my-account-536497
"To add a new bank or edit an existing bank account, simply select the ManageDirect tab, then select Update my Bank Information under Manage My Account. Click the Add or Edit button on the ManageDirect Bank Information page. This will take you to the the Bank Change Form Request page where you will be directed to complete and mail a Bank Change Request FS Form 5512 to add a new bank or edit an existing bank.
Note: The bank selected as your primary bank appears first on the bank information list and in the drop-down boxes throughout TreasuryDirect. To designate a different bank listed in your existing bank information as the primary bank, e-mail us by clicking the Contact Us link or call us at (844) 284-2676."
Complete the FS Form 5512, get Signature Guarantee from your bank/credit union, and mail to the address indicated.
https://treasurydirect.gov/forms/sec5512.pdf
Edit/Add: BTW, TD has redesigned its website, so if you have saved/bookmarked TD links, they won't work anymore. They need to be replaced or removed.
To edit an existing bank account, click the "radio button" for the bank you wish to edit and click the "Edit" button.
The ManageDirect >> Bank Change Form Request page will appear.
A page will display with a link to a Bank Change Request FS Form 5512 to edit an existing bank in your TreasuryDirect Account.
You must sign the paper form in the presence of an authorized certifying official available at a bank, trust company, or credit union and mail it to us for processing. Certification by a Notary Public is not acceptable.
Your request will not be processed until we receive and approve your form with any necessary supporting documentation. We will notify you by e-mail when your transaction has been completed.
You may be able to do this by phone. To find out, call (844) 284-2676, choose option 4 at the first menu, and choose option 1 at the second. Or, if you prefer, you can send us FS Form 5512 as described below.
If you provided the routing and checking account numbers of Schwab bank account, TD should not have any issue. The routing number identifies the banking institution.
FWIIW, the IRS had no difficulty yesterday in accepting my tardy 3rd quarter estimated taxes debited from the same Schwab account. I missed the 9/15 deadline because we're dealing with a death in the family. I've been filling out forms for the funeral director and my patience and tolerance are at ebb tide.
I sent you a private message.
Catch
Updating calculations for unadjusted CPI,
New fixed rate (November 1) 0-1.5% est
New I-Bond Rate (November 1) 6.47-8.02% est
Inflation rages, but the govt reporting is simply inaccurate. Same as (un)employment and every other metric they issue to the public.
7.5% would not be a terrible return, but their calculation of the inflation rate is questionable at best.
It's not as though the government doesn't have its thumb on the scales. While the CPI went up just 0.2% between August (296.171) to September (296.808), the headline number it pushed out was double that, 0.4%, month over month. It "seasonally adjusted" the figures and made inflation look worse.
This is much the same as many equity-linked securities work. See, e.g. the point-to-point payout description in Fidelity's description of structured products.
https://www.fidelity.com/fixed-income-bonds/structured-products
The current I-bond rate of 4.81% (for six months) was calculated using the two endpoints: September 2021 and March 2022. It didn't matter that most of that inflation occurred in the last three months (0.8% in Jan, 0.9% in Feb, and 1.1% in March).
Annualized Rate = fixed rate + 2 x 6mo inflation adjustment + fixed rate x 6mo inflation adjustment
BTW, Social Security used Q3 averages, so July-August-September average now vs year ago, so it does capture a bit more history (Q3). Index used is CPI-W.
Schwab ( and probably TD) "banks" are weird. They may be banks but I have had lots of trouble moving money between Schwab and other brokerages using their banks. moving money to and from a bank doesn't seem to be a problem.
B+M banks seem easier to deal with Treasury Direct
I would use a B+M bank to connect with Treasury Direct. While it is roundabout, move money from Schwab, or TD ( that always seems easy) to the B+M account then Treasury Direct
A few institutions will link only to real banks, not to these pseudo "bank" accounts. I don't have any problems linking Treasury Direct to such accounts. So it doesn't look like Treasury Direct is one of those few picky institutions.
On the other end of the spectrum are real brick and mortar banks with lots of branches. Such as Chase, or TD Bank that is "one of the 10 largest banks in the U.S" and "a subsidiary of The Toronto-Dominion Bank of Toronto, Canada". They are FDIC insured, unlike brokerage accounts masquerading as checking accounts.
https://www.tdbank.com/aboutus/investor_relations.html
When it comes to Schwab, Schwab Bank is a real, FDIC-insured bank, separate from but affiliated with the broker-dealer Charles Schwab & Co. "Affiliated" here means that they are both owned by the same parent company, The Charles Schwab Corporation.
https://www.schwab.com/savings
But the Schwab One brokerage account (as opposed to the HY checking account) appears to operate as a pseudo "bank" account. The account disclosure says that "Checking account and Debit Card services provided by the Bank". And it defines "Bank" to be "BNY Mellon Investment Servicing Trust (IST) Company and/or its affiliates, the entity responsible for administering the Bank Services."
https://www.schwab.com/legal/schwab-one-account-agreement
Then there are internet-only banks (e.g. Ally Bank). In theory that shouldn't make any difference in the context of electronic transfers as opposed to walk-in services. One doesn't walk into a bank to set up a domestic EFT link.