Treasury I bonds weren’t just a bargain in October. They were fine with their 9.62% interest rate. And now it’s time for you to consider investing in the latest attractive Treasury I bond.
The interest rate of 6.89% of the new bond is the fifth highest ever on Series I bonds since their inception in 1998.
And the generous size of the rate somewhat surprised the experts.
I Bonds: website crashed
The fabulous 9.62% annual interest rate of the old I bond was the highest ever on I bonds. But it is no longer available.
The 9.62% rate was so enticing that the TreasuryDirect.gov website collapsed under the weight of investors trying to buy the debt. Sales in October alone set a record. Single-day sales of $979 million as of the Oct. 28 deadline nearly matched cumulative sales of $1 billion from 2018 to 2020.
October sales nearly exceeded $7 billion.
You can buy the new I bond with its 6.89% rate by April.
How do these bonds work?
The reason why I bonds have relatively high interest rates is that they are indexed to the rate of inflation. The Treasury sets new rates every six months using inflation data.
As many Americans are painfully aware, inflation hit nosebleed highs in the second half of 2022. “Even though inflation began to moderate in late summer, it remained elevated,” he said. said Ken Tumin, founder and editor of DepositAccounts.coma bank account comparator.
Technically, these bonds consist of two components, each paying its own return. One is related to inflation. This rate is reset every six months. The new inflation-linked rate is the third highest on record, Tumin says.
The other rate, now 0.40%, is fixed for the 30-year life of the bond. “Treasury raised the fixed rate to 0.4%,” Tumin said. “It was a little more than I expected.”
The composite rate is equal to 6.89%.
How to buy bonds I
Each calendar year, you can purchase an electronic bond with a maximum value of $10,000. Plus, you can buy up to $5,000 of paper I bonds. But the only way to buy paper versions is with tax-free money. You can do this when you file your taxes, using IRS Form 8888.
Later, you can convert a paper bond to an electronic bond.
Yet, as the IBD explained in a previous report, a married couple can use loopholes to plow up to a total of $75,000 in these links.
Here’s how: each spouse buys $10,000 worth of I bonds directly. Each spouse must have their own CashDirect account.
If you’re a dual-career couple and you each run a business, your businesses can buy you an extra $10,000 each. If your financial plan calls for the creation of two living trusts, these entities can each purchase one of these treasury bills for each of you.
The main purpose of living trusts is usually to transfer assets to loved ones after your death.
In the meantime, let’s say you have three children. You can buy up to $5,000 worth of bonds for each one. Each child must have their own TreasuryDirect account. It’s still $15,000. As a family, you would invest $75,000 in I bonds in a single year.
But remember the limits of the calendar year. If you purchased up to any limit of the 9.62% bonds, you must wait until January to purchase the new 6.89% bonds in those same accounts.
Beware of risks
You can cash in an I Bond after 12 months. But if you cash in one before it’s five years old, you’ll lose the last three months of interest.
The new rate of 6.89% will last only six months before the Treasury resets it.
Still, bond rivals are losing steam as inflationary pressure appears to ease.
Rival investments
Rivals include 5- and 10-year Treasury bills. “We are already seeing a drop in 5- and 10-year Treasury yields following the October Consumer Price Index (CPI) release,” Tumin said.
Tumin said: “Even if inflation is falling and the May 2023 Bond I inflation rate is lower, the annual return is likely to be very competitive with today’s safe alternatives such as treasury bills. one-year and one-year certificates of deposit (CDs). The highest one-year CD rate is currently only 4.84% annual percentage yield (APY).”
If inflation slows, it will be even more valuable to lock in today’s I bond rates. “Bond rates will only be attractive when inflation is high,” Tumin said.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for advice on personal finance and top mutual fund strategies.