If you're like us, you've been doing the annual "let's-make-sure-our-accounts-are-all-in-order-and-we-make-all-the-necessary-year-end-and-new-year-contributions" exercise in recent days.
It's a fun bonding experience that involves shouting temporary login passcodes across the room to each other, and trying to figure out whether 100% S&P 500 portfolios will outperform an 85/15 international split over the next few decades. Oh, and triple-checking all the fund fees to make sure we're not getting hosed. There's also the annual how on earth can the bank still require paper transactions for Roth IRA conversions?! discussion. Things like that.
It also stirs up memories. Remember I bonds? Ah, yes. The investment craze of 2021-22. That 9.6% yield sure was fun for a few months' time! But what should you do with them now? Most of us are probably resigned to holding them for at least five years, at which point they can be sold with no penalty. Maybe by then we'll know if any inflation has stuck around enough to make them worth hanging onto for longer than that.
In some ways, we were all suckers for jumping on them back when their fixed rate was still 0%. It means all we'll collect going forward is the floating inflation rate, which right now is a little under 4% and appears to be headed even lower this year. Not a terrible deal, but not a great one, either. Unless you were to buy them now. Why? Because Treasury has actually boosted the fixed rate to its highest in nearly two decades.
For whatever reason--and they don't tell you their formula explicitly--the fixed yield on I bonds has gone from 0% for basically all of the 2010s up through late 2022, to now a healthy 1.3%. That means if you buy now, for the thirty-year life of the bond, you get the inflation rate plus 1.3%. So people who buy now are getting a nearly 5.3% yield for this six-month period, without having to pay taxes, which can you defer until the bond matures.
The fixed rate hasn't been this high since the 2000s, when it also averaged around 1%. It was even higher in the late '90s, when it was roughly 3.5%. The lucky ones who bought back then have been making out like bandits. Again, Treasury doesn't fully explain how it calculates the fixed rate, but the speculation is they want it to be around 0.5 to 0.75 points below the real TIPS yield.
So could the fixed rate go even higher, if you wait and buy after the next reset, in May? Possibly, given that the real TIPS yield peaked at 2.5% in recent months. Perhaps that could imply the fixed rate going up to nearly 2%. Or maybe not, since the TIPS yield is already back down to 1.75%. Either way, you can lock in a better lifetime yield now than at any point since the mid-2000s.
So if you bought I bonds a few years ago, should you go ahead and buy more? That's for you to decide--if you have any brain space still left over from having to make a dozen other such investment decisions already. Oh, and don't forget to update all of your beneficiaries while you're at it! Ah, the joys of ringing in the new year.
See you at 1 p.m!
Kelly