Marc Cuniberti The government I-Bond was recently covered here on Money Matters in an article I penned called “A gift from the U.S. government” dated May 9, 2022.
This adjustable but 100% guaranteed U.S. bond at that time featured an interest rate of about 9.62% annualized, which needless to say, was one hell of a deal. Investors piled into the bond and indeed, I received a ton of emails on the article thanking me for bringing it to light.
Since the bond adjusts its payout rate every six months based on a two tier calculation, the most recent adjustment brought the current issue’s interest rate down to 6.89%. This new coupon rate took effect Oct 31st.
On the surface, the current bond looks less of a bargain then the one a few months back but keep in mind the 9.62% rate no longer is applicable even to the buyers of that original bond.
But on the surface, 9.62% still appears better than 6.89%, but new buyers, don’t fret just yet.
Because of the way the bond is calculated, the current 6.89% bond will outperform the 9.62% bond in about 4 years.
How can that be you ask?
The interest rate the bond is advertised at is actually made up of two components and each component effects how it will pay out over time. There is a guaranteed base rate and an adjustable rate based on inflation. The guaranteed base rate doesn’t change over the entire life of the bond. The adjustable rate CAN change every six months based on a calculation that takes inflationary statistics into consideration.
The previous 9.62% bonds has a 0% base rate while the current bond has a .40% base rate. This base rate is a “bump” to the overall inflation calculation. Note at 0%, the 9.62% bond will never get that “bump” while the 6.89% bond will always get it.
How that all works out over time is that, all things considered, the buyers of the new 6.89% bond will be ahead of the 9.62% bond buyers in about 4 years since the .40% won’t change on the current buyers while the older higher paying bond forever gets no bump. Remember the 9.62% rate was based on the inflationary calculation at the time, but its adjustable rate was lowered right alongside the new 6.89% bond. In other words, the 9.62% bond no longer pays 9.62%. A bit convoluted in its explanation I agree, but just know that the current I-Bond is still one hell of a buy in my humble opinion.
The first I-bonds were issued in 1998 with a guaranteed base rate of 3.40% and rose to 3.60% by May 2000. Since then, because of the continuing erosion of interest rates set by the Federal Reserve to address multiple crisis such as Y2k, 9/11, the Dot.com blow up, the 2008 real estate crisis and Covid to name, the guaranteed rates are nowhere near what they used to be.
Keep in mind the adjustable rate is just that, adjusted every six months, and who knows where interest rates will go from here.
The way the I-BOND is structured, there is also a fairly inexpensive way to bail out of the bond should the rate of return fall into the unfavorable zone compared to what rates may be offered later on or in other investments.
An investor may also have other reasons to bail out of the bond in future years such as if the market starts to offer more competitive rates compared to its risk or an emergency pops up requiring funds. The good news is the I-Bond will let you out inexpensively whatever the reason.
For a complete explanation of the I-Bond request a copy of my original article by emailing: [email protected]
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His website is moneymanagementradio.com, and was recently voted Best Financial Advisor in Nevada County. 530-559-1214.
