There’s no rush to buy I-bonds

What got far less attention was the flurry of excitement that the inflation report caused in the normally-staid I-bond market. I-bonds, of course, are U.S. savings bonds whose interest rates are based on the consumer-price index’s rate of increase. Because of quirks in how I-bond interest rates are set, many commentators have seized on the opportunity that now exists to capture a little extra yield—provided you act before the end of October.

I think these commentators are making a mountain out of a molehill, however. While they’re not wrong about the window of opportunity that exists for the next two weeks, the actual dollars involved are too small to make any real difference to anyone’s retirement.

As Dr. Spock once said on Star Trek, “A difference that makes no difference is no difference.”

I-bond logistics

But I’m getting ahead of myself.

The window of opportunity to capture a little more yield exists because of the interaction between the semiannual schedule for resetting I-bond yields and the particular semiannual rate reset schedule that you individually will have when investing in I-bonds. While I-bond yields themselves are reset each year by the U.S. Treasury in early May and early November, your individual rate reset schedule will be based on the six-month anniversaries of the month in which you purchase your I-bonds. (Two recent columns that do a good job going into more detail about these logistics are here and here.)

The bottom line of these logistics: If you purchase an I-bond before the end of October, you will earn the I-bond rate the Treasury set last May, which was 9.62%, and this rate will remain fixed for you through the end of March 2023. Given this week’s inflation report, we know that if you instead wait until November to purchase an I-bond rate your rate will be 6.48% through this coming April.

It’s this 3.14 percentage point difference between 6.48% and 9.62% that is the source of the excitement: Those purchasing before the end of October can lock in this higher yield—for six months.

Why the extra yield is not that big of a deal

That much additional yield certainly seems exciting, especially when stocks and regular bonds are in historic bear markets. But I nevertheless don’t think this yield differential is that big of a deal, for several reasons.

One is that the dollars involved just aren’t that consequential. The maximum amount of I-bonds that any individual is allowed to purchase in a calendar year is $10,000. The 3.14-percentage-point yield difference translates to $26 more per month. While that’s better than a stick in the eye, it’s not enough to make a difference to your retirement standard of living.

The cost-benefit calculus of acting now versus early November also needs to take into account what inflation will be next spring. If the I-bond rate set in six months’ time is higher than the 6.48% rate that will be set in early November of this year, then the extra interest you earn by investing in I-bonds in the next two weeks will be even lower than $26 per month.

There’s yet another consideration as well. The I-bond yield is actually the sum of two individual rates: The inflation-adjustment factor and a fixed rate. That fixed rate currently is zero, but I’m willing to bet that this will change in early November. That’s because the Treasury’s Inflation-Protected Securities (TIPS), the closest competitor to I-Bonds, currently trade at a hefty yield above inflation. The 5-year TIPS TMUBMUSD05Y, 4.267%, for example, sports a real yield of 1.80%, which is a lot more attractive than the I-bond fixed rate of 0%.

It was understandable in prior years why the U.S. Treasury set the I-bond fixed rate at 0%, since TIPS’ yields at the time were negative. But now that TIPS yields have become significantly positive, the I-bond fixed rate will need to rise to become competitive. Though there’s no way of knowing whether the U.S. Treasury will in fact increase the I-bond fixed rate in early November, Harry Sit of The Finance Buff, said in an email that he would be “disappointed” if they don’t.

If the Treasury does increase this fixed rate component, then you would come out ahead by waiting until November to purchase any I-bonds. That’s because the fixed rate you would earn by waiting would more than make up for any lower inflation-adjustment factor. The fixed rate you get when investing in I-bonds remains in place for the entire time you’re holding them—up to the maximum of 30 years—while the higher interest rate you lock in by acting in the next two weeks lasts just six months. So by waiting until November and giving up $26 per month of interest for six months, you’ll quite likely lock in a nonzero fixed rate for as long as 30 years.

That’s why waiting strikes me as a good bet to make.

TIPS vs. I-bonds

As this discussion implies, TIPS in recent months have become competitive with I-Bonds, if not more so, because TIPS now trade at high positive real yields. An additional advantage TIPS have is that there is no purchase limit, so they have the potential to make a real difference to your retirement standard of living.

TIPS do have some downside risks, however, which I discussed in a recent Retirement Weekly column. As always, it’s a good idea to discuss your various options with a qualified retirement financial planner.

But it would be a mistake to think you have just two weeks to make a decision. I-bonds can be very attractive additions to your retirement portfolio, but only as part of a long-term financial plan of gradual accumulation. They are not a short-term trading vehicle.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.