New Rates For I Bonds – April 2023
New Rate Calculation
As a reminder of how I Bonds work, please refer to https://astrawp.com/what-are-i-bonds-how-do-i-buy-them/
The new semi-annual inflation rate for I Bonds purchased on May 1, 2023, will be 1.69%, or 3.38% annualized. This is calculated using the last six months of the non-seasonally adjusted CPI-U from September 2022 to March 2023. The CPI-U in March 2023 was 301.836, while in September 2022 it was 296.808. Dividing the two numbers gives us an inflation rate of 1.69%.
The new fixed rate will be announced on May 1, 2023, at https://treasurydirect.gov. Currently, the fixed rate is 0.40%.
Should I Buy I Bonds Now?
I Bonds purchased between November 1, 2022, and April 30, 2023, will receive an annualized rate of 5.34%. Therefore if you haven’t purchased I Bonds this calendar year, you still have the opportunity to lock in a 5.34% return for one year.
(0.40% + 3.24%1 + 1.69%2 + (0.40% * 3.24%1)) = 5.34%
1 Previous semi-inflation I Bond rate
2 Forecasted May 2023 I Bond rate
However, I Bonds must be held for at least one year and incur a three-month interest penalty if sold before five years. Thus, the annualized rate will be lowered depending on whether you are subject to the penalty. If you bought an I Bond today and sold it in 15 months, your annualized rate of return would be 4.27% (the above rate multiplied by 12/15).
Currently, three-month Treasuries are trading at around 4.96%, six-month at 4.92%, and 1-year at 4.63%. Given these rates, the increased liquidity of Treasuries, and the same state tax-free nature, Treasuries may be more suitable for investors.
Should I Sell My Current I Bonds?
When you purchase an I Bond, you lock in six months of the current semi-inflation rate based on your purchase date. The previous semi-inflation rate of 3.24% (6.48% annualized) beats current interest rates. If you are past the 5-year penalty rule, you may consider selling your I Bonds once the new inflation rate of 1.69% takes effect. If you have held them for less than five years, consider holding them for three additional months after the new inflation rate kicks in so the penalty is taken on the lower rate before selling.
However, I Bonds contributions are limited to $10,0004 per person per calendar year. Once you sell your I Bonds, you can only replenish them at the $10k/yr limit. They may still be suitable as a federal tax-deferred, state tax-free short-term investment to hedge against inflation.
4 Technically, you can purchase an additional $5,000 through paper I Bonds on your tax return.
Sources
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