Earlier this week, the semi-annual reset of I-Bond interest rates happened. The interest rate went from 9.62% (May-October 2022) to 6.89% for newly issued I-Bonds (November 2022-April 2023). With the cut in rates, the very short window between announcement and implementation caused enough demand in a short enough window that the Treasury Direct website went down, whoops.

Technical details – the best kind of details

With that background, on the surface it looks like a pure loss to be buying this week compared to last week. But it’s not as straight forward as it looks.

If you bought your 9.62% return I-Bond, that bond will pay out at that rate for 6 months, and then pay out at the new rate for the next 6 months. But for those who aren’t purchasing new, that rate isn’t 6.89% anymore. That’s because the I-Bond rate is actually a compound rate. There’s an inflation-based percentage (6.48%) that all I-Bonds old and new will pay out. And then there’s a fixed percentage that was an enticement at the time of purchasing the I-Bond that is good for the life of the bond. That enticement was 0.40% for those bought in the November-April 2023 cycle, 0% for those bought in May-October 2022 and many prior semi-annual windows. If you check out the Treasury Direct chart, you can see that the need to add an enticement has waxed and waned in clusters over time.

Buying I-Bonds when the fixed rates are high can have a really good payoff over time. For example, while new buyers in May-October 2022 will have received payouts of 9.62% and 6.48%, buyers who bought in May-October 2000 and are still holding their 3.6% fixed rate I-Bonds received a composite 13.39% and 10.20% for those same time windows. In the long term, buying now at a fixed rate of 0.40% will be valuable, and it will do you more good to hold this November-April 2023 I-Bond post maturity than it would be to hold that 0% fixed rate I-Bond bought in May-October 2022.

Ignore the details, focus on the big picture

All of this is mostly technical noise. Make your decisions about how much cash or cash equivalents to keep, and in how liquid of a form, based on your needs and family situation. If I-Bonds made sense for your situation last week, they still made sense this week, and they’ll still make sense next week. I-Bonds are not a growth tool, they are an asset preservation tool with a minimum lock-in period of 1 year and a minimum penalty period of 5 years. To buy I-Bonds, go directly to the source, no commissions involved.