Optimistic is one way to put it. He’s on crack would be my version. Inflation for the first 3 months of 2022 amounts to exactly 2%. Thinking that the next 9 months are only gonna see price increases amounting to another 2% (meaning annual inflation rate of 2.66%) seems very far-fetched to me.
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Your I bond rate may be lagging in 2025, but the excess you make now creates a very large margin of error for 2-3 years from now.
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I looked back and didn’t see a super strong correlation between the fixed rate changes (ie when it increased from 0% to 0.1% to 0.3% to 0.5%, or subsequently fell back to 0%), neither those fixed rate changes to changes in 5 year inflation expectations nor to the absolute level of interest rates. I think there was a weak correlation to absolute changes in medium term rates, but it seemed to be a bit sticky, ie small changes would result in no change to fixed rate, but larger changes would get something (although perhaps not proportionally). Since the Fed hasn’t done much between Nov’21, just 0 to 0.25%, I’m not sure I’d expect a bump in the fixed rate but that’s with less confidence than I claimed previously. I guess you could hope for +0.1% fixed maybe.
I’ll post more numbers later since I backed out the inflation marginal yield curve from the TIPS and treasury rates today, but the short version is that even if the fixed rate was hiked to 0.25%, you’d still rather buy in April at 0% fixed (and get 6 months of 7.1%) than wait til May for the higher fixed rate and miss that, at least out 4-5 years which was the extent of my analysis.
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This post looks at the tax situation of who and when are the taxes due when a savings bond is first held as a gift for a year by the purchaser and then given to the owner.
https://www.bogleheads.org/forum/viewtopic.php?p=6630413#p6630413
It depends on whether the owner is taking the default tax deferral treatment (in which case there’s nothing due, since it’s deferred) or if they’re paying taxes on accrued interest annually. In the latter case, it seems like the owner pays taxes on the accrued interest as of the time of the gift (presumably along with whatever else the bond accrued during the rest of that tax year), so it can build up a bit until given.
So for example, you buy your kid $10k now. Then you buy them another $10k and hold it as a gift bond til next Jan. Your kid elects to pay taxes annually, to make use of their limited kiddie tax deduction and low bracket on unearned income. The second bond will end up with 1.5-2 years of interest for the first year, and then one years worth thereafter.
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I-bonds are beginning to get some competition from tips. The 10 year tips real rate is now zero, same as I bonds.
I bonds can be cashed at five years without penalty so they may be more equivalent to five year tips, which currently have a -0.5% real rate.
There are some big differences between Tips and ibonds.
Ibond values will not go down during deflation but tips can go down to their principal value.
Tips do not have a purchase limit like iBonds do. This makes a lot of difference to me since I do not want to go through all the hassle to purchase more than $10k.
https://www.bloomberg.com/markets/rates-bonds/government-bonds/us
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So as of yesterday I ran the numbers on what the big fixed income players were pricing expected inflation in the future. Here you can see the graphs. All rates are annual / annualized rates.
First I looked up the treasury and TIPS yields for the various maturities from 0-5 years, linearly interpolating if there wasn’t an exact bond with the right maturity. Then I subtracted these, ie Treasury - TIPS for the same maturity, to get the breakeven (market expected) inflation.
Then I bootstrapped the breakeven inflation rate for the first 6 months, together with the breakeven inflation for the whole first year, to find out how much inflation was happening the 2nd 6 months, etc (carefully for compounding). This is the forward curve for inflation expectations. The red line is the breakeven inflation curve from the last graph, and the blue line is how much the annual inflation rate is for each 6 month period ending on the time given. So the first 6 months is expected to be 8%, then the 2nd 6 months is expected to be 2.5%, etc. Normally you’d smooth this, but good enough for government work.
Then I used these expected inflation amounts for each of the successive 6 month increments to find out what an I bond would pay if it was held for different maturities. You always hold for the first year (for the great 7.1% / 9.7% rates), and then you possibly hold for some number of additional 6 month periods, and then (when the rate is no good anymore) you hold for 3 more months and forfeit that unless you made it to 5 years.
I used 2 models for the inflation.
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Pink Line. One was a flat 3.4% annual rate over the whole 4 year period, corresponding to roughly the breakeven 4 year inflation (since we get the first year known, and want to know the next 4 years to make it, potentially, to the 5 year penalty maturity).
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Blue Line. The other was the inflation forward curve rates, which were higher initially and lower later, and probably more in line with what is reasonable. The blue line uses the expected inflation over time, while the pink line uses the flat / average inflation rate throughout.
The other lines are to compare the I bonds held for varying times with other fixed income options of that maturity (and those are are all much much worse currently; CD rates from bankrate’s top national option).
Here’s the same info in table form:
| years | term | maturity | I bond (market) | I bond (flat) | best CD | treasury | TIPS |
|---|---|---|---|---|---|---|---|
| 1 | 4/1/23 | 7/1/23 | 7.31% | 7.31% | 1.30% | 1.84% | -3.25% |
| 1.5 | 10/1/23 | 1/1/24 | 7.51% | 6.15% | 1.40% | 2.15% | -2.60% |
| 2 | 4/1/24 | 7/1/24 | 6.36% | 5.55% | 1.65% | 2.46% | -1.73% |
| 2.5 | 10/1/24 | 1/1/25 | 5.94% | 5.16% | na | 2.57% | -1.44% |
| 3 | 4/1/25 | 7/1/25 | 5.42% | 4.91% | 1.90% | 2.68% | -1.07% |
| 3.5 | 10/1/25 | 1/1/26 | 5.13% | 4.72% | na | 2.71% | -0.91% |
| 4 | 4/1/26 | 7/1/26 | 4.83% | 4.58% | 1.85% | 2.74% | -0.66% |
| 4.5 | 10/1/26 | 1/1/27 | 4.62% | 4.46% | na | 2.76% | -0.66% |
| 5 | 4/1/27 | 4/1/27 | 4.59% | 4.60% | 2.15% | 2.79% | -0.56% |
The above yields assume you buy near the end of this month and then hold for the listed number of years or half years.
Several things to note from the last chart and table.
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The market inflation based I bond yield looks very good to hold for 1.5 years, ie not just the guaranteed 2 known 6 month periods, but the market is saying the next 6 month one (ie Apr’22-Oct’22) is going to be really high too. After that the yields for holding longer drop on average as the initially high historical inflation is diluted across a longer period of time with (expected) lower inflation.
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you can use it to decide, given your personal feelings about what constitutes a “good” yield, how long you are likely to hold an I bond bought this month. Let’s say you look at the market I bond column and decide that you think 5.5%+ is good, but for less than that, you’ll take your chances YOLO’ing NFLX options around earnings (pro tip: short). So that means you’ll want to hold for the 2.5 years worth of interest, ie 2.75 years including the 3 month penalty.
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Following up on the example in point #2, this might suggest you personally should want to buy up to $40k worth of I bonds, including $30k of gifts (say from your spouse and they v.versa) that use your 2022 allocation for the first $10k, as well as your 2023, 2024, and 2025 allocations to receive the additional $30k in gifts each following year. You can tell this because the maturity column in row 2.5 years is 1/1/25, meaning that’s when you’re planning on cashing out. Since that’s in 2025, you can use your gift allocation for all years up to and including 2025.
Side note - if you pay state or local income tax, you should adjust your “good enough” threshold for an I bond into a “tax-equivalent” yield. That is to say, the yield you would want from a fully state/local taxable bond to be equivalent to the I bond given you will take home more after-tax from the I bond.
- tax equivalent yield = (I bond yield) * (1 - federal marginal income tax rate) / (1 - fed and state combined marginal income tax rate)
So if you are in the 35% tax bracket federal and 10% local, you would take your I bond rate and multiply it by 0.65/0.55 = 1.18x to get the tax equivalent yield. So a 7.5% yield for the 1.5 year period would be worth 8.9% for a fully taxable bond in this situation. If you can deduct your state taxes in full on your federal itemized deduction (hard to do with the SALT cap these days), in principle you would reduce your effective state tax rate for this in the denominator.
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trying to follow WTF you did (I’m not worthy), but 
for the effort.
I see one issue with the approach and conclusion/note/suggestion #3. You took inflation expectations to chart likely future I-bond rates, but plotted them next to the current CD, treasury, and TIPS rates, which have no bearing on future rates. At least CD rates are likely to increase with the FED rate bumps. For all we know the best 1-yr CD could be crossing 4% by December. I think this would reduce the amount of I-Bonds you’d want to buy now. 2023 is a no-brainer, 2024 maybe, 2025 is questionable IMO.
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Thank you, kind sir. Xtra nice work. I’ve purchased for grandkids and their offspring for this year an next, but will hold at that point.
My financial advisor says that recession will hit next year and carry through the 2024 election. This doesn’t guarantee lower inflation, but I suspect BIG government will report lower inflation, regardless of facts on the ground.
Thanks, @xerty, that is pretty remarkable stuff. But I agree with @scripta on this part:
For me as a retiree, what I love about I bonds is that I do not have to report the interest year by year. This is a serious help where the IRMAA is concerned. Younger people who don’t worry about the IRMAA now will need to deal with it soon enough, assuming you remain alive. And the IRMAA sucks!
Contrariwise, my best understanding is that with TIPS the increase in value is reportable each year when you file with the IRS. If that is wrong I hope one of you guys will correct me. But if I’m right:
TIPS offer no help with the IRMAA at all. And they also can boost you into a higher tax bracket. 
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This is from the Bogleheads, the real yields for tips versus maturity from the quotes at Fidelity
a rundown for those who are big I bond enthusiasts for limits, including kids, gifts to your spouse, and various trusts.
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Thank you, kind sir for the articles, particularly the revocable living trust one. For some reason, I thought they would be considered an extension of the buyer. That’s great news. Two more Ibonds will be in the can tomorrow. Again, thank you.
For those who have gifted 2023 allocations but are on the fence for 2024, here is how you can think about it:
10k invested. 6 months 7.12%, 6 months 9.62%, 6 months of 0 (highly unlikely - thank you xerty for details/analysis!), then 3 months of early liquidation penalty.
That takes you to January 2024, the first permissible month for the gifts may be delivered (and liquidated if desired).
10k → $10356 → $10854.
At worst, this strategy is like a 21 month CD yielding 4.8% per year.
For comparison, 24 month CDs currently yield 1.8% max from small banks, and 1.6% from big online banks. 18 month CDs yield 1.5% (from Marcus).
(I won’t belabor the fact that you can buy late April and liquidate early January 2024, so it’s more like a 20 month time frame).
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Thanks for the links, xerty.
There are interesting discussions under article about gift I-Bonds, one reader called TD customer service and asked about which limits and when purchase of gift I-Bond will affect, he got answers that goes against the author’s views. I still side with author, on that but curios if TD will try to cancel those purchases later due to huge volume of money inflow. I guess we now can only wait and see.
That is the reason why such deals should not be popularized too much as all those calling and asking may kill it for all.
Free to try, not sure why people were worrying about this.
That is the reason why such deals should not be popularized too much as all those calling and asking may kill it for all.
They must have forgotten the rule of good deals - never call!
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I am already packed with 60k for 2 of us in gifts, hope nothing will get canceled.
Thanks for the info Xerty. I had no idea a simple grantor trust could be completed with a short document and doesn’t have to be filed anywhere. DIY looks possible, at least for smallish stakes of a 10k ibond.
Gonna go get that Nolo press book from the library today,
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Regarding the fixed rate come May, I found this nice chart that shows the fixed rate for I bonds seems to track with TIPS yields and, given those are nearly all negative currently, we shouldn’t expect a bump as of next month.
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I’'ll side with the author over the Canadian bank. … after doing my own due diligence. 
Fixed rate speculation. He expects no bump.
I’ve been handicapping the fixed-rate adjustments for 11 years, and my best speculation is that the yield of a 10-year TIPS needs to be above zero for the Treasury to even consider raising the fixed rate
As of Friday’s market close, the real yield of a 10-year TIPS had increased to -0.08%, jumping 100 basis points higher in just five months. The I Bond now has only an 8-basis-point advantage over a 10-year TIPS. Yet, I’d say the possibility of a higher fixed rate remains very slim — for the May reset. In November, much more likely.
And it’s still better to buy the current bonds than the May ones, unless somehow you’re in the edge case of investing for exactly 12-13 months and need to cashout in a way that would otherwise lose the 9.6% rate for the penalty. Buying in May let’s you lose the future unknown 3 months interest instead of getting the 7.1% in full and then losing some of the 9.6%.
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