If you buy now, you have two good 6 month interest periods - first 1.77% and second 3.56%. Then whatever comes after that. Say it sucks, you hold 3 more months, now 15 in total, and then redeem it losing the low rate interest. You wouldn’t want to lose the 7.1% IRR months from the 2nd 6 month block. I suspect inflation will continue to be fairly high, but you’ll know that when you decide to keep holding or not.
The other thing to note is that if you wait to buy in Nov (end Nov), you will not lose 3 months of the 7.12% interest if you redeem in a year. The 3 months of interest you lose will be an unknown interest rate yet to be announced in May 2022. So it all depends on whether you have the flexibility to extend the withdrawal for one to three months as in xerty’s scenario.
BTW, when purchasing, you can buy near the end of the month and still get that whole month’s interest. And when you redeem, you should redeem on the 1st of a month to get the previous month’s interest. This also means that the minimum holding period is not 12 months, but just a little over 11 months.
Here’s a question - if you cash out and pay the penalty, is that penalty 3 months interest at the current rate, or is it the most recent 3 months of actual interest you’ve accrued?
My calculation would presume that if the next May 2022 rate is low enough to make me want to cash out, I’d rather hold an extra 3 months at that rate (earning 12 months of great rate, then netting nothing for the next 3 months) than be stuck earning that crappy rate for the full 6 month period before cashing out (6 months of great, 3 months of crappy, and 3 months of nothing).
Regardless, I dont expect savings/CD rates to bounce up any time soon, so even modest inflation numbers going forward will make holding the bonds attractive far beyond the minimum 12-month holding period.
It is the last 3 months earned.
Just keep in mind that if you buy on the last day of the month and sell on the first of the month, you really only lose 1 month and 2 days worth of interest. Or is it 2 months and a day? I can’t quite remember
The minimum period you have to hold is a little over 11 months (e.g. buy near end of Oct 2021 and sell on Oct 1st 2022). You will get interest for 12 - 3 = 9 months. So overall, you lose a little over 2 months in interest for a 11-month (plus a few days, depending on whether there are weekends when purchasing and selling) holding period.
For a “buy and hold” person like me:
Is it smarter to buy (a few days) before the end of this month or . . .
wait and buy (a few days) before the end of next month?
This month if you’re happy with 3.5% IRR. I think for most lower risk people, this month is an easy, easy choice. What you get down the road you’ll have a look at before you have to decide to hold or sell. Plus even the 0% base rate is still 1.5% or so better than the negative yield on medium term TIPS right now…
But as noted, this would result in the “-3” being at the 7% rate. In most cases, holding an extra 3 month so the penalty will be at the next (still unknown) rate will be the better play. 4.6% over 9 months is better than 3.5% over 6 months. The only other variable is the opportunity cost from keeping the money locked up for an extra 3 months.
My reply was only in response to scripta’s question about how much interest will we lose for a minimum holding period. The answer is a little over two months and not “1 month and 2 days”.
The difference is - buy now, earn 3.5% for 6 months and 7% for 6 months.
Buy next month, earn 7% for 6 months, then ???% for 6 months.
And of course when buying now, you can still continue to hold for the ???% period. For buying and holding, you get the same rate schedule either way, buying now you just slip in an extra 3.5%/6mth at the top.
I hope that makes sense? It’s tough to find the right wording, not knowing how much explanation is even necessary.
Good summary of the choices for Oct-vs-Nov. I think Oct is standout unless you have really short term time limits and a strong view on the unknown future inflation being high.