Back in April 2022, when the 1 year treasury bill was around 1.6%, and Ibonds were offering 7.12% for 6 months followed by 9.62% for 6 months, it was a complete no brainer decision. For the same level of risk, for the same level of liquidity, there is an approximately 8% more in yield. I loaded up on Ibonds at that time. That was the most optimal time to invest in ibonds.
With the new year, it renews the annual limit to invest in Ibonds. This month, the story changes. Currently Ibonds will offer at 6.89% yield for 6 months, however the May 2023 yield is unknown. Meanwhile, the 1 year treasury bill is at 4.730%. There is now only about a 2% spread. Furthermore, we know the treasury bill is somewhat tied to the Fed Funds rate which is still slated to rise, with the intent of driving inflation down, of which the Ibonds rate are based on. So the big question is what will the May 2023 Ibond yield be?
So one strategy is simply to wait until April 2023 before deciding whether to invest further in Ibonds, since the May 2023 rate will be known. However, that’s an additional 4 months loss of liquidity. Since my intent in investing in Ibonds is for the short-term basis, while inflation is still high, that 4 months can be significant.
Currently, the Fed is forecasting another 3- 0.25% rate hikes. Given the rough correlation with treasuries, that suggests the 1 year treasury will reach about 5.5%. Meanwhile, given the current Ibond yield is 6.89%, what this suggest is the inflation data from now until April will need to be about 4% to make Ibonds a poor decision. Although it appears inflation is coming down, I think it’s hard pressed to believe that it’ll drop to 4% this fast.
As such, it still makes sense to continue investing in Ibonds this month, granted it’s a much less optimal scenario than April 2022. Another $40K into Ibonds for Jan 2023.
