Icosian Reflections

…a tendency to systematize and a keen sense

that we live in a broken world.

Series I (April 2022 update)

To recap:

The Series I savings bond is a US government bond offered to US citizens, with purchases limited to $10k per person per year. It pays interest set by a formula based on the official inflation rate, with a built-in lag. (...)

In particular, the interest rate formula for bonds bought before May 1, 2022 will be:

  • 3.56% until October 1
  • X% for the next 6 months (where X% is the inflation of CPI-U from Sept 2021 to March 2022)
  • Y% for the following 6 months (where Y% is the inflation of CPI-U from March 2022 to Sept 2022)

...and so on. You'll forfeit the last 3 months of interest if you redeem anytime before 5 years (which I'm assuming will be correct to do).

When we checked in December, we'd seen 2 months of the Sept'21->Mar'22 period and I had conservatively estimated that the 6-month inflation rate would come in at 2.17%, implying a 4.57%/ann rate for redeeming after 12 months (and abandoning the last 3 months of interest). But now there are three more months of CPI-U out, and we can make a more-informed estimate.

Inflation has slightly accelerated since then -- Sept->Nov saw 2 months of 8.23%/ann inflation, and Nov->Feb saw 3 months of 8.56%/ann inflation. If we assume (very conservatively, I think) that Feb->Mar inflation will be halfway between 8.43%/ann and historical 2.62%/ann, we get 3.90% for the Sept->Mar interval, and a 6.03% annualized return for holding for the first 15 months.

Given that the rest of the terms are value-increasing (in particular, the option to continue holding and redeem later if high inflation continues), I feel pretty comfortable saying (not financial advice) that borrowing money at 1.83%/ann from Interactive Brokers and using it to buy Series I looks pretty close to a 4.20%/ann arbitrage (nice). And, as discussed previously, the April and November vintages give you the greatest optionality to look 'ahead' when you make the later redemption decisions.

As before, there are some reasons why this might not be right for you, and given that my experience opening a TreasuryDirect account required me to physically go to a branch of my bank(!), I certainly can't promise that that $400-$600 is worth your time. But there's something about doing a trade good by 400-basis-points-plus-a-free-roll against the US Treasury that's aesthetically appealing to me as a trader(-at-heart).

Perhaps it's appealing to you, too.