Bob’s Journal for 11/10/2022

The 9.62% Yield on I-Bonds Is Gone. They Might Be a Better Buy Now

There was a rush to buy inflation-protected savings bonds (I-bonds) before the Oct. 28 deadline to lock in the 9.62% rate. Those who waited might be better off in the long term.

The new rate on I-bonds is 6.89%. The rate is good for six months on I-bonds purchased between Nov. 1 and the end of April. After that, the rate will reset every six months to whatever the current rate is.

What many people don’t realize is, because of the way I-bond yields are computed, they might be better off purchasing now than buying before the Nov. 1 reset.

When I-bonds are purchased online through the Treasury Direct website, an individual can purchase up to $10,000 worth per calendar year. When a paper application is used, only $5,000 per year can be purchased.

The I-bond must be held for at least one year. If you redeem it before five years, you lose the last three months of interest.

Here’s why people who buy after the Nov. 1 reset might be better off over the five-year minimum holding period or longer than those who bought by Oct. 28.

The yield on I-bonds is composed of two rates.

First is the fixed rate, which is determined by the Treasury Department and lasts for as long as you hold the bond. The other rate is the variable rate that is based on changes in the Consumer Price Index over the last six months.

Every six months, the total rate is reset. The fixed rate when you purchased the I-bond stays the same, and the variable rate is added to it.

For I-bonds purchased before Nov. 1, the fixed rate was 0%, and it had been 0% for some time.

But, because of the increase in market interest rates in 2022, the fixed rate rose to 0.4% for purchases after Nov. 1 through the end of April.

Changes in the variable rate will be the same for I-bonds purchased before Nov. 1 and those purchased after Nov. 1. But bonds purchased on Nov. 1 or later will have the higher base rate. Over a holding period of five years or longer, that higher base rate could be better compensation than locking in the 9.62% for six months.

Another thing to keep in mind is that the 9.62% rate is an annualized rate. Yet, it is guaranteed for only six months. After the first reset, the actual yield for the first year of holding the I-bonds is going to be less than 9.62%.

Don’t fret if you missed buying I-bonds before Nov. 1. They’re still a good place to hold $10,000 of cash for five years, and you could be better off buying $10,000 of them now and another $10,000 in early 2023.

Who Pays for the Credit Card Rewards?

You know that those credit card rewards aren’t free, but who’s really paying for them?

Most of the people I know have credit cards or other payment cards with some kind of reward or point program. For every dollar charged to the card, the card carrier is credited with points or some other reward measure. Often, people try to pay as many of their expenses as they can through the cards to maximize their points.

Who pays for the benefits received by accumulating points? Are the card issuers taking lower profits per transaction to increase the use of their cards? Are merchants paying the price through higher fees? Or are the card holders paying in some way?

A new study by some economists answers the question. The economists are from the National University of Singapore, the International Monetary Fund and the U.S. Federal Reserve.

The study concludes that the costs are borne by some of the card holders. Some card holders benefit while others pay for those benefits. The difference depends on how the cards are managed.

The economists say what they call sophisticated consumers benefit while naïve consumers pay. The points systems induce more spending. Sophisticated consumers pay off the card balances regularly and capture the rewards. Naïve consumers don’t pay down their balances as often. The interest and fees they pay for carrying balances more than offset the reward benefits.

The card issuers also profit several ways. Cards with rewards generally carry lower interest rates than cards without rewards. But since the rewards stimulate more spending, the naïve consumers pay more total interest because they carry higher balances than they would without the rewards. The card issuers also profit, even from sophisticated consumers, from the fees charged to merchants because more spending is put on the cards.

There’s a free lunch for the card owner who pays down the balances each month, avoiding interest charges and fees. That lunch is paid by other card owners and merchants.

Interest Rate Changes in 2022 are Historic

The markets and investors don’t seem to realize how dramatic the interest rate increases in 2022 have been.

It was only last May 4 that Fed Chairman Jerome Powell said that interest rate increases of 0.75% weren’t being considered. That was after a 0.50% increase was implemented.

Since then, there’s been a series of 0.75% increases, because inflation turned out to be higher than the Fed expected.

Market interest rates on treasury bonds and other securities also rose rapidly. The yield on the 10-year treasury went from less than 1% to more than 4%. The yield on the three-month treasury went from close to 0% to 3%.

Charts and other data on interest rate changes over time show that the increase in rates in 2022 is historic. Interest rates increased faster in six months than at almost any time in the past.

Consumers have kept spending despite the rate hikes because of high wage increases and savings accumulated during the pandemic. But now the savings generally are spent, and inflation is offsetting the wage increases.

The economy is starting to show the effects of the rate increases, especially the housing market. But there likely is more damage to come from the rapid change in interest rates, and more increases are likely to be needed to stop the steady rise in inflation. These likelihoods aren’t reflected in stock prices yet.

The Data

The PMI Composite Index for the economy finished October at 48.2. That’s up from 47.3 at mid-month but down from 49.5 at the end of September. That makes October the fourth consecutive month the economy contracted, according to this measure.

The decline was driven by a fall in the PMI Services Index for October. It came in at 47.8 at the end of October, compared to 46.6 at mid-month and 49.3 at the end of September.

The ISM Non-Manufacturing Index for October was 54.4. That indicates the sector still is expanding because it is above 50. But it is expanding at a slower rate because the October level is below the 56.7 level recorded at the end of September.

Factory orders increased by 0.3% in September. But after excluding the transportation sector, orders declined by 0.1%.

Consumer credit outstanding increased by $25 billion in September, which is a 6.4% annualized jump. That’s less than August’s 7.8% rate of increase.

Revolving credit (mostly credit cards) balances increased 8.7% in September after soaring 18.1% in August. Nonrevolving credit (mostly vehicle and student loans) balances increased at a 4.5% annualized rate in September.

Optimism is fading among small business owners. The Small Business Optimism Index from the National Federation of Independent Business (NFIB) fell to a three-month low of 91.3 in October from 92.1 in September. Concerns about inflation rose while the percentage of owners who said they plan to increase employment in the next three months declined to 20%.

Last week’s Employment Situation reports for September estimated that 261,000 new jobs were created. That’s lower than the 315,000 new jobs created in August but still well above economists’ projections and indicates the labor market still is strong.

Average hourly earnings increased another 0.4% in September after increasing 0.3% in August. That gives earnings a 4.7% increase over 12 months, down a little from the 5.0% increase as of the end of August.

Average weekly hours held steady, and the unemployment rate increased to 3.7% from 3.5%.

New unemployment claims declined to 218,750 in the latest week from 219,250 the previous week.

Continuing claims increased to 1.485 million from 1.438 million.

The Markets

The S&P 500 lost 0.66% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.62%. The Russell 2000 declined 2.19%. The All-Country World Index (excluding U.S. stocks) added 3.49%. Emerging market equities increased 4.77%.

Long-term treasuries lost 2.55% for the week. Investment-grade bonds fell 0.59%. Treasury Inflation-Protected Securities (TIPS) declined 0.71%. High-yield bonds retreated 1.05%.

In the currency arena, the U.S. dollar declined 1.63%.

Energy-based commodities increased 1.54%. Broader-based commodities rose 2.72%, while gold gained 3.84%.

Bob’s News & Updates

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