New inflation numbers were just announced, which allows us to make an early estimate of May 2015 savings bond rates before their official semi-annual announcement. This also allows us the opportunity to know exactly what a April 2015 savings bond purchase will yield over the next 12 months, instead of just 6 months.
New Inflation Rate
September 2014 CPI-U was 238.031. March 2015 CPI-U was 236.119, for a semi-annual decrease of 0.80%. Yikes! Deflation! Using the official formula, the variable component of interest rate for the next 6 month cycle will be approximately -1.60%. The new fixed rate won’t be announced until May 1st (speculation below). You add the fixed and variable rates to get the total interest rate, but there is minimum composite rate of 0%. If you have an older savings bond, your fixed rate may be different.
Purchase and Redemption Timing Reminder
You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time though, since if you wait too long your effective purchase date may be bumped into the next month.
Buying in April
If you buy before the end of April, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed the current variable interest rate of 1.48% for the next 6 months, for a total rate of 0 + 1.48 = 1.48%. For the 6 months after that, the total rate will be 0%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy on April 30th, 2014 and sell on April 1, 2015, you’ll earn a ~0.81% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes.
This average rate is lower than what is currently available from the highest 1-year bank CD rates (ex. 1.23% APY at Synchrony Bank as of 4/17/15). Given the eventual 6 months of 0% that you will be facing, I may put my cash in a competitive savings account or CD until mid-October and November 2015 to see if inflation has picked up again by then.
Buying in May
If you wait until May, you are virtually guaranteed to gain a composite rate of 0% for the first 6 months. The next 6 months will be the sum of an unknown fixed rate plus an unknown rate based on future inflation. My best guess for the fixed rate is 0.0%, unless somehow the Treasury suddenly feels pity for us individual savers (doubtful). Given that the only guaranteed thing you’ll get is 6 months of zero interest, I would rather buy in April than May, but otherwise I’d still check back in during mid-October 2015 to see if inflation has picked up.
Existing I-Bonds
If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate + variable rate (minimum floor of 0%). Unless you bought your I Bond before November 2002, you will not be earning any interest for at least 6 months. For now, I think I will still hold my existing I Bonds and see what happens at the next update. I still value their unique advantages like ongoing tax deferral, exemption from state income taxes, and being a hedge against inflation (and even a bit of a hedge against deflation).
Annual Purchase Limits
The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.
For more background, see the rest of my posts on savings bonds.
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Jonathan, seems to me you’d want to use the upcoming six consecutive months of no interest to gracefully exit I-Bonds purchased two or three years ago with a 0% premium over inflation. These are very questionable long-term investments (0% real interest rate); the rationale for buying them initially was short term, and we will be getting a “get out of jail free” card by being able to exit these and forego three months of interest that is 0% anyway.
I can certainly understand and support that position, especially if you are truly treating these as short-term instruments in your emergency fund. I now consider my I Bonds to be part of my long-term portfolio and don’t want to sell just yet.
Since you can always replace these 0%’ers with I-Bonds you could buy later (subject to annual limits), since you cannot do worse by buying later because the fixed rate cannot go lower than 0%, and since you can buy the inflation rate with a lag (so if inflation spikes you can capitalize on that after the fact by buying I-Bonds), what advantage is there to keeping 0% fixed rate bonds yielding 0% which will cost you a real penalty to close if you wait past this window? Tax considerations seem quite insignificant. So is it a question of the annual limits? Or are you worried that the terms will get worse in the future? Or is it inertia? I’m just trying to understand the motivation for holding these rather than thinning out and waiting for better terms, which you can readily pounce on when they occur. I’ve been buying I-Bonds since you could do so with a cash-back credit card (until the WSJ published an article causing Treasury to shut that cash machine down), and this is the first time I’ve felt compelled by the economics to bail on some of these. But I’ve been reading your blog for some time and I respect your views. So what’s the underlying thinking here?
Well, I suppose one reason to keep them is if you are close to holding them 5 years, you remove the 3 month penalty… Not a big factor, but at lease one positive reason to hold.
Well, I have bought the annual limit for many years now and plan on continuing doing so, making it difficult to replace them in the future. Also many have non-zero fixed rates, some above 1%.
The main reason that inflation is so low right now is gas prices. If/when they rebound, that will give a boost back to inflation on top of the other stuff. Earning 0% instead of 1% for 6 months just isn’t that bad for me to give up my inflation hedge. I plan to keep buying the max each year as long as the fixed rate is 0% and better than the real yield on a 5-year TIPS which is negative.
Tax deferral is a big deal if your tax bracket is really high now and probably very low upon withdrawal.
Jonathan, please allow me just two observations and I’ll move on (and thank you for your indulgence!). First, the way you are looking at these I-Bonds suggests to me that the 5-year TIPS may not be the appropriate benchmark; you are really a buy and hold investor and might consider benchmarking against 20-or even 30-year TIPS where the real interest rate is positive, albeit not as positive as it used to be (correct me if I’m wrong–not a market I follow). So perhaps liquidating some 0% fixed/penalty-period I-bonds and partially reinvesting in long-term TIPS might actually work better for you, particularly in light of compounding. Second, I wonder–having read your blog for a long time–why you wouldn’t put some $ into EE bonds, since you are very keen on income in retirement and the Treasury market seems to be predicting 3% or less nominal (even as a forward rate, presumably when the Fed is all done with this monkey business) except in the EE’s where you get 3.5% nominal all the way through and the deferral really means something. Very rough back-of-the-envelope stuff in the last sentence, but you know what I mean. Thanks again for your indulgence. I love your blog.
…before I headed out the door it occurred to me that some reader might misconstrue the 3.5% stuff about EE bonds and jump in feet first. The stated interest rate is much lower, you only get 3.5% effective yield if you hold it for 20 years under current doubling provisions, please don’t go out and buy these things without learning exactly what you’re getting into. Same goes for long-term TIPS.
I thought I’d share what I am planning to do…for what it’s worth.
I bought $20k in I-Bonds (myself and my wife) in early 2012 and again in early 2013. These all have a fixed rate of 0.0%. Essentially, I bought 5k a month in January, February, March and April in each of those years. My rationale at the time was that the 11-month return outpaced what I could get in a comparable short-term investment. Since that rationale did not apply in 2014 or 2015 (at least in a compelling fashion), I did not buy additional I-bonds in those years.
I also own many more I-bonds from previous years, including $20k face with 0.0% fixed from May 2011, which I am leaving alone because they are close to the 5-year mark.
So I plan to cash out the 40k of 2012 and 2013 I-bonds, 10k each on October 1 2015, November 1 2015, Jan 1 2016 and Feb 1 2016 (or whatever weekday immediately follows).
I plan to replace those with 20k of fresh I-Bonds I will buy on November 27, 2015 and another 20k I will buy on January 28, 2016.
Assuming non-negative CPI-U changes, I will be essentially be replacing 3 months of no interest with 3 months of some interest, and I will also keep whatever interest I can earn while I am holding the cash. Note I am benefitting from the float between the beginning of the month (cash out date) and the end of the month (buy in date).
I am on an accrual basis for these bonds, so there are no real tax consequences for me. But even if I were on a cash basis, the interest we’re talking about here is de minimis.
I’d rather just keep the money in my savings account and pay the taxes on the interest. Am I missing something here?
My problem with I-Bonds is the government has an incentive to keep inflation numbers low because numerous spending programs are based off the CPI, such as Social Security payments. If the CPI goes up, then the government must spend more on these programs to keep pace with the increase in cost of living. Does anyone really believe that the cost of living has gone down by nearly 1%?
Wouldn’t the fact that SS and private pensions are linked to CPI mean there are lots of people paying very close attention CPI and how it is calculated? It’s pretty much impossible to actually convince anyone that it is being secretly manipulated, so I won’t contribute further to that debate.
But yes, I can believe CoL has gone down 1% if my cost of gasoline went down 30%.
It’s easy to see inflation is reported correctly by the government, just look up the historic price of an item, and plug it into an inflation calculator. That’s how much money the calculator will say it was worth at the time. If they were fudging the numbers the prices wouldn’t match up. The government can’t rewrite history.
Might the fixed rate go up a bit or is that just wishful thinking?
I believe it to be wishful thinking given current TIPS yields, but we can always wait and see. 🙂
Deflation? Check your grocery receipts again.
Food costs rose about 2% over the last 12 months, but the overall drop is mostly due to the drop in fuel costs like gasoline.
When I log into treasurydirect.gov and look at all of the Ibonds I own, other than going through one-by-one and looking at the purchase date, is there some way to get it to display what the fixed rates are for the Ibonds? Mostly, my Ibonds are 0% fixed, but I do have a few that I purchased last year that have fixed rates.
Clarification on my question. The default treasurydirect display for Ibonds gives confirm #, issue date, interest rate, status, amount, current value. Is there a way to get a display that shows two columns for the interest rate? One column for variable rate and one column for fixed rate?
I don’t know of a way to display the fixed rate for each bond in that manner. TreasuryDirect isn’t really known for their great UI 🙂
I’m getting confused. I currently purchase $800 in i bonds every month. Are you saying that I if I buy any the next 6 months I will get zero percent total interest on those for the next 6 months? (assuming your estimate is correct).
Yes, starting in May 2015 and ending in October 2015, I Bonds bought in that period will earn 0% interest for the first 6 months. Of course, all your previously bought I Bonds will also do that eventually unless you sell them.
Thanks for the reply. I won’t sell anything but I guess I will put a hold on my purchases. Although the alternatives out there are pretty close to zero as well.
zero percent fixed rate is confirmed: http://www.treasurydirect.gov/news/pressroom/pressroom_comeeandi0515.htm
Thanks for the update!
0% fixed rate and a -.8% inflation rate.
I have always suspended contributions to the TD account when the base rate was at 0%.
With a -.8% inflation rate, bonds purchased with a .1%, .2%, or .3% fixed rate also earn 0% overall for this period.
As I never contribute the max, I think I will sell the bonds sitting at 0% and see what November brings.
Older than 5 years there is no penalty so I can sell now and buy a 26 week bill. My younger than 5 year bonds I think I will wait three months because I don’t want to lose that interest I earned. In 3 months time, I will have made no interest and lose nothing when I sell.
Jonathon. I am confused. I own 20 I bonds of varying denomination purchased from 2003 until 2010. They have fixed interest rates of .3% to 1.6%. I just downloaded my current values from Treasury Direct. To my surprise most had an interest rate of 0% even though though the fixed rate on many were 1.1%. In fact some of my later issues with a fixed rate of .3% displayed an interest rate presently of 1.78%. And my highest fixed rate of 1.6% displayed an interest rate of 3.09%. What gives? This is the first time I have seen this. Thank you
I have the same questions. My earliest fixed rate is 3%.
I am working out all the math in XCEL and will present my results to the folks at Treasury Direct. When I asked for specific help I was told
“We are here to collect – you should go to the internet site and figure it out for yourself”
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#compositerate
Interestingly, I posted more detailed information to this site yesterday and have not appeared. I wonder what happened.
The folks at Treasury Direct no longer allow for personal meetings. The way to contact them is by calling (844)284-2676. To get to a human the system requires you to listen to two messages after the first hit #2 after the second hit #3
You will be told they use a COMPOSITE rate to figure you Interest.
The formula the COMPOSITE rate is
COMPOSITE rate = [fixed rate+(2xINFLATION rate)+(FIXED rate X INFLATION rate)]
This information is laid out on the following Federal Direct URL
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#compositerate
Could anyone comment on the current interest rate my IBONDs are earning? I’ve tried to check all the websites and still am confused if they should be cashed or continue to earn interest given the low rates on any CD’s. They were purchased in July 2003 and 5/14/08. Thanks for any advise you can provide.