Wow, harsh. No wonder they finally started to enforce the buying limits recently. Hope people bought what they could in April.
New Series I Bonds Fixed Rate is… ZERO
May 1, 2008 By 34 Comments
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The rate is 4.84%. Isn’t that a good thing? That’s much higher than before right?
Yes it’s 4.84% for the 1st six months, and then 0% + inflation for the 2nd six months. If you think inflation will still be high enough over the next 6 months and you haven’t bought any yet, then this might still be a good short-term play.
But I’d much rather be getting 1.2% + inflation.
Wow and I just signed up online at TreasuryDirect. Havent purchased any yet, of course, still waiting for my info to come in the mail.
I already have my 401k and a Roth IRA maxed out, so this can still be a good long term place to park some cash though right? Thoughts?
0% above inflation bites, but I see no alternative for folks looking to safely preserve purchasing power. CD rates, online savings accounts and money market funds don’t come close to I-Bonds right now.
On the positive side, even with zero fixed rate, the 4.84% rate still beats any 1-year CD! My bank is offering 1-year CDs at 2.95%, so my 1-year I-bond will earn me 64% more interest! Granted that we don’t know what the rate will be in Nov, but it doesn’t take an economist to see inflation continuing to rise. Nowadays, one has to view I-bonds no more than a 1-year CD. With their 1.40% fixed rate now, I wonder if anyone would buy the EE bonds. Guess many could still be buying without knowing it…
I bought some just in time! I’m happy I locked in the rate before it dropped to ZERO! 🙁
Thank you Jonathan for making me aware of this option as an alternative to low interest CDs. Wish I was able to have locked in those 3% fixed rates back in the early 2000s but at least 1.2% is better and a big fat 0.
Jonathan, provided I bought before the end of April, is my variable portion the new and improved 2.42% or the old 1.53%?
Okay, I get it now.. so for people who bought before, 1.2%+inflation would be 4.84%+1.2% which is over 6%? That’s a pretty good rate for people who bought before..
Even at 0%, its still a good buy. If we really get to a situation of HyperInflation like some economic pundits are predicting, you will start getting negative intererest. offered on these bonds.
Yan, you’ll get 1.2% + 3.08% for the 1st 6 months starting from 4/1/2008, and then 1.2% + 4.84% for the 2nd six months, and then 1.2% + inflation from March to September 2008 for the 3rd six months.
If you buy today, you’ll get 0% + 4.84% for 6 months, then 0% + inflation measured from March to September 2008 for the 2nd six months, and then 0% + inflation from 9/2008 to 3/2009 for the 3rd six months, and so on…
How do they determine the fixed rate again?
Mike, they will make sure you don’t get too high an interest rate than the wider market. But I think zero is already the bottom. Is Treasury allowed to set a negative fixed rate?
You could try to put your money into a foreign bank account and get a considerably higher APY.
For example, you can get 7% APY (AER in UK terms) here: http://www.icesave.co.uk/fixed-rate-savings.html
Considering how weak the USD is, you are likely to get a favorable exchange rate, in addition to the 7%, when transfering your money back to the US.
HI , HOW SAFE IS THE OVERSEAS BANK “ICESAVE” ???
Don’t everyone get too excited. First, you need to be a UK citizen to open an account at this IceSave place.
Second, you will be subject to currency risk if the USD/Krona exchange rate changes. If the dollar gets any stronger before you cash out, you could lose a lot of money. This is not a no-risk proposition. Everbank has some foreign currency savings account if you still wish to pursue this route.
Iceland is fighting inflation themselves, which is why their interest rates are so high.
Oh yeah, zero percent fixed rate is MAJOR HARSH. I now REALLY regret dawdling last month and not purchasing a savings bond. For those who heeded the warnings and didn’t dawdle, earning ~4.26% for six months and ~6.04% for the second six months.
The trick is to hold the bond for at least 15 months — 12 months for the above return, plus 3 months for the early redemption penalty. Of course, if inflation says high and savings account rates stay low, you can hold it longer.
My consolation is that my current Series I savings bond portfolio (2.44% + inflation) will be doing very well for a while.
I gotta thank you for doing your timely writeups before the rate dropped, otherwise I probably would have waited for the new rates to get published. Got in just in time!
Thanks a lot Jonathan for bringing this up at the right time for us to take advantage of it.
Super!
I just got a check for over $400 from citibank for the credit card
you recommended (5% rebate for 3 mo)
thanks for that too!
I had been using I-Bonds to supplement my retirement savings (since I max out my 401k and Roth, and savings bonds are tax deferred). Until the fixed rate goes back up over 0%, I see no incentive to continue purchasing new I-Bonds (as my objective is to beat inflation, not keep pace with it).
I’m now trying to figure out my alternatives. Treasuries, money markets, and CDs aren’t looking so good right now. Maybe I’ll boost investments in dividend-paying stocks in my taxable accounts. That’s not ideal, since this was the portion of my regular investments that had 100% safety of principal, but I don’t see a good alternative out there that meets that requirement. Maybe highly-rated municipals?
Anyone have any advice on a suitable alternative that can offer safety of principal and tax benefits?
Nickle:
TIPS offer much better rates than I-bonds right now and are completely safe. However, they don’t offer any tax defferal and do not have the “implied put” that an I-bond offers. You can find TIPS rates here:
http://www.bloomberg.com/markets/rates/index.html
Sorry Jonathan,
What you’ve stated about IceSave is incorrect. At least check your facts!
Firstly, IceSave is a Bank in the United Kingdom (owned by an Icelandic Bank). Thus, IceSave has nothing to do with Krona. It has to do with British pounds (GBP). All of this is clearly seen from the website.
GBP is much stronger than the dollar and has been since the 1930s. See historic exchange rates if you don’t beleive me.
Secondly, you do not need to be a UK citizen to open an account. Simply obtain a citibank UK current account (i.e. checking account) and then from there you can open up an IceSave savings account (by law only requires a UK checking account). Their website has the option of entering a UK passport, but you can omit this step. There might be an issue needing a UK post address. There are ways around this.
Besh wishes.
Bob – You’re right, I only glanced at the site and was mistaken about the connection to Iceland, it’s only an Icelandic bank. However, it does say you need to be a UK resident (though you point out possible loopholes) on the site, and again there is currency risk between USD/GBP. People are very down on the dollar, but it is still quite possible that it will become stronger relative to current exchange rates. A possible investment, but not without risk to principal.
Wow, good thing I bought all I am allowed before the end of April. Wish I bought more in the past before they reduced the limit and when the fixed portion was higher.
One problem I see about both I-bonds and TIPS as hedge against inflation is that what they count for inflation rate isn’t real inflation you see in stores. I don’t buy their reason for excluding food and energy either – does the fact that it is “too valatile” means that it doesn’t count? They could’ve averaged it out over a period of time and gave us real rate of inflation. This is one reason I am not sure about buying TIPS.
My understanding is that the principal is not safe with TIPS. If we end up in a deflationary economy, the principal will erode.
Also, if you need to redeem it before maturity, you have to take what you can get for it in the market (unlike I-Bonds, which can be redeemed anytime after 1 year at face value).
Besides that, the rates on TIPS right now are horrible.
Nickle:
With regard to principal protection, your understanding of TIPS is not correct. You will always get back at least your principal at maturity:
http://www.treasurydirect.gov/instit/marketables/tips/tips.htm
You are correct about early redemption, however. You will get the market price, which could be substantially higher or lower than what you paid. I-Bonds have an implied put, in that you can redeem that at face value.
And yes, TIPS rates are horrible right now…but they are still better than I-Bond rates, especially at longer maturies. (e.g. 1.5%+CPI for 10 years; 2.0%+CPI for 20 years) Last summer the TIPS rates were actually quite good.
For everyone bummed about missing the deadline, don’t be. You can get a much higher rate of return investing in Canadian oil trusts. Is there risk? Of course, but when the return is averaging 12% you have a lot of room for downturns.
Also, a Canadian oil trust (or any oil service stock for that matter) is a nice hedge against higher oil prices. As the price goes up at the pump, your investment goes up. As the price goes down, your investment goes down. A win-win or a lose-lose, depending on how cynical you are… 😉
I had begun stashing some money in I-bonds to reinforce my emergency fund- money that I almost certainly won’t use but should probably have available. I liked that they were readily accessible (after the 12 months) and that the tax was deferred. Now I don’t really see the point of buying more for the long term with a 0% fixed rate.
I’m tossing around the idea of using my ROTH contribution this year to buy a low expense TIPS bond fund (like VIPSX). This seems to have the same advantages as the I-bonds. The only drawback that I see is sacrificing the ROTH contribution this year to an investment that I wouldn’t make for my retirement time-frame.
Any comments?
Take a good look at the history of the Series I savings bonds fixed rates:
http://www.savingsbonds.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
and tell me how those rates were calculated.
I phoned the Bureau of Public Debt and asked them that question. They could not give me an answer except to say that it was (more or less) at the discretion of the Secretary of the Treasury.
This is just one more way that the Bush administration is sticking it to the middle class. The coming inflation will wipe out everyone who is not well connected to the corporate elites.
@RedRover: I doubt, as you imply, that the Secretary of the Treasury (Henry M. Paulson, Jr., FYI) makes the decision on his own in a vaccuum after conspiring with Halliburton, Blackwater, and Exxon to pull a number out of a hat.
I’m sure it is some committee of Civil Service economists that pull a number out of a hat. That said, I’ve read that the fixed rate tends to be about 90% of the average 10-year TIPS rate, which was very small to begin with.
Since 2000 the Bureau of Public Debt has, IMHO, taken steps to make purchasing Savings Bonds increasing more difficult and inconvenient. First you couldn’t buy them with credit cards. Then they instituted that cockamamie randomized virtual keyboard feature. Then they made it almost impossible to change your bank information. Then they reduced the amount of Savings Bonds you can buy a year. Now they pay nothing on top of inflation — so you lose value to taxes although you don’t lose value to inflation.
In the big scheme of things, buying Savings Bonds and other Treasury instruments is a bad idea. Whereas buying corporate bonds are paid for by increased productivity by the corporation, buying government bonds are paid for by increasing taxes.
This abrupt and complete elimination of the fixed rate is unsettling for so many reasons (probably the major one for me being one less hedge against a loss of purchasing power) And don’t even get me thinking about negative rates. However, I’d like to assume it might go back up to a positive number in the future.
Really changes (ruins) the entire nature of the I Bond as a long-term investment.
Victor, I Bonds and their relative benefits have been around for quite a few years now, and as always those later to the party will never get the best pickings. Been buying since 2003 when each person could buy up to $30K in paper I bonds –some really sweet six-month variables during that time and better fixed rates than the surprising “0” announced for May 2008. My view is that the government in Jan 2008 by first reducing the limit to $5000 I bonds yearly down from $30K sent a clear message that it wanted to decrease that investment –perhaps expecting the variable rate to start rising (as it did in May 2008). I think the “0” handle announced in May was another conscious salvo to further reduce the public’s interest in these bonds. Those that still want to maximize their I bonds can always buy $5K in paper and another $5K in electronic issuance and a husband and wife each qualifies for these amounts. Still plenty of room to put significant money in I bonds and if there is some version of hyper-inflation, it won’t make much difference whether you’re getting 0, 1 or 1.5% fixed on your bonds.
Kitty,
The I bond inflation portion is based on the CPI-U, US average, All items, six month percent change from May-Nov. and Nov.-May.
This index includes gas and food. You are refering to the CPI ‘core’ rate which is NOT used for I bonds, Social Security COLAs, or really any other major program. This is a common misunderstanding.