May 2021 predictions confirmed. The fixed rate will indeed be 0% for I bonds issued from May 1, 2021 through October 31st, 2021. The variable inflation-indexed rate for this 6-month period will be 3.54% (also as predicted). See you again in mid-October for the next early prediction for November 2021. Don’t forget that the purchase limits are based on calendar year, if you wish to max for 2021. (I’m going to max out by the end of May.)
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Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. With a holding period from 12 months to 30 years, you could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.
New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the May 2021 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2021 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a May 2021 purchase.
New inflation rate prediction. September 2020 CPI-U was 260.280. March 2021 CPI-U was 264.877, for a semi-annual increase of 1.77%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 3.54%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be up to 3.60%.
Tips on purchase and redemption. You can’t redeem until after 12 months of ownership, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A simple “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 – same as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.
Buying in April 2021. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 1.68 = 1.68% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 3.54 = 3.54%.
Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2021 and sell on April 1, 2022, you’ll earn a ~1.88% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on April 30th, 2021 and sell on July 1, 2022, you’ll earn a ~2.24% annualized return for an 15-month holding period. Comparing with the best interest rates as of April 2021, you can see that this is higher than a current top savings account rate or 12-month CD.
Buying in May 2021. If you buy in May 2021, you will get 3.54% plus a newly-set fixed rate for the first 6 months. The new fixed rate is officially unknown, but is loosely linked to the real yield of short-term TIPS, and is thus very, very, very likely to be 0%. Every six months after your purchase, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.
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 (set at purchase) + variable rate (total bond rate has a minimum floor of 0%).
Buy now or wait? The question is, would you rather get 1.68% for six months and then 3.54% for six months guaranteed, or get 3.54% for six months plus an unknown value? If you think the next inflation adjust will be greater than 1.68%, then you may choose to buy in May. Either way, it seems worthwhile to use up the purchase limit for 2021 as the total rates will at least be higher than other cash equivalents. You are also getting a much better “deal” than with TIPS, the fixed rate is currently negative with short-term TIPS.
Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.
Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.
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. You can only buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.
Bottom line. Savings I bonds are a unique, low-risk investment that are linked to inflation and only available to individual investors. Right now, they promise to pay out a higher fixed rate above inflation than TIPS. You can only purchase them online at TreasuryDirect.gov, with the exception of paper bonds via tax refund. For more background, see the rest of my posts on savings bonds.
[Image: 1946 Savings Bond poster from US Treasury – source]
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Thank you, Jonathan. So the rate over 3% is only for 6 months? If I have an 84 months CD from a credit union with 3% interest, is it worth buying this govt Bond and exit the CDs?
No, I wouldn’t break an existing, fixed 3% APY CD for this I bond. But in terms of currently available options with new money, this is quite competitive.
Thank you, Jonathan.
How come because the I Bond fluctuates/adjusts every 6 months?
Yes, I wouldn’t give up a guaranteed 3% for something that pays a variable 0% + inflation, when the target inflation is only about 2% and expected inflation varies between 2% and 2.5%. Especially since you’ll also be hit with an early withdrawal penalty.
I always appreciate these posts. There are 10,000 or more financial websites out there, but you seem to be the only one who does this type of analysis. I’m nearing retirement and want a safe place to put some of my funds. I can buy a 12 month CD with 0.50% yield or some I Bonds with a yield of 2.24% over the next 15 months. I’ll probably keep the bonds longer than 15 months, and I realize they could lose their advantage over other cash investments over time, but at least they’re off to a good start. Thanks again.
Not to detract from Jonathan’s posts but here’s another excellent place to read about I-Bonds. They post the analysis at about the same time as Jonathan: https://www.depositaccounts.com/blog/inflation-treasury-series-i-savings-bonds/
Please explain this to me:
“Buying in April 2021. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 1.06 = 1.68% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 1.68 = 3.54%.”
It is so confusing, and I keep thinking, maybe it’s an editing error?
Yeah, I’m confused by that part as well.
Yeah just all sorts of typos *facepalm* (now fixed). The final numbers were correct though. 1.68% for 6 months and then 3.54% for 6 months, if you buy in April 2021.
Jonathan. This is great article. A somewhat related question. For YEARS I was able to use the Treasury Depts Savings Bond Wizard to mot only have an inventory I could Print out but I could see the rate on each and which stopped earning Interest. The TD eliminate the Savings Bond Wizard a few years ago. Is there a simple way to get the similar info and created a valued inventory
It appears that they replaced it with this Savings Bond Calculator, which looks somewhat clunky but there is a way to save your inventory. You can also export the list from your Savings Bond Wizard program.
https://www.savingsbondwizard.gov/indiv/tools/tools_savingsbondcalc.htm
The calculator is for *paper* bonds only.
True, but TreasuryDirect already shows the exact current value of your digital I bonds (and you can’t hold them anywhere else).
Hi Jonathan,
I purchased an I Bond in late 2020-Apr. I just redeemed $25 of that I Bond today on Apr22, as an experiment to see how long it takes to hit my bank Rewards Checking account. The note on TreasuryDirect said it should be within 2 banking days.
Can you verify: I may purchase new I Bonds by month end, up to the $10K limit. The small Apr22 $25 redemption has no impact on when I may purchase new I Bonds. Pls confirm or clarify. Thanks again, your site is very informative & you are a genuine expert.
Each individual can purchase up to $10,000 per year at TD, it doesn’t matter about the redemptions. Good luck!
You might try this? I’ve being using this monthly since 2002, just entered my 5 bonds then saved as a web page to a reminder/calendar program (Outlook). After the first of each month I refresh with the current date and it updates. Still works for me.
https://www.treasurydirect.gov/BC/SBCPrice
I bought $10,000 worth of I Bonds in December of 2021. Why did it only pay me $176.00 in June of 2022? I figured 7.12% would be $712.00 for the year and half of that would be $356.00. Why did it only pay $176.00?
Thanks,
Ray
For the first 5 years, the interest is lagging by 3 months by design, to encourage you to not cash them in for at least 5 years.