Update November 2020. The fixed rate will be 0% for I bonds issued from November 1, 2020 through April 30th, 2021. The variable inflation-indexed rate for this 6-month period will be 1.68% (as was predicted). If you buy a new bond in between November 2020 and April 2021, you’ll get 1.68% for the first 6 months. Don’t forget that the purchase limits are based on calendar year, if you wish to max out for 2020. See you again in mid-April for the next early prediction for May 2021.
Original post:
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 November 2020 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a October 2020 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a November 2020 purchase.
New inflation rate prediction. March 2020 CPI-U was 258.115. September 2020 CPI-U was 260.280, for a semi-annual increase of 0.84%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 1.68%. 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 very different than one from recent years.
Tips on purchase and redemption. 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 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 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 October 2020. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 1.06 = 1.06% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 1.68 = 1.68%.
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 October 31st, 2020 and sell on October 1, 2021, you’ll earn a ~1.04% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on October 31st, 2020 and sell on February 1, 2022, you’ll earn a ~1.10% annualized return for an 15-month holding period. Comparing with the best interest rates as of October 2020, you can see that this is slightly higher than a current top savings account rate or 12-month CD.
Buying in November 2020. If you buy in November 2020, you will get 1.68% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS. In the past 6 months, the 5-year TIPS yield has been consistently negative! My confident guess is that it will be zero (0%). Every six months, 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 fixed rate is most likely going to be zero for October and November purchases, and so I would personally wait until November and get the 1.68% inflation and unknown inflation rate after that, betting that it will be higher than 1.06%. Either way, it seems worthwhile to use up the purchase limit for 2020 as the rates will at least be slightly higher than other cash equivalents.
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. 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.
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 for your post.
I see more and more investors are ditching the Govt Bonds and investing in stocks. I know a few CUs in my State offer 2%-3% Savings checking/accounts, but still.
I even read that people are investing the Emergecy Fund money in the market because you can always tap credit cards for the immediate needs.
Do you still consider investing a chank, even the Emergency Fund into the safe assests, Govt Bonds and bank accounts?
Thanks. I look forward to this article every time we get close to a rate change.
Any tips for how to buy I bonds for both yourself and your spouse on treasurydirect.com? Do I need two accounts?
When buying, there’s a “Add New Registration” button next to my name, so I thought maybe I can just add my wife there and then buy $10k with my name and then $10k with hers. But it’s confusing because there’s a “sole owner”/”primary owner”/”beneficiary” option to select, then “first-named registrant” and “second-named registrant” fields, so not sure where I put her info, and if I include my info as well, even though I’ve already got my own info entered with my original registration.
Savings bonds can have more than one owner, but the issue is that the purchase limits apply to SSN, so you might want each person in a couple to buy their own up to the limit. I believe that TD accounts themselves are one per SSN, eventually you will need a separate account for each individual. However, you can buy a “gift” savings bond in someone else’s SSN and it will stay tracked in your account until the other person claims it and transfers it into their own account. (I don’t think you can sell or redeem it in the meantime.) I probably bought 5 years of gift savings bonds for my wife until finally she opened her own account and claimed it. Hope that helps! TreasuryDirect is a bit clunky.