New fixed rate as of May 1st, 2016 is 0.1%, the same as the last 6-month period. The variable inflation-indexed rate is 0.16% (as was predicted). Thus, buying a new I Bond between May 2016 through October 2016 will earn a composite rate of 0.26% for the first six months, and after that 0.1% plus the current inflation-indexed rate updated every 6 months.
Original mid-April post below:
New inflation numbers were just announced, which allows us to make an early prediction of May 2016 savings bond rates a couple of weeks before the official announcement on May 1st. This also allows us the opportunity to know exactly what a April 2016 savings bond purchase will yield over the next 12 months, instead of just 6 months.
New Inflation Rate
September 2015 CPI-U was 237.945. March 2016 CPI-U was 238.132, for a semi-annual increase of 0.0786%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be approximately 0.16%. 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.
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 is guaranteed to be 0.1%. You will also be guaranteed the current variable interest rate of 1.54% for the next 6 months, for a total rate of 0.1 + 1.54 = 1.64%. For the 6 months after that, the total rate will be 0.1 + 0.16 = 0.26%. 1.64% for 6 months, then 0.26% for 6 months.
Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2016 and sell on April 1, 2017, you’ll earn a ~0.97% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. This average rate is somewhat lower than what is currently available from the highest 1-year bank CD rates (ex. 1.25% APY at Synchrony Bank as of 4/15/16), but matches the APY of most online savings accounts.
Buying in May
If you wait until May, right now I can only estimate a fixed rate of between 0% and 0.2% plus the variable rate of 0.16% for a composite rate of 0.16 to 0.36% 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. Given this low rate for the first 6 months, I would rather buy in April than May, otherwise I would wait and check back in during mid-October 2016 to see if inflation has picked up.
Existing I-Bonds and Unique Features
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%). Again, this new rate update is low, but due to their annual purchase limits, you should still consider their unique advantages before redeeming them. These include 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. You can also buy an additional $5,000 in paper bonds using your tax refund (see 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.
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Does anyone care about these posts?
Yes, as a matter of fact I care. I enjoy reading the posts here and have learned from them.
I care about these posts. If you don’t then why are you here? I have been looking forward to these analyses by Jonathan twice a year over several years now.
I enjoy reading these! rates may be dinky now, but they’ll rise eventually. (so, keep posting them, Jonathan!)
These are useful posts for those of us accumulating I-bonds. One of these posts taught me how to estimate how the I-bonds rate will change. But, of course, it easier when Jonathan looks up the inflation data and does the math for us. With the rate drop I plan on avoiding them for the next 6 months.
@Mark
Add me to the I care list for these posts. Just when I start thinking about the new 6 month rate, Jonathan does his post on the subject.
Inflation-protected bonds are an asset class that many people own. Similar TIPS are constantly being sold with equally low yields, so obviously there is demand. A 5-year TIP currently has a slightly negative real yield (as of 4/15 it was -0.20%). As of 4/15 the 5-year nominal Treasury has a 1.22% real yield.
Buying I Savings Bonds gives me exposure to inflation-protected bonds with a tax-deferred option that I would not have available otherwise as I have maxed out my other eligible tax-deferred accounts. I can wait to redeem them until I have a period of being in a low marginal tax bracket, maximizing my return. They may not be attractive as short-term investments currently (but how would one know unless they did the math?), but I am still buying them as part of my overall portfolio asset allocation.
It makes more sense to buy savings bonds now in April than to buy 52-week T-bills, currently at 0.55, no matter what the new variable rate in May on I bonds.
i love these I-bonds interest rate posts.
Jonathan, you were right again. I bought some more Series I bonds in April before today’s 0.26 rate announcement. Thanks!
Glad you found it useful. I bought mine in April as well. Looks like the new fixed rate stayed the same at 0.1%.
I have a question. We bought IBonds in October of 2001. Fixed interest rate has been 3%, yes that is right.
Basically the inflation rate was 1.32-1.56 for the last 15 years meaning we were getting 4.32-4.45 % All of a sudden last October, 2015 it dropped to 1.38. When I emailed them they said something about a negative inflation rate etc. What happened to my fixed 3%? This April the rate is back to 4.56%. Do you think I am entitled to that interest for those 6 months?
I just found this post! Will be following you from now on.
Thanks
you can not drop below 0, but you can lose up to your 3%, hence your protection against deflation.