New inflation numbers were just released for September 2012, so here’s the usual semi-annual update.
New Inflation Rate
March 2012 CPI-U was 229.392. September 2012 CPI-U was 231.407, for a semi-annual increase of 0.88%. (CPI-U increased 2.0% over last 12 months.) Using the official formula, the variable interest rate for the next 6 months will be approximately 1.76%.
Purchase and Redemption Timing Tips
You can’t redeem savings bonds until after 12 months, and any redemptions within 5 years incur a interest penalty of the last 3 months of interest. A known “hack” 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. It’s best to give yourself a little buffer time though, as if you wait too long your effective purchase date will be bumped into the next month.
Buying in October
If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed an variable interest rate of 2.20% for the next 6 months, for a total rate of 0 + 2.20 = 2.20%. For the 6 months after that, the total rate will be 0.0 + 1.76 = 1.76%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy at the end of October 2012 and sell at the beginning of October 2012, you’ll earn a 1.68% annualized return for an 11-month holding period, although you may want to hold it longer if the rates stay higher than that of other available safe investments. This is much better than any 1-year FDIC-insured bank CD available right now, keeping in mind the lack of early withdrawals and purchase limits.
Given the combination of current low rates and the fact that you lose the last 3 months of interest (again, for holding less than 5 years), it might be better to wait long enough to grab 12 full months of interest by holding for 15 months (14 month holding period if buying late). If you buy at the end of October and hold until January 1st, 2014, you’d achieve a annualized return of ~1.70% over 14 months. After that, you can see what the new inflation rates are and decide whether to keep holding them.
Buying in November
If you wait until November, you will get a new unknown fixed rate + ~1.76% for the first 6 months, and an unknown rate based on ongoing inflation after that. Based on the current market rates of Treasury Inflation-Protected Securities (TIPS), it is almost certain that the new fixed rate will remain zero. So you’ll get 1.75% for 6 months for certain. My personal opinion is that you might as well lock on the guaranteed above-market rates for 12 months by buying in October instead of buying in May. If rates spike, you’ll eventually get the benefit of any higher rates eventually in the future anyway.
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. Even at a low or even zero fixed rate, your existing savings bonds are paying much more than current savings accounts and will continue to be hedged against inflation, so weigh carefully whether or not to redeem them.
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. I’m keeping all of mine for the foreseeable future, due to their tax deferral possibilities and other unique advantages. Compare the rates on these savings bonds to what you’re earning on your FDIC-insured bank deposits or even your TIPS and bond mutual funds, and you may find them a good addition to your portfolio.
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I picked up a few of these last year when you mentioned them though I’ve never been able to understand how much they. Thanks for the regular updates!
I bought $10k of these in April. Just checked them. I was supposed to earn 3.06% the first 6 months then 2.2% for the next 6 months. It says the “current” account value is $10,076. How’d they come up with that number? At what point do they update the account value with accrued interest? Thanks!
@nick – The online account value reflects the actual value if you cashed them out today so it includes the 3 month interest penalty (ie, you had the bond for 6 months but you have credit for only 3). You wont see the non-penalty amount until 5 yrs is hit.
Based on your numbers: 10k @ 3.06% for 6 months = $153 interest. Subtract 3 months (half) and you get your $76 interest. The account will always be 3 months “short” until 5 years times out.
There is also a very handy offline savings bond tool (savings bond wizard) which tells you are yield to date so it shows what your effective interest rate has been since holding them. Get this from the Treasury site.
Thank you Thad. Makes sense. One other question… is the $10k purchase limit per 12 months, or per calendar year? Since I bought $10k in April, I am considering purchasing $10k in late January, if I am able, in order to lock in 2.2% interest rate for the Jan-Mar time period.
Its per calendar year so you can buy again in Jan. There is also the loop hole that you can have your tax refund additionally paid out in bonds beyond the $10k limit (though there’s a $5k limit on any tax refund bond purchase). Those can be in paper or electronic form.
By the way, the interest rate is locked in for 6 months based on your purchase date. Reread Jonathon’s post: if you buy in Oct (or any month), you get that months rate for the next 6 months, then the next 6 months is the new rate (that started in Nov). If you buy in Jan, you are not locking in 2.2%, but getting the 1.76% (Nov rate) for the period of Jan-June…..then in July, you get the next rate that is set in May for your period July-Dec….
Your Apr’12 purchase will get the 2.2% from Oct-Mar, then the 1.76% rate Apr to ….etc.
i have a question on $10000 limit. Is this limit applicable only for new money? Lets says I’ve $20000 already invested in these saving bonds. I redeem them in a year and buy again if there are better rates available for new issues of saving bond. And then add $10000 of new money to buy some more.
Would it be considered $30000 in a calendar year, or only new money of $10000?
raj,
I’m no I Bond expert, but afaict the $10K limit is the limit, when u buy a I bond it doesn’t matter how u generated the money to purchase said I Bond, including from selling another I bond. keep in mind you can get an extra $5K per yr via your Fed Gov Income Tax return – IRS gives u an option to get your refund check as an I Bond.
I’m confused as to why you would want to redeem an existing I Bond just to purchase a new I Bond (unless say you bought it in 1982 & it hit its 30 yr maturity). Keep in mind that the Fixed Interest Rate portion for new I Bonds is 0%, so your existing I Bond will have the same (if your existing I Bond’s Fixed Rate is also 0%) or better (if your existing I Bond’s Fixed Rate is > 0%) Composite Rate than a new I Bond. Hence, the only reason for one to redeem a not-matured I Bond is if one needs those dollars for purchases either now or for <1 yr emergency cash fund purposes.
I may be missing an obvious idea here, but I doubt it.
FYI, a few things in this post that are confusing (probably just typos): “If you buy at the end of October 2012 and sell at the beginning of October 2012, you’ll earn…” and “…you might as well lock on the guaranteed above-market rates for 12 months by buying in October instead of buying in May.”
From 1986 to 1997 I regularly purchased EE bonds then from 2003-2005 I purchased I bonds. I use the tool Savings Bond Wizard to get interest updates. This tool gives me a rate % and a yield %. It says I am earning good rates (like 3%,4% and 5% ) on different bonds. I am confused. Am I really earning good rates or was that the rates when I purchased and am now earning much smaller rates. If the rates, are smaller, I will start cashing in these bonds and look for more lucrative investments. Thanks for your great website.