For those that are unfamiliar with I-Bonds or just need a refresher, please check out my old post U.S. Savings Bonds: I-Bonds and EE-Bonds - Good investment?. Keep in mind that it was written 6 months ago, so “current” and “today” means March. Everything else should be good.
Best source for additional information: Gov’t Treasury sites here and here. I’ll try to answer comments too of course.
As promised last month in my How To Predict I-Bond Savings Bond Rates post, the CPI-U inflation data for September is out, and we can get busy predicting the new I-Bond rates that will be officially announced on November 1st, so we can make educated decisions on to buy now or later. Spoiler: it’s gonna be high, as in over 6% APR high. But, first the math:
The inflation-linked part of the I-Bond rate is based on the inflation change for the last six months as measured by the CPI-U:
March CPI-U = 193.3
September CPI-U = 198.8
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I’ve got some U.S. Savings Bonds from back when you could buy them with no fees with a credit card and earn cash-back rewards. Unfortunately that ended in 2003. But I still have these paper bonds worth over $5,000, just asking to be misplaced or stolen. And the Treasury has been teasing me with this page about their SmartExchange program to convert these bonds to online electronic format. It’s invitation only, and I’ve been waiting for one for almost a year now. Finally I found out how to get an invitation - just ask! (Seems like a recurring theme now)
Benefits of Electronic Bonds include:
» Cash them in online, instead of having to go to a bank
» Track their current value online
» You don’t have to worry about losing them
» You can make transfers online
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I-Bonds are currently paying 4.80% interest, which is pretty good. The rate changes every 6 months though, and I just spent the last hour trying to figure out how to predict it. As I’ve mentioned in an older savings bond post, I-Bonds pay a rate based on two parts, a fixed component good for the life of the bond and a variable component based on inflation that changes every November and May 1st.
It turns out you can actually predict the variable component of the rate before it is actually announced officially. Inflation in this case is measured by the CPI-U, which is released every month by the government here. For example, the inflation information for August 2005 was just released today. The rate in May is a measure of inflation from the previous October through March; the rate announced in November is a measure of inflation from the previous April through September. Here’s how to use this information to compute the I Bond rate:
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As of May 1st, the Treasury announced that I-Bonds bought from now until 10/05 will earn 4.8%. The fixed component is up from 1.0% to 1.2%, and the inflation-indexed component rises to 3.6%. (For more on how I-bonds work, please see this previous post). For me, my older I-bonds, with a fixed part of 1.1%, pay 4.7% now. Not too shabby, especially since you’re not paying state income tax on the interest.
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It looks like my post on EE Savings Bonds a few weeks ago is already obsolete, as the U.S Treasury Department announced yesterday that Series EE Savings Bonds issued on and after May 1, 2005, will earn fixed rates of interest for the lifetime of the bond. You’ll basically be buying a 30-year CD with no early withdrawal penalties after 5 years.
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(This post is continued from Part 1)
Okay, so we went over I-Bonds for a little bit, now let?s see what EE Bonds have to offer. Again, EE-Bonds share many characteristics with I-Bonds, which were outlined in my previous post. However, EE-Bonds are sold at half of face value ? a ?$50 EE Bond? costs $25. Whenever a contest offers you a ?$50 Savings Bond?, odds are it?s an EE-Bond.
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Right now, my portfolio is very cash heavy (almost 50k), as I saving for up a house in crazy-prices land. Accordingly, I am always on the looking for liquid investments that are safe and pay competitive interest rates. So I’m taking another look at U.S. Savings Bonds.
Let?s start with the two types of Savings Bonds that are available: EE and I Bonds. I’ll start with characteristics that are the same for both types, and then focus on I-bonds, leaving EE bonds for a later post.
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