Savings I-Bonds September/October 2013 Rate Speculation

Update 11/3/13: The new rates for November 2013-April 2014 are 0.20% fixed and 1.18% variable. See details here.


Update 10/30/13: September 2013 CPI was finally announced to be 234.149. March 2013 CPI-U was 232.773. New variable rate is 1.18%, you can use this number instead of my prediction of ~1% in the original post below as it is very close. As a CD replacement, it’s probably won’t be that much worse than the top rates but not much better, either. I’ll still be buying some in late November as sadly they are still better than short-term TIPS as a taxable investment.)

Original post 10/16/13:

I was supposed to provide an update on the new Savings Bonds interest rate, but the reporting is delayed due to the government shutdown. Instead, I’ll try to get some rough numbers based on the BLS.gov inflation data that we have so far.

New Inflation Rate
March 2013 CPI-U was 232.773. September 2013 CPI-U is unknown, but the latest August 2013 CPI-U was 233.877. If September’s value ends up the same as August, then that would be a semi-annual increase of 0.47%. Using the official formula, the variable rate component for the next 6 month cycle would be 0.94%. The new fixed rate is nearly guaranteed to be zero, so the total rate will be 0.94% as well. If you have an older savings bond, your fixed rate may be different.

If inflation skyrocketed between August and September, then the actual rate will be higher. I don’t see any indication that it did, but it probably did increase a little bit. Now, it is possible that the BLS will announce the September CPI-U numbers by the end of October. Otherwise, the government may use the a number based on the last 12-month change, which from August 2012 to August 2013 was 1.5%. So my rate estimate would remain likely close to 1%, but up to 1.5%.

Buy in October, November, or not at all?
If you buy an I Bond before the end of October, you will be guaranteed an interest rate of 1.18% for the first 6-month cycle (0% fixed + 1.18% variable) and then a guesstimate 1% (0% fixed + ~1% variable) for the 2nd 6-month cycle. Again, you can wait to see if the hard numbers get announced shortly.

If you wait until November, you’ll get the guesstimate 1% (0% fixed + ~1% variable) for the first 6-month cycle. After, it depends on future inflation. Instead of locking in a low 1% rate for 12 months by buying in October, I’d probably just wait until late November to buy. It’s a gamble, but this way my second 6-month rate chunk has more upside possibility if inflation gets going again.

Or, you could just pass if you’re just looking for a really good short-term CD-like instrument. Even at these current low rates, I’ll probably still buy some as I’m out of tax-deferred IRA/401k space and 5-year TIPS still have a negative real yield. I now consider Savings bonds part of my long-term portfolio. Not really excited about it though.

If you’re confused as I’m skipping over stuff, please check out my previous Savings Bonds posts which go into more detail.

Comments

  1. Christine says:

    Jonathan, what do you do after the 12 months is up? Do you let your bonds sit? How long?

  2. What’s the new SS wage base for 2014? Although I guess we probably don’t have an answer for that one either yet because of the shut down.

  3. Christine – Earnings are tax deferred, so if there’s no better rate offered at that time, why not let it sit? If there’s no better rate on anything for 30 years, you could let it sit the entire 30-year maturity period of the I-Bonds if it suits you. If there’s a better rate on the I-Bonds available in a future year, you can always just exchange the one’s you bought at the lower rate (up to the annual limit) for the better ones.

  4. Thanks, Jonathan. Because of you, I set up an account three years ago and am happy I did.

  5. @Christine – I started buying Savings I Bonds due to their interest rate being better than FDIC bank alternatives. But now those old ones have a high fixed rate, and I don’t want to sell them. More recently, I bonds are attractive relative to TIPS, especially due to their tax-deferral qualities (I can wait to redeem them when my tax rate is lowest, or perhaps for educational purposes tax-free).

    Short answer: yes, they are sitting. I now considering them part of my bonds holdings for my retirement portfolio.

    How long? Well, 1% is still about as high as any 1-Year CD, plus there is ongoing inflation protection. My old bonds are earning 2-3%. Who knows how long until the Fed raises rates higher than inflation.

    @Andy – I don’t know, Google says it is projected to be $115,500.

  6. Shtinkykat says:

    If you now consider savings bonds as part of your long term investment portfolio, have you considered buying the EE bonds? I’m just wondering because I too consider my savings bonds as part of my long term investment strategy and the recent returns on the I-Bonds are frustrating to no end. The EE bonds have crappy interest rates but on the 20th anniversary, the returns jump as though I was earning 3.5% all along.

  7. @Shtinkykat – I have considered EE bonds, but 20 years is a long time. Meanwhile, you’ll be stuck with really low rates which makes it basically like a 20-year CD with a huge early withdrawal penalty. I don’t own any bonds with a 20-year maturity like that.

  8. Cowtipper says:

    Looks the data may be messed up going forward (hopefully to I Bond holder’s advantage):

    http://blogs.wsj.com/economics/2013/10/17/inflation-data-to-be-screwed-up-for-months/?mod=WSJ_hpp_LEFTTopStories

  9. Looks like the revised release date for CPI is 10/30/13. Not really enough time to time your savings bond purchases if you wanted to buy in October.

    http://www.bls.gov/bls/updated_release_schedule.htm

  10. Hi Jonathan,

    I return to your columns every six months or so (just around the time the new savings bond rates show up). The 0% fixed rate is still discouraging me from buying the series I bonds for now. I have some from back in the early 2000s where they had good fixed rates. Sounds crazy but I have been building up T bills with their 0.13% rate and rolling them back in at maturity. I’m within 13 years of being able to draw full social security. I think I will start buying Series I bonds again, maybe in a year. Interest rates ought to go up at some point and that should help any fixed rate of a savings bond.

  11. @Bill – Why not just hold your cash at a FDIC online savings account for ~0.85% APY?

    More food for thought… Here’s an article by Scott Burns about why he likes short-term TIPS:

    http://feedproxy.google.com/~r/Assetbuilder/~3/Etf32zObFPY/A_NEW_PLACE_TO_PARK_CASH

    …and savings bonds are better than short-term TIPS besides the limited purchase amount.

  12. Thanks for the advice and Scott Burns link. The Vanguard ETF VTIP was “right in my backyard,” so to speak, and I had money in Vanguard Prime Money Market fund. I just moved some of it to my Vanguard brokerage to order a few dozen shares of the VTIP. .10 expense ratio is better than the .2 of the investor shares version!

  13. @Bill – Glad you found it useful! I’ve been considering VTIP as well.

  14. Actual rate is 1.38%. Much to my surprize the fixed rate is 0.20% :)
    Glad I waited, and will make my purchase the end of November

  15. @John – I’m surprised as well. Takes a little of the pain away :)

  16. SS wage base for 2014 is 117,000

  17. Hi Jonathan,

    Are you going to post predictions for the Series I Savings Bonds new rates coming up May 1?

    thanks in advance

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