Savings I-Bonds March/April 2012 New Rate Prediction: 2.21%

New inflation numbers for March 2012 were announced on April 13th, so it’s time for the usual semi-annual update and rate predictions.

New Inflation Rate
September 2011 CPI-U was 226.889. March 2012 CPI-U was 229.392, for a semi-annual increase of 1.1032%. Using the official formula, the variable interest rate for the next 6 months will be approximately 2.21%, depending on the upcoming fixed rate announcement (although really it’s highly unlikely to be anything but zero).

Purchase and Redemption Timing Tips
You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a 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 will be 0.0%. You will be guaranteed the current variable interest rate of 3.06% for the next 6 months, for a total rate of 0 + 3.06 = 3.06%. For the 6 months after that, the total rate will be 0.0 + 2.21 = 2.21%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy on April 30th and sell on April 1, 2013, you’ll earn a 2.27% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. This is better than any 1-year bank CD that I can find right now, keeping in mind the liquidity concerns and the 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 buying late). If you buy on April 30th and hold until July 1st, 2013, you’d achieve a annualized return of ~2.26% over 14 months. After that, you can see what the new rates are and decide whether to keep holding them.

Buying in May

If you wait until May, you will get a new unknown fixed rate plus 2.21% for the first 6 months. I would bet my own money that that the fixed rate will be 0.0% again (any takers?), given current real yields for TIPS. The next 6 months will be based on an unknown rate based on future inflation. If there is high inflation for the next 6-month period, this may get you a higher rate sooner, but buying in April will eventually get you the same rate anyway.

My personal opinion is that you might as well lock on the guaranteed above-market rates for 12 months by buying in April instead of buying in May. You could always wait all the way until in October for the next rate announcement, but if you have the cash now you’ll have the opportunity cost of lower rates until then.

Low 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.

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, and you may start hoarding them like me.

Comments

  1. Jonathan – check your sell dates in the “Buying in April” section. Thanks.

  2. Great breakdown; thanks for the info. Definitely beats the wimpy 0.8% at ING!

  3. In addition to your sell dates needing to be in 2013, are your annualized return figures right? It doesn’t make sense that the 15 month hold is lower than the 12 month hold.

    And if those figures ARE right, then your statement that “it might be better to wait” wouldn’t seem right.

  4. Any idea if opening multiple TD accounts would get around the $10k limit, using one or more sole proprietorships? They ask for a SSN OR a EIN (which are free to obtain). Being a sole proprietorship, the income would default to the individual anyway. Any thoughts on this angle?

  5. I just balanced my IRA portfolio to include 37.5% TIP ETF (and 12.5% for a corporate bond ETF, and 12.5% each for four broad stock ETFs) , which is an index for I-Bonds including last 6 years or so. This way I don’t have to worry too much about when to buy I-Bonds.

    I am a great enthusiast of I Bonds, because they keep up with inflation without exposing you to any risk. I don’t think there is anything like this. I know that some people may argue that they don’t count the real inflation, and stuff like that. But even if they are not perfectly keeping up with inflation, the extra interest you get on top of inflation adjustment, should take care of the difference. I just think those who ignore I bonds in favor of stocks are too greedy, while those who ignore them in favor of CDs for their retirement investments are irrational (since I-Bonds will always beat CDs if not in the short term, definitely in the long term, with the same if not better risk exposure as CDs)

  6. @ttfitz
    It works out to less because what you’re losing by cashing out early is the interest on the lower rate, so the 3% interest proportianally makes a larger share of it. Think of it this way instead:
    11 months = 6mo@3.06 + 2mo@0% + 3mo@2.21%
    14 months = 6mo@3.06 + 2mo@0% + 6mo@2.21%

    In the second example, the only thing different is the extra 3 months of 2.21% interest rate, which is lower than the average, so holding it longer will bring down your average rate.

  7. @Ron – Switched the 2012′s to 2013′s, thanks. 2013 seems so far away!

    @ttfitz – I am reasonably confident my numbers are correct on an annualized basis. The rates are annualized, so it’s the average interest rate over a year. Even though 2.26 is a bit less than 2.27, wouldn’t you rather earn an above-market rate for a longer time than a shorter time?

    @Joshua – I honestly hadn’t thought of holding I bonds under a business name. You can also buy them in your children’s name if you have kids.

  8. I figured that the lower rate in the latter months might account for the difference, but was too lazy to bother figuring it out. :)

    But in any case, I don’t see how holding on to get the same rate qualifies as being “better” to wait. After all, it’s all a matter of deciding when to get out – you aren’t going to be doing any better by holding 15 months than 12, so your decision after 12 months is actually easier, since you can do the same “see where rates are” decision making process at that point. Sure, I’d “rather earn an above-market rate for a longer time than a shorter time”, but this isn’t what this is about, is it? It’s about whether you gain anything by waiting, which doesn’t appear to be the case.

    This post was a repeat of previous posts when the new rates came out, and in the last few of those, with similar wording, holding increased your rate.

  9. The post is basically the same, but the actual content is changed to fit the interest rate environment. The rates calculated are annualized, not absolute. Earning 2.26% instead of 0.85% for 15 months instead of 12 months will actually earn you more money on an absolute basis. Unless your bank starts paying more than 2.26%, why not stay on the ride a bit longer? I don’t quite understand your counter-argument.

  10. ttfitz, I came to the same results as Jonathan, these numbers seem to be right:
    (6/12*0.0306+3/12*0.0221)*12/11~=0.0227 or 2.27% annualized for 11m
    (6/12*0.0306+6/12*0.0221)*12/14~=0.0226 or 2.26% annualized for 14m

    “It’s about whether you gain anything by waiting, which doesn’t appear to be the case.” – it depends on what your are earning while waiting and for most of us it is indeed not the case, but for some it may well be.

  11. Okay, let me try again. Yes, if you don’t cash in the bond at month 12 and continue holding it, it will “earn you more money on an absolute basis”, but that’s true no matter what, whether there is a penalty or not. It’s also a trivial point, so I wouldn’t expect it to be brought up and labelled as “better”. You wouldn’t have said, “But if you hold it the entire 5 years, you’ll earn interest that whole time and not pay a penalty, so on an absolute basis, that would be best”, would you? Technically true, but not really the point, is it?

    My understanding about the point of these kinds of analyses is “How do I make out if I cash in this 5-year instrument early?” or “I don’t want to tie up my money for 5-years, so what is the effect of cashing out early? The point of looking at holding for one year then cashing out while paying the penalty is to say, “Even with the penalty, you earn x%, which is better than what you can get with a 1-yr CD now.” And, to me anyway, looking at holding to 15 months – and calling it a better option – is when holding gives you even BETTER return annualized than with cashing out. Because that means you are earning more over the period which already happened, too. There seems no reason to look beyond the 12 months if it doesn’t improve your situation – particularly since you don’t know what the rates will be month 13-15 and beyond. It MIGHT be better if rates are down or remain the same, but it could be WORSE, since you could be keeping your money in earning 2.26% when you could cash out and do better. When you know the 2nd 6 months is at a higher rate than the first, it is much more likely to be better because you will not only be earning higher interest on the last 3 months, but will because of the penalty be earning extra on the first 9 months (it’s an annualized return as you point out), meaning rates would have to go much higher to equal the return.

  12. One more point, many don’t realize that you cannot have joint account in TD. It is only individual account. In you post, you mentioned for couple you can own $20k. One should open 2 accounts with each individual SSN instead of Joint account we used to open in Banks. Just want to clarify for others.

    BTW, your post was right on time while was I wondering what to do with my Tax year end distributions from the business.

  13. I’m finding it impossible to open a Treasury Direct Account. When I tried received some message about my account not being confirmed and that I had to mail in a 54444E…. so I filled out the form, went to the bank, got someone to certify it, and mailed it in — 6 weeks ago. I still can’t get into the site – if I enter my account number I get a message that they haven’t received the form I mailed. I have emailed them numerous times with NO reply. They don’t seem to have a phone number any more.

    I mean, I’m a big fan of IBonds and have paper bonds I bought years ago sitting in a safe deposit box… but this is pretty ridiculous. There is NO WAY I am going to deal with buying anything from them until they fix their web site & communications issues!

  14. I am new to I bond. So i have basic question. Where do you sell I Bonds? through TD website, to a Bank or any secondary market?
    Do you recommend to buy max limit of 10k now? or should one buy 5k now and next 5k in Oct/Nov time frame?

    Will appreciate your thoughts.

    –Akshay

  15. @ttfitz What Jonathan is suggesting is to leave your money in the bonds to get 3 more months at a _known_ interest rate of 2.21% which is still likely higher than you could get anywhere else. So assuming current trends continue and rates keep going down, 2.21% is the best rate you’ll find for the last three months in the 15 month holding period and you will be better off holding for 14 months than cashing out after 11 months and perhaps repurchasing new ibonds to restart the 11 month time holding period.

  16. Jonathan:
    I confused about the APY. I bought $5,000 in 10/2011, the rate at that time is APY 4.6% (0%+2.3%*2+0%). My account is $5,058 now. They calculate semiannually which mean I earned $58 for the first 6 month. So the APY is 2.3% =rate(0.5,, -5000, 5058), not 4.6%. If use simple way, $5000, $58/6 month, $118/year, $118/5000 =2.3%.

  17. Lily,

    The $58 you earned is for three months at 4.6%. Treasury Direct doesn’t include the most recent three months of interest until you pass the five year mark because that is the penalty for cashing the bond early. Next month your account will be $5076.

  18. Karl:
    thanks for the explaination and you are right. this is my first time to purchase I-bond. I will watch next month of $76. but I thought they calculate seminannualy, then I will see increase after 6 month. thanks again!

  19. Akshay,
    you can sell them back to the Treasury after 1 year through that same web site and deposit the proceeds into one of your bank accounts linked to your TD account. From my experience it takes a couple of days as with any other ACH transfer.
    If you have the money you won’t need for a year and it is earning below 2%, then I don’t see a reason to do this 6-month staggering (5k now, 5k in October). Better buy the whole limit now and start earning above 2% yield on it.

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