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.
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.