New inflation numbers are out, so it’s time for another semi-annual update:
New Inflation Rate
March 2009 CPI-U was 212.709. September 2009 CPI-U was 215.969, for a semi-annual increase of 1.53%. Using this official formula, the variable interest rate for the next 6 months will be approximately 3.07% based on current fixed rates.
Buying Now? If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.10%. You will be guaranteed a total interest rate of 0% for the next 6 months due to previous deflation, and 0.10 + 3.07 = 3.17% for the six months after that. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a 3-month interest penalty.
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. Let’s say we buy on October 31st. You’ll be able to sell on October 1st, 2010 for an actual holding period of 11 months. (3-month interest penalty still applies.)
However, given the first 6 months of 0% and the 3-month penalty off the end, I think I’d wait until November 1st.
Buying Later? If you wait until November 1st, you will get a new unknown fixed rate + ~3.07% for the first 6 months, and an unknown rate based on ongoing inflation after that. It can’t go much lower than the current 0.10%, so I’d wait a couple weeks and see if you haven’t used up your buying limits this year.
Existing I-Bonds? If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month to your original fixed rate + variable rate. Even though you probably went through 6 months of 0% total interest, the next 6 months won’t be that bad as compared to current savings account rates of ~1.50% APY. I have some at 1.2% fixed rate, which will give me 4.28% for the next 6 months. Interest on savings bonds is not subject to state income taxes. I am keeping mine.
Beware Low Purchase Limits
The annual purchase limit is now $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. For a couple, that’s a $20,000 total cap per year. Buy online at TreasuryDirect.gov. As for paper, here is a post on how to buy paper savings bonds from your local bank.
For more background, see the rest of my posts on savings bonds.
By Jonathan Ping | Savings Bonds | 10/15/09, 8:05pm