Series I Bonds November 2008 Fixed Rate: 0.7%

The new fixed rate for Series I Savings Bonds (“I Bonds”) was announced on Monday to be 0.7%. A few readers asked if I thought this was a good time to buy.

As a long-term investment, a 0.7% real yield makes I-Bonds a poor choice, as you can buy TIPS with much better yields. As of yesterday, a 5-year TIPS had a 3.66% real yield.

As a short-term investment, it depends on how you think inflation will turn out in the near future.

If you buy now in November, you will earn 0.7% fixed + 4.94% based on inflation = 5.64% for the first 6 months. The second 6-month rate will be 0.7% + a variable rate based on inflation from September 2008 to March 2009. So far, the markets seem to suggest that there is a decent possibility that there might even be deflation for this period. Reminders: You must hold for at least a year (or 11 months and a day if you buy on the last day of the month). If you hold for less than 5 years, there is a penalty of the last 3-months interest.

Worst case scenario, there is deflation of worse than 0.7% which makes the total rate zero for the 2nd six months. Earning 5.64% for 6 months with an 11-month holding period gives you only an effective 3.07% APY. If say, inflation is 1%, you’d get an effective 3.54% APY for the minimum 11-month hold. Even if this is exempt from state taxes, the tax-equivalent yield won’t be far above 4%. You can do better with bank CDs.

The only scenario where I-Bonds may be better than what you can get from a bank is if you think annualized inflation will be higher than 1.5% over the next 6 months. Personally, combined with the lack of short-term liquidity, I don’t think I’d take that bet right now.

For more background, see my last post on savings bonds.

Comments

  1. Bought mine last night

  2. Usual caveats include the government’s underestimation of actual inflation (and the benefits they derive from such a setup). At 0.7% you’re basically guaranteed to not lose too much of your money.

    This is not an “investment” in the sense of “growing wealth”. It’s an “investment” in the sense of “attempting to not lose purchsing”.

  3. 0.7%?!?!?!

    Glad I bought the 5-yr TIPS last week at 3.27% and also locked in the October I-bond rate for the short term on the 28th instead of waiting for this bologna!

    Of course, the 0% savings bond will be promptly redeemed on the first business day in 2010, lol.

  4. WaMu savings APY is now down to 2.50 %

  5. You say a couple may purchase up to 20,000 of I bonds – I was told by Treasury Direct that only 5,000 per person, per year.
    Please clear up?!

Trackbacks

  1. Savings: I-Bonds Still Moderately Attractive for Short-Term « Family Money Today says:

    [...] I-Bonds Still Moderately Attractive for Short-Term The Money Blog did a nice overview of the latest U.S. I-bond rates and what to expect if using them as an investment. Take a look. In a nutshell, the rate is still [...]

Speak Your Mind

*