US Savings Bonds November 2013 Update

One more quick savings bond update… the official rate for new I Savings Bond was announced and the variable rate is indeed 1.18% but the fixed rate was a surprise at 0.20%. It’s still very small, but the last time we got a rate slightly above inflation was May 2010.

This means that if you buy a I Savings Bond from November 2013 to April 2014, you will earn 0.20% + a variable rate based on inflation updated every 6 months. The first six month variable rate is 1.18%, so your total rate for the first six months is 1.38%.

Short-term CD replacement? If you wanted to use this bond like a short-term CD, at the very minimum you would be guaranteed 6 months at 1.38% and then 0% after that. If you assume you buy at the end of November and hold for 11 months to maximize interest, with the 3-month early withdrawal penalty your effect annual rate would be approximately 0.75%. That’s not a bad floor considering that the minimum scenario would only occur if we had mild negative inflation (deflation).

Purchase limits. The annual purchase limit per calendar year is $10,000 in I-bonds via TreasuryDirect online (per calendar year), and also $5,000 in paper bonds purchased with IRS tax refunds (per tax return). For a couple filing as married filing jointly, that’s $25,000 per year.

EE Bonds. Series EE bonds issued from November 2013 through April 2014 will earn the newly announced rate of 0.10%. All Series EE bonds issued since May 2005 earn a fixed rate in the first 20 years after issue. At 20 years, the bonds will be worth at least two times their purchase price. This means *if* you hold the bond for 20 years, you would earn an effective 3.5% annualized rate.

A couple of readers have asked me about my opinions on this feature. First, 3.5% is only slightly higher than what a 20-year Treasury bond is currently paying (3.4% today). While the savings bond does offer potential tax advantages, I’m just not really interested in what is basically a 20-year CD with a huge early withdrawal penalty as otherwise you’re just earning 0.10% for 19 years. 20 years is a really long time and there may be many temptations to cash it in early. If it was 10% for 20 years, maybe, but not 3.5%.

Comments

  1. Or how about just skip a matinee movie once a year and your savings will exceed the interest you would have earned.
    That we’ve sat around like sheep for 5 plus years and suffered with the Anything but Honest and Transparent Federal Reserve’s zero percent interest rates, specially designed to punish the people who did nothing wrong and reward the people who engaged in Financial Terrorism and fraud is mind boggling.
    And now if two terms of Ben Bernanke were not bad enough we get a meaningless choice between Larry Sumners and Janet Yellen as if they are the only two monkeys in town that could run the Fed.

  2. I’m completely shocked that they raised the fixed rate from 0%. Sure, it’s only 0.2%, but still… That’s a welcome change for sure.

  3. Meh, I don’t like low rates either, but complaining about the Fed doesn’t help me at all. I’d rather focus on things that actually make me more money. I’m happy with 0.2% more that will compound perhaps 30 more years.

  4. Jonathan, what would you think of cashing in some I bonds currently paying 1.18 and buying new with 1.18 plus the .20 fixed? I don’t have the money to buy any more right now so its either hold the ones I have and buy none this year or sell and rebuy.

  5. Mark: It depends in part on how old they are. If they’re under a year old then you can’t redeem them. Between 1-5 years, there’s a penalty of 3 months interest. Beyond that, there’s not penalty. So for bonds over 5 years older, there’s really no downside to trading them in for bonds with a higher fixed rate, even if it’s a small gain.

  6. Correction to the CD replacement portion.

    Guaranteed 1.38% now and 0.2% after that (now that there’s a fixed rate)

  7. @Hans – If there is deflation, the variable rate can be negative wiping out the fixed rate (the total composite rate won’t go any lower than zero).

  8. @Mark – That’s a tough call, you’d lose some liquidity for another year and you’d pay the interest penalty of last 3 months interest. If the last three months is 1.18% that’s 0.295% so if you absolutely can’t buy any more right now and you intend on holding for a long time then it may be worth it to sell and rebuy. Be sure to sell at beginning of month, put the cash somewhere earning 1% like a savings account, and then rebuy at end of month.

  9. @Joanthan – Wouldn’t Mark have to pay the interest penalty of the last 3 months’ interest *only if* the I-Bond is less than 5 years old (like Michael said)?

    (I might do this too, so I want to be sure!)

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