Savings I-Bonds March 2011 CPI Update: 4.60% Variable Rate = Competitve Interest Rates

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New inflation numbers for March 2011 were announced on April 15th, so it’s time for the usual semi-annual update and rate predictions. This time around presents a good buying opportunity for a low-risk investment with interest rates higher than current bank CDs.

New Inflation Rate
September 2010 CPI-U was 218.439. March 2011 CPI-U was 223.467, for a semi-annual increase of 2.30%. Using the official formula, the variable interest rate for the next 6 months will be approximately 4.60%, depending on the upcoming fixed rate announcement.

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 month 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 little 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 an variable interest rate of 0.74% for the next 6 months, for a total rate of 0 + 0.74 = 0.74%. For the 6 months after that, the total rate will be 0.0 + 4.60 = 4.60%. 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, 2012, you’ll earn a 1.66% 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 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 that 4.60% for the entire 6-month period. If you buy on April 30th and hold until July 1st, 2012, you’d achieve a annualized return of ~2.29% over 14 months.

Buying in May

If you wait until May, you will get a new unknown fixed rate plus 4.60% for the first 6 months. My guess for the fixed rate would be 0.0% again, given current real yields for TIPS. The next 6 months will be based on an unknown rate based on future inflation. Worst case scenario, there will be zero inflation and you get paid nothing. Even in that case, if you buy on May 31st, 2011 and sell on May 1st, 2012, you would end up with an annualized return of 2.51% over 11 months.

If you are looking simply for the highest interest rate for a short period, then it would likely be better to wait until May 31st to buy up your savings bonds this year. If CPI inflation is very low or negative for the next 6 months and you are holding for at least 14 months, then it may end up being slightly better to buy in April. In the end, there’s more potential upside for buying in May, so that’s what I plan to do.

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 $20,000 per year. Buy online at As for paper, here is a post on how to buy paper savings bonds from your local bank. Some larger banks may have an electronic process.

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.

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  1. I wonder what the logic behind the current low individual purchase limit is. It seems to me that no matter who is in power the debt is going to be with us for a long time. So why not allow more people to take ownership of it? It would seem that there is plenty of it to go around. By the way, who do we actually owe all that money to anyway? I’ve heard that the Japanese have a huge national debt, but that the Japanese people own most of it. Why don’t we follow their example in this?

  2. Donald–you can buy unlimited amounts of Treasury bonds or TIPS if you’d like to. There is just a limit on these savings bonds because they don’t want people to be able to exploit some of the unique and nice properties that may arise with these instruments from time to time. They are meant to be long-term personal savings vehicles, not arbitrage instruments.
    I think more U.S. households and institutions would buy government debt if/when the rates are higher. The marginal buyer, which is currently the Chinese, the Social Security trust fund, or the Fed, is very insensitive to rates, i.e. they are buying the securities not primarily for income but for other reasons.

  3. How often does interest accrue? Also, can you go on your account on treasury direct and see what the bond is currently worth?

  4. Thanks for I-bond updates. Thought I was only one who bought them lol. You said something about easier redemption in $1000 denomination than $5000, could you specify?

  5. This is great! I’m going to do this (using the May 31 – May 1 strategy). I’d always thought it was dumb to buy I-bonds with a 0% or near-0% fixed rate because I’ve always seen them as long-term purchases. But this is obviously a great alternative to 1-year CDs for money that I absolutely won’t need over those 11 months no matter what.

    (And of course it may end up being a good idea to keep them longer, but I love this worst-case scenario analysis.)

  6. I have moved a lot of funds to Indian banks in fixed deposits (CDs) that are insured by the Feds. These give me 9.5% interest rate. Of course there is forex exposure, but the rupee has gained a good chunk against the dollar, and will only likely continue to do so.

  7. Sunil–which “Feds” are insuring your deposits?

  8. not sure why you deleted my comment

  9. @Donald – I think Andy explained it well. The purchase limits have been going down regularly, as I think savings bonds are less popular amongst the general public, and it’s easier for the gov’t to sell more plain Treasuries. I feel that the cost of maintaining the savings bond system will in the next decade lead to it’s complete shutdown, so buy ’em while you can!

    @May – If you buy them online, you can perform partial redemptions. If you buy them in paper format, you can only redeem all-or-nothing. So if you buy a 5k paper bond, you can either redeem all 5k or nothing, even if you for some reason only needed 1k or so. Just depends on your needs

    By the way, I never deleted your comment, it was simply being held for moderation as you were a first-time commenter.

  10. Everyone should have an diversified equity portfolio, but I-Bonds are a great diversification strategy. They have the advantage of being close to a risk less investment and provide inflation protection. Not a bad combination. There biggest drawback is the $5,000 per year purchase limit.
    Thanks for the informative update!

  11. I’ve been waiting on the new rate, having just started looking at bonds last November, when the rate went to 0%. I’m trying to diversify my investments and want to have something in i-bonds. This gives me more incentive. Thanks for posting an update!

  12. The $5k electronic/$5k paper is pretty wonkie. Can you then turn around and convert the paper to electronic using their “SmartExchange” program? If so, now I know why our govt is so messed up……

  13. Thad, the answer is no. Now, do you feel a little better about our government? 🙂

  14. I haven’t tried recently, but I believe you can convert from paper to electronic savings bonds, yes. Not instantly, but after receiving the paper versions and sending them in. I have in the past.

  15. I apologize for the amateur question: since the annual limit is 5k, why do you decide now it’s the time to buy for the whole year? Will there be other update(s), hence better buying opportunities, later in the year?

  16. The total amount of electronic I-bonds issued in the same calendar year in TD account cannot exceed $5K. I tried to convert paper to electronic last year but they returned the paper bonds to me.

  17. evilrabbit says

    Ugh, had to establish a new checking account since the one linked to my TreasuryDirect account is no longer. Unfortunately you need signature from a bank official to establish a new account.

  18. Am I the only one that sees the humor in calling these “low-risk investments” anymore?

  19. Assuming the interest is exempt from State and Federal tax?

  20. Jonathan, based on your posts I assume you do not redeem these bonds after 14 months but rather hold them for 10+ years?

    1) Is the interest rate paid by these bonds still a good deal over the long run? Any concerns wrt Inflation?
    2) I assume these savings bonds are part of your overall bond portfolio allocation?

  21. Jonathan says

    It might be too late to be asking questions, but…
    Hypothetically, could someone buy a paper I-bond of $5,000, convert it to electronic, then turn around and buy another $5,000 in I-bonds? I would guess no? The reason I ask is because I’m getting to this later than I had anticipated, and I doubt I’ll get the Treasury Direct account verification mailing in time to set up the account before the end of the month.

    Also, Lithium asked a question earlier that has gone unanswered:
    I apologize for the amateur question: since the annual limit is 5k, why do you decide now it’s the time to buy for the whole year? Will there be other update(s), hence better buying opportunities, later in the year?

    I was also wondering the same thing.


  22. Really loving the blog, I like your approach to financial advice. No cut-throat, “get-rich-quick” bull.

    More to the point, curious about the answers to Johnathon’s and Lithium’s questions. I am very interested in buying a bond as I have a $1000 sitting in an online savings account (which I had opened a couple years ago after poking around this blog) but isn’t gaining as much interest anymore. I don’t foresee needing the money anytime soon so these bonds seem like the way to go for me. My question is, what if after 11 months I decide I still don’t need the money, am I better off keeping the bond or cashing it and buying another or is this a dumb question because that would all depend on whether rates change or not? I have a feeling it’s the latter of those three options but I wanted to comment anyways since I appreciate all your hard work maintaining this blog. Thanks

  23. Hi,

    Can you explain a bit more on “if you buy on May 31st, 2011 and sell on May 1st, 2012, you would end up with an annualized return of 2.51% over 11 months.”. I understand I will get 4.6% for the first 6 months (May to Nov) but how did you get 2.51 from May 31’st 2011 to May 1 2012.

    Am really confused.

  24. ($100 * 4.6% * 6 of 11 months) + ($100 * 0% * 5 of 11 months) = $102.51 cents…. or 2.51%… tax free

    paste in excel
    =(100 * 1.046 *(6/11)) + (100* 1 * (5/11))

    This is assuming worst case scenario of 0% interest in final 6 month period, which is actually only 5 months due to end of month purchase trick.

    I’m torn since I still am getting 4% in rewards checking… but after taxes, I’m only getting a hair over 2.75%… so I plan on dropping 10K in (assuming I get my TD verification back in time)

  25. I meant State tax free

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