Update 5/1/18. The fixed rate will be 0.30% for I bonds issued from May 1, 2018 through October 31, 2018. The variable inflation-indexed rate for this 6-month period will be 2.22% (as was predicted). The total rate on any specific bond is the sum of the fixed and variable rates, changing every 6 months. If you buy a new bond in May 2018, you’ll get 2.52% for the first 6 months. Not bad. See you again in mid-October 2018 for the next early prediction.
Original post 4/11/18:
Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as a replacement for cash reserves (they are liquid after 12 months) or bonds in your portfolio.
New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the May 2018 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2018 savings bond purchase will yield over the next 12 months, instead of just 6 months.
New inflation rate prediction. September 2017 CPI-U was 246.819. March 2018 was 249.554, for a semi-annual increase of 1.11%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 2.22%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.
Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months 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 few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.
Buying in April 2018. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.1%. You will be guaranteed a total interest rate of 2.58% for the next 6 months (0.10 + 2.48). For the 6 months after that, the total rate will be 0.10 + 2.22 = 2.32%.
Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2018 and sell on April 1, 2019, you’ll earn a ~2.04% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you held for three months longer, you’d be looking at a ~2.10% annualized return for a 14-month holding period (assuming my math is correct). Compare with the best interest rates as of April 2018.
Buying in May 2018. If you buy in May 2018, you will get 2.22% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS, which has been rising a bit. The current real yield of 5-year TIPS is ~0.56%. My best guess is that it will be 0.20% or 0.30%. Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.
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 (set at purchase) + variable rate (minimum floor of 0%).
So, which one? Buying in April 2018 would lock in a 11-14 month return equal to the top 12-month CD rates, which isn’t bad (plus the interest is exempt from state and local income taxes). If inflation picks up in the next year, you could still keep the bond and have potential upside. I would choose this option if I was treating savings bonds as short-term CD alternatives. However, if you buy in May 2018, your (real) fixed rate may be higher. This helps in the long run if you intend to keep these savings bonds indefinitely. I am a long-term holder (see below), so I am waiting until May.
Unique features. Due to their annual purchase limits, you should still consider their unique advantages before redeeming them. These include ongoing tax deferral (you don’t owe tax until redemption), exemption from state income taxes, and being a hedge against inflation (and even a bit of a hedge against deflation). There are also potential benefits when using the proceeds for college.
Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.
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. You can also buy an additional $5,000 in paper bonds using your tax refund with IRS Form 8888. 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.
[Image: 1946 Savings Bond poster from US Treasury – source]
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Hello,
If the decision on when exactly to buy i-bonds is too much to handle, what about to invest 1/3 in April, another 1/3 in May and the last 1/3 in November of 2018?
Thank you,
Seems fine. Everyone gets the same inflation rate, eventually. Only the fixed rate will possibly change. You could also just set up an auto-invest every month (I’m pretty sure they have this), if that works out better for cashflow reasons.
2.22%. That is what I figured, too. Thanks for confirming, and thanks for your insights.
It’s much appreciated.
-JP
Treasury Direct site down for scheduled maintenance. Problem is, TD usually posts maintenance schedule ahead of time and hours of unavailability, and there isn’t anything I can find online anywhere explaining the odd situation. Called TD, they said the situation was unusual but it’s legit.
Still, it is concerning in this era of security breaches. Have a fairly big slug of money with TD. Wondering if something is awry.
-JP
If I live in a no tax state, is it even worth compared to SB accounts on synchrony bank ?
If you are solely looking for an alternative to a online savings account, I would probably not buy savings bonds at this time.
I bought stock in a certain bank and sold it 3 days later for a gain of 3.8%. To each his own but I am less interested by a 2% APR.
I bet on red once, and obtained a gain of 100% in less than 10 seconds!
great comeback! 😉
Question: the minimum holding period for an Ibond is 12 months. You cannot redeem the Ibond before that period expires (If you’ve been affected by a disaster, special provisions may apply). But what about the beneficiary of an Ibond or estate in the case of a trust? For example, the owner buys a bond, then dies the next month. Does (for example) the owner’s wife or children still need to wait 11 months to redeem the bond?
Here we are again! Great article Jonathan! I too, will wait for May and might buy $1000 I bonds. Though now a lot of my ten year notes and TIPS are maturing and I am rolling them into two year notes. My asset allocation into savings bonds since the year 2000 has been doing great! My average annual gain is above 5% on my paper bonds. The two year yields are about 2.4% now! So I might limit myself to $3,000 worth of I-bonds between May 1 and November 30.
Just a note in case other commenters are not familiar with my past comments: my primary investments are my traditional and Roth retirement accounts which are very aggressive. These savings bonds allow me to stay 100% aggressive in my retirement accounts – in stock funds – though I am within three years of retirement. I also have a reasonable municipal bond portfolio and Bitcoin and precious metals. There is a need for something conservative like savings bonds and I appreciate them very much.
An interesting question came to mind. In what denomination does it make sense to get these? If I don’t know how much I might need to sell in 12 months, if any, it seems like buying in 100 – 500 amounts might make sense.
You are allowed partial redemptions of online savings bonds in TreasuryDirect:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iredeem.htm
numbers just released on the TreasuryDirect website.
The composite rate for I bonds issued from May 1, 2018 through October 31, 2018, is 2.52%.
Fixed rate = 0.30%
I am in shock. Need to leave work and lie down.
Last time the fixed I bond rate was above 0.2 was the period from November 1 2008 when it was 0.7. And in November 2007 it was 1.2%, so yes this fixed rate of 0.3 is a nice thing. I ordered $1000 worth of I-Bonds today. I might buy another $2000 worth this six month period.
Haha! Within my guess range again. Will update in a bit, thanks
How does one keep track of these? The Savings Bond Wizard is no longer supported and the Web based tool offered in its stead only lets me enter fixed amounts, 50, 500, 1000, ect., but I purchased a bond not matching one of the fixed denominations. Do I need to calculate out my interest for each bond by hand every year so I can have some idea where I stand?
Thanks.
https://www.treasurydirect.gov/BC/SBCPrice has denomination options of 10, 25, 50, 75, 100, 200, 500, 1000, 5000, 10000. You could add multiple entries to add up to the amount you bought, e.g., 10+10=20. But for some amounts like 15, I’m not sure what to do; you could try saving that page to a .htm file and editing the values, but I don’t know if that’ll work.
It looks like I can use 500 as the value and multiply as necessary manually. Unfortunately the calculator only provides a value if you’ve held for at least a year, it seems. Originally I wanted to credit the interest in Quicken monthly, but it looks like I’ll do it annually.
With the fixed rate going up, has anyone considered cashing in old bonds with lower fixed rates and re-purchasing to lock in the higher fixed rate?