Savings I Bonds November 2018 Interest Rate: 2.32% Inflation Rate, 0.50% Fixed Rate

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Update 11/1/18. The fixed rate will be 0.50% for I bonds issued from November 1, 2018 through April 30, 2019. The variable inflation-indexed rate for this 6-month period will be 2.32% (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 November 2018, you’ll get 2.82% for the first 6 months. See you again in mid-April 2019 for the next early prediction.

Original post 10/14/18:


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 an alternative to bank certificates of deposit (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 November 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 October 2018 savings bond purchase will yield over the next 12 months, instead of just 6 months.

New inflation rate prediction. March 2018 CPI-U was 249.554. September 2018 CPI-U was 252.439, for a semi-annual increase of 1.16%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 2.32%. 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 October 2018. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.30%. You will be guaranteed a total interest rate of 2.52% for the next 6 months (0.30 + 2.22). For the 6 months after that, the total rate will be 0.30 + 2.32 = 2.62%.

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 October 31st, 2018 and sell on October 1, 2019, you’ll earn a ~2.09% 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 ~2.20% annualized return for a 14-month holding period (assuming my math is correct). Compare with the best interest rates as of October 2018.

Buying in November 2018. If you buy in November 2018, you will get 2.32% 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 now about ~1.00%. My best guess is that it will be 0.50% or 0.60%. 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%).

Buy now or wait? In the short-term, these I bond rates will not beat a top 12-month CD rate if bought in October, and probably won’t if bought in November unless inflation skyrockets. Thus, I probably wouldn’t buy in October. I haven’t bought any savings bonds yet this year, and will wait until November to see what the new fixed rate will be. If it greatly lags the real yield on short-term TIPS, then I will probably just buy TIPS instead. However, if it is close, I will probably buy some savings bonds as a long-term investment given the unique benefits below.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

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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Comments

  1. Hi Jonathan, I wonder if you’re still holding 0.0% fixed I Bonds, and, if so, if you’ve considered redeeming those? I’ve redeemed all my 0.0% fixed, mostly during the last deflationary cycle where the 3-month penalty was “free”, and most recently paying the penalty in September (for I Bonds issued March 2017 IIRC). If you use the proceeds to buy new I Bonds that you wouldn’t otherwise purchase, it’s really only a 2-month interest penalty (considering the free first month), and if you’re a buy-and-hold investor do you really want to be holding 0.0% fixed? (I hate paying penalties too!)

    • I should probably sell the 0% fixed I bonds right now while the real yields on short-term TIPS are decent again, but I haven’t. I just don’t have that much tax-advantaged space to puts the TIPS in. I should probably do what you state and buy in November and sell the old 0% fixed bonds even if the new fixed rate isn’t that great.

      • Moe Howard says:

        I have the same dilemma with 0% bonds but these bonds are past the 5 year mark so they are the same as cash. Also, I don’t want a tax event when it’s not necessary. iBonds are part of my “safe money”, getting a few extra basis points isn’t a good argument.

  2. Jim Davidson says:

    Jonathan can you share your thoughts on the choice between savings accounts versus investing at this time in the cycle. On the one hand rates are going up and cash is a priority I would think. On the other hand investing long-term through a dollar cost average method like the robo-advisors advocate seems reasonable e.g: https://investormint.com/investing/betterment-vs-online-savings-account

    • I think everyone should have an adequate savings buffer, not matter where the cycle may be. (It’s not easy to even say where in the cycle we are anyway.) Depending on your risk tolerance, job security, you should have at least 3 months or higher of expenses saved up. After your cash buffer is set up, then you can think about long-term investing. I have a huge cash buffer of two years of expenses since I’m semi-retired. With the rest of my money, I’m still investing every quarter.

  3. In the “Buying in November 2018” section is there a typo? Based on what you wrote above I think it should say …you will get 2.32% plus…

  4. I also calculated 2.32% (actually (2)*(252.439-249.554)/249.554 = 2.312% – they round any non-zero thousandth’s place up).
    I usually buy a Series-I Savings Bond at the end of October (using the interest-for-the-full-month trick) but NOT this year because 2.32% + ?fixed? isn’t likely to come close enough to the 3% interest rate I get with 5-year CD’s from my federally-insured Credit Union – which also only charges just a 3-month interest penalty for early withdrawal.
    I normally look at the excess that’s building up in my bank savings account (I have an automatic monthly stock investment program) and put some of it in I-Bonds and some in Credit Union 5-year CD’s – hedging the bet that the Credit Union CD’s should be higher than inflation.

  5. I hate to wish for higher inflation, but I sort of feel like that is what we all need in this economy.

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