Savings I-Bonds Update: New Inflation (err… Deflation) Rate Announced

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New inflation numbers for March 2009 were announced today, so it’s time for the usual semi-annual update:

New Inflation Rate
September 2008 CPI-U was 218.783. March 2009 CPI-U was 212.709, for a semi-annual decrease of 2.78%. Using this official formula, the variable interest rate for the next 6 months will be approximately -5.55%, depending on the fixed rate. What does this deflation mean for the investment returns for I-Bonds?

Buying Now = ~3.08% APR, 11-month investment
If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.7%. You will be guaranteed an variable interest rate of 4.94% for the next 6 months, for a total rate of 5.64%. For the 6 months after that, the total rate will be zero, not -4.85%. This is due to the 0% floor on savings bond rates.

You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a 3-month interest penalty. However, 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. Let’s say we buy at the end of this April, hold for the minimum of one year, and pay the 3-month interest penalty for redeeming within 5 years. You’ll be able to sell on April 1, 2010 for an actual holding period of 11 months.

This would leave you with a 5.64% return on your money for 6 months, and then nothing for 5 months. Overall, that’s a 3.08% annualized return, and you will be exempt from state income taxes on the interest as well. This is very competitive with current bank CD rates.

Buying Later? If you wait until May 1st, you will get a new unknown fixed rate minus 5.55%, for a virtually guaranteed composite rate of zero for the first 6 months. (The next 6 months will be based on an unknown rate based on future inflation.) Unless there is a big bump in the fixed rate that makes it a good long-term investment, sticking with banks or credit unions will likely give you a higher yield.

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.

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  1. Is this is a good alternative to 529 for Childs education…?? Can I keep that money in my child’s name…?

  2. Dhiraj, If you have a chance of getting financial aid then its better to have the money in the parents name. If you put money in your childs name then it will count worse against them when financial aid is figured.

  3. Minor typo: Should it by “If you buy before the end of April” instead of October?

  4. I believe:

    “If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.7%.”

    should be:

    end of April…

  5. Yes, you are both correct. Sorry, I was working off a post from six months ago and overlooked that one.

  6. Where can i get iBond? I have an acct with Scottrade, can I buy this from Scottrade?

  7. Forget about my previous question. I thought I can buy an iBond from any banks/brokerage acct/ etc, but found out that it is sold only at treasury site or something. hehe 🙂 Btw, your site is fascinating…

  8. Thanks. I think maybe I will put $1000-2000 here instead of in the GMAC 1-year CD at 2.65% that I was planning for.

  9. Great ibond update. I find this very useful.

  10. Thank god we bought our I-Bonds earlier huh Jonathan? What’s the update on our I-bonds anyways? What’s the rate for us?

  11. Nice update. I bonds are a great savings tool for college education, general savings, etc. They were helpful in paying for my duaghters college education. I keep about 25% of my emergency fund in a few old EE Bonds and I bonds. What’s even more “exciting” is having bonds that are paying an interest rate of 8.67%, and great many over 6.4%. You can’t be that return anywhere, and probably for the foreseeable future! The best part is all the comments I would receive about buying savings bonds, “waste of money”, “bad returns”…..etc, from friends. They are not laughing at me now.

    Jonathan, your web site is great, please keep up the great work.

  12. I want to buy these bonds for my kids, but from reading about what Jim wrote about financial aid, should the kids be either beneficiary or co-owner?

  13. For anyone that bought in April 2008, it is probably best to sell them in January 2010, right after you get your last interest payment under the inflationary variable rate.

  14. High Yield Bonds (ETF) pay 9-13%, buy if you think the US economy is improving. Some to watch HYG,JNK,PHB. HYG up 11% in last 100 days.
    Buy and sell any hour of trading day,with brokerage account.
    Not for everyone.

  15. I’m confused… Wouldn’t you only get the 5.64% for 1 month in this scenario? Then in May the variable rate changes and yield effectively goes to 0% until November when another reset happens?

  16. Clayon W. says

    I applied for a treasury direct account (TD), and like some of you, I had to send in an authorization form. I hope to receive my access card prior to the close of the month, because I want to lock in the 3.08% interest rate!

    What’s the procedure for funding my TD account? Must I wait for the three or so day ACH transfer to occur between my bank and TD before I can purchase I bonds, or will treasury allow me to buy bonds before a transfer I initiate completes?

    I mailed my authorization form on Apr 16, so I’m holding out hope I’ll receive my access card in time.

  17. I’m still confused a bit. . .If I were to buy an I bond today, then I will always receive that .7% amount for 30 years? Then whatever the adjusted inflation rate is, which will change twice every year, will be the other interest rate determining factor??

  18. .1 % fixed rate?!? So much for my plan to wait for the big jump in the fixed rate…

  19. I purchased iBonds in Apr 2008. Now that they are not earning interest, I am torn about whether to hold onto them. Short term they are paying nothing so it makes sense to cash them in and put the money where it will earn something. Long term, the government is sending a clear message – they want these bonds cashed in. Why? My guess is they expect inflation to increase substantially and they don’t want to be stuck paying out the higher interest rates these bonds will earn. So I may want to hold onto them to reap those rewards. However, I am reading elsewhere that if the government were to default on anything, it would be TIPS and iBonds. And I have lost trust in the government after their shady maneuver of setting the inflation rate to a large negative number to wipe out the fixed rate of the iBonds. I would like to see a post on this topic or more discussion. If I do cash them in I guess I would want to wait until July 2009 so that my last 3 months of interest would be $0. Maybe I will cash in half of them.

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