Savings I-Bonds Update: New Inflation Rate Announced

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New inflation numbers are out, so it’s time for the usual semi-annual update:

New Inflation Rate
March 2008 CPI-U was 213.528. September 2008 CPI-U was 218.783, for a semi-annual increase of 2.46%. Using this official formula, the variable interest rate for the next 6 months will be approximately 4.92%.

Buying Now? If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed an variable (well… total) interest rate of 4.84% for the next 6 months, and 4.92% for the six months after that. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a 3-month interest penalty.

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 on October 31st. You’ll be able to sell on October 1st, 2009 for an actual holding period of 11 months. (3-month interest penalty still applies.)

Not bad as a place for short-term cash reserves, but not necessarily the best. There are certificates of deposit with comparable interest rates, and you can still access your money early in an emergency.

Buying Later? If you wait until November 1st, you will get a new unknown fixed rate + ~4.92% for the first 6 months, and an unknown rate based on ongoing inflation after that.

Bought already? For those that bought back in April when the fixed rate was 1.2%, the next reset rate will be 1.2% + 4.95% = 6.15%. So we got 4.38% from April-September, then 6.06% from October-May, and now 6.15% from April-September ’09. And this is not counting that the interest is exempt from state income taxes. Yep, I’m keeping these for another 6 months. 🙂

Beware 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. I am already nearly maxed out for this year already, and don’t think I’ll be buying any more.

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  1. Jonathan – I bought these bonds back in April through TreasuryDirect and am happy to be earning 6.06%. Do you know how this interest pays out? Whenever I look on TreasuryDirect it shows my balance as the same amount as the purchase price of the I-bonds (i.e., no interest has been paid yet).

    Thanks for your help!

  2. If you bought in April, you have to hold for another 6 months, the minimum holding period is a year. 🙂

  3. Sorry–this might be an obvious question, but I’d appreciate if someone helped me out on it anyways.

    What’s the advantage of a high interest savings account like emmigrant direct over these i-bonds? Are they both FDIC insured? Do they both carry basically 0 risk? For someone looking to hold on to money for roughly 10-12 months, is there any reasons to keep it in emmigrant rather than invest it in these? It seems like these interest rates are significantly higher, and if liquidity isn’t a big concern, what’s the downside?

    I guess my question can be boiled down to: for a young (mid-20s) full time employed investor, what is the best place to stick a couple thousand dollars with little to no risk. Right now all of my money is in a high interest online savings bank, but I feel like for a ~12 month time span–without taking on any more risk–I could be getting much better returns than ~3%.

  4. Not that we really want to think about this, but if the next currently unknown 6 month period has a negative CPI, it would be a GREAT time to sacrifice that 3 months interest and sell any 0% I-bonds bought now.

    The market apparently believes we’re going to experience serious deflation soon, as evidenced by the secondary market yield on TIPS maturing in January 2009. (more than 10% real yield!)

  5. Ethan – Jim is correct, it is accruing but the website will take into account the minimum holding period.

    Robert – Savings bonds are guaranteed by the US gov’t. Bank accounts are insured by FDIC. Rates may go up or down in the meantime, so you have to weigh your options. 12 months CDs also exist that earn about 4.5%.

    Dan – That’s a good point, we can keep an eye on the CPI and decide when we want to sell as the 3-month penalty is on the last 3 months.

  6. To answer Robert’s question, if you only want to hold for 10-12 months, a savings account is definitely the way to go. The is a 3 month penalty with the I-bonds if you cash them in before 5 years.

    Also, it doesn’t really even matter the rate of return for such a short time period. If you have $10000 to save, the difference between a 3% return and a 3.25% return is only 25 dollars over the course of a year.

    As far as the difference between these bonds and a savings account, they are just a different savings instrument that has different risks and such. Since they are guaranteed by the government, there is a zero chance of default on an I-bond. Since it has a fixed component and an inflation component, you are also guaranteed a real return. I bought in April, so I locked in a 1.2% return, including inflation, for the life of the bond. A savings account will often return less than inflation.

    But like what was mentioned in the article, I-bonds are not quite as liquid as a savings account to begin with. There is a minimum 12 month holding period, and a penalty if you cash in before 5 years.

    You just have to evaluate your needs and figure out what works for you.

  7. Jonathan,
    Can you help understand the following calculation?
    For those that bought back in April when the fixed rate was 1.2%, the next reset rate will be 1.2% + 4.95% = 6.15%.
    So we got 4.38% from April-September,
    then 6.06% from October-May (HOW U CALCULATED THIS),
    and now 6.15% from April-September ‘09(HOW U CALCULATED THIS)). And this is not counting that the interest is exempt from state income taxes. Yep, I’m keeping these for another 6 months.

    My understanding is:
    So we got 4.38% from April-September,
    6.15% from October 08-May09.AM I missing something here.

  8. Robert – if you’re not already a Patelco member, you could put $1000 of that in a NCUA-insured promotional 7% 1-yr CD and beat the I-Bond rate handily for the next year.

    Then maybe leave the other $1000 in the highest rate liquid account as Rick said.

  9. Joe – Please read through the posts in the Savings Bonds category section. I’ve done the calculations step-by-step several times, so this time I just didn’t type it all out.

    Rates reset every six months. The variable rate was 3.18%, then 4.86% (note the 4.84% on the official website).

    The 6.15% is simply an advance calculation. Notice the official website doesn’t even show this, and won’t until November. So you’re definitely not earning it this month.

  10. Robert: I’m in your same position, and when I get my balance transfer check (just started doing what Jonathan has recommended for a long time!) I’ll be dumping it into a 9 mo CD yielding 4.15% apy. Here’s the bank offering; they also have decent rates for 3 and 6 mo CDs.

  11. Jonathan, thanks for the update! I bought these back in April too when there were several posts going around and I’m glad I locked in. I thought I would have to give them up after a year but the rate still seems great for the 6 months after that. At least this is a tiny bit of good news for me these days….

  12. Wall Street says

    Wait until Nov 1st reset. The fixed rate is probably going to be more like 2.5% (instead of 0%) – based on TIPS trading rates.

  13. You stated that “So we got 4.38% from April-September, then 6.06% from October-May, and now 6.15% from April-September ‘09.” Since rates reset every 6 months, shouldn’t the 6.06% be from Oct – March?

  14. would you recommend buying righnot now if you have some spare cash…or just keept it in a high yield savings…HSBC has an online 6month CD for @ 4% so I am considering that…laddering up (if applicable)

  15. I bonds have worked well, in my opinion, for anything longer than a year. My vintage ones, (eg., circa 10/2001 currently pay 7.91%, circa 2002, 6.89%, etc.), and, unlike c/d’s and bonds, you can “ladder your own”; that is, pick your own date to redeem them. Thus, you are not faced with bond calls nor renewing a c/d when interest goes down, but always have that option. Also, unlike c/d’s and most bonds, the interest on I bonds is tax deferred, so the tax on the interest income, while compounding at the same rate, can be taken in later years when redeemed, maybe in lower bracket years, just like an IRA or 401K, but without the restrictions. Also, the interest is state tax exempt, and all I-bond transactions are “hands-off” to your friendly stock broker/money manager.
    I was sorry to see the “max” annual contributions go from 60K to 10K (per couple). Maybe, with the cash crunch the Treas. is going to be in with all of these bailouts and give-aways, they will move the limit back up. In any case, many believe (including myself) that these bailouts will cause rampid inflation – making I-bonds seem very logical. Seriously, with the stock market going up and down 2,3,4,&5% PER DAY — is that any place to keep retirement money?? Ed

  16. Hi Zach and Dan..

    Just something to keep in mind when comparing CD’s and I-bonds. I bonds accumulate interest “tax-deferred”.

  17. SavingEverything says

    CD’s 12-month and less accumulate interest “tax-deferred”, meaning you pay taxes in the year you receive the full interest earned. SO, from this post, would you be buying i-Bonds now in October, waiting til November, or just buying a 12-month 4.10% CD, a 2-yr 4.50% CD or a 5-yr 5.0% CD? The 3-month penalty for i-Bonds is comparable to all CD’s <= 12-mo; and is better than the usual 6-month penalty for breaking longer term Cd’s.
    How do we know the fixed rate will be greater than 0.00? From historical point, the fixed rate dropped from ~3.3% during the Internet Bubble of 1999-2000 to 2.0% 11/2001, and to 1.00% 2003-2007, and dropped to 0.0% 5/2008. The inflation rate has fluctuated alot during the periods; but a general trend from the 1999-2001 i-Bonds is that the combined rate has dropped!

    Values as of 10/08 for i-bonds at $1k each; issue 09/2007=33.60 int; 09/’06= 70.40int; 09/’05 =130.40int; 09/’03=223.20int; 09/’01=488.40int; 09/1999=723.20int. Issue 01/2008=21.6; 12/’07=26.80; 04/’08=10.80; 05/’08=8.00. It looks like i-bonds are not meant for short term holdings.

  18. You’re dead on with this post. Who would’ve thought US Bonds would pay better than many CDs right now. What an upside down world it is.

  19. Do you know how many times I’ve kicked myself for not buying more I bonds back in 2001/2002, I’ve lost count. They’re the only thing still in positive territory for me, I started investing around the same time. If the fixed rate of return climbs back above 1% I’m loading up on them. The 0% rate is silly, I won’t buy them at that, but 1% or above and you get a totally safe investment that returns 6% or more.

  20. SavingEverything:

    There’s one factor that you didn’t account for during that historical period. Deflation.

    If the fixed rate is 0% and inflation ends up being a negative number, then the I-Bond would be 0% fixed (no return). Common sense (if there’s any left in this environment) would say that they have to raise the rate. If it’s at least 2% like someone suggested, then it’s a hot deal with possible inflation in a year or two.

  21. Strabo, Jonathan’s numbers are the inflation rates that one would get over the next year regardless of any deflation in the upcoming months.

    The next few months’ CPI figures will not affect the I-Bonds purchased during October 2008 until the six-month period beginning November 2009.

    If there is deflation the next few months, then that would make January 1, 2010 an optimum time to login and redeem the 0% I-bonds, because at that time the most recent three months interest will be very low and not that much of a sacrifice.

  22. Just a heads up, fixed rate is now 0.7%, so new purchases will yield 5.64%

  23. I’ve been buying I Bonds through my AF retirement pension (DFAS) with $1,400 per month being taken out. That equates to $16,800. in I bond value for the year, well above the new $5,000. limit I just now found out about. I will make adjustments to keep the total to $5,000. per SSN during the coming year, but how do I deal with the excessive amount of paper bonds I already have possession of for this past year?

  24. Ted,

    No definitive answer appears on the TreasuryDirect FAQ. But apparently you might get lucky and sneak by, or else they might refund some of your money.

    Someone reports in the comments on that they specifically asked the Treasury about this and received an answer: “Depending on the circumstances, the refunding of the excess purchase may be required.”

    Someone on fatwallet forums reported receiving this response:
    “Please be advised the limit is $5,000 per series and TIN per calendar year. Repeated violations may result in an action by this office; for example, a refund of account holdings and/or account closure may occur.”

  25. Mack jackson says

    Thanks for sharing such great post, it will surely help many people who want such detailed info about saving bond.

  26. I have quite a few I bonds that I’ve had for years. With no interest, am I wise to hold onto them for now at least until the November rates come out?

  27. Anne,

    If you are happy with the fixed rate portion of your I-bond, don’t let a six-month period of 0% interest scare you into selling your I-bond early. Especially if you’ve had the bonds since the time they were offered with fixed rates of 1.6% or larger – those are definite keepers!

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