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
New inflation rate prediction. September 2018 CPI-U was 252.439. March 2019 CPI-U was 254.202, for a semi-annual increase of 1.16%. Using the
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 2019. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.50%. You will be guaranteed a total interest rate of 2.82% for the next 6 months (0.50 + 2.32). For the 6 months after that, the total rate will be 0.50 + 1.40 = 1.90%.
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, 2019 and sell on April 1, 2020, you’ll earn a ~2.06% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. Comparing with the
Buying in May 2019. If you buy in May 2019, you will get 1.40% 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. In the past 6 months, the
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 definitely not beat a top 12-month CD rate if bought in April, and most likely won’t if bought in May either unless inflation skyrockets. Thus, if you just want to beat the current bank rates, I Bonds are not a good short-term buy right now.
If you intend to be a long-term holder, then another factor to consider is that the April fixed rate is 0.5% and that it will likely drop at least a little in May in my opinion. You may want to lock in that higher fixed rate now.
Honestly, I am not too excited to buy either in April or May, but if I really liked the long-term advantages of savings bonds (see below), I would consider buying now in April rather than May due to my guess of a higher fixed rate. You could also wait, as things might change again during the next update in mid-October. For my own accounts, as I am now semi-retired and thus no longer a big saver looking for any tax-deferred space possible, I will probably just
Unique features. I have a separate post on
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
Annual purchase limits. The annual purchase limit is
For more background, see the rest of my
[Image: 1946 Savings Bond poster from US Treasury –
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