Dedicated to Deposits: Deals, Data, and Discussion

Series I Savings Bond Inflation Rate is High, But Still Not a Good Deal

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Thanks to recent inflation, you can lock into a year of nearly 5% on I Bonds if you buy them before November 1st. This WSJ article describes how this is possible. However, this rate is due entirely to the CPI. After one year, as inflation goes down, so will the yield. The yield of the I Bond consists of both an inflation rate that changes every 6 months and a fixed rate. The fixed rate is currently at 0%, the lowest it has ever been.

You can redeem the I Bond after the first year, but it costs you 3 months of interest. That would lower the yield from around 5% to 3.68%. Another downside is the annual limit on I Bond purchases. The Treasury lowered it from $30K to $5K. So you now can only buy $5K of I Bonds from Treasury Direct and $5K in paper I Bonds from your bank.

I used to post more on I Bonds as an attractive alternative to CDs, but the changes the Treasury has recently made have hurt the deal. The fixed rate may go up on Monday, but I'm not optimistic. For those who bought I Bonds at the start of the decade when the fixed rate was over 3%, you'll want to hold on to them. Those I Bonds may now be earning over 8%.

A good resource of I Bond information is available at Savings Bond Advisor. One interesting chart at the website is a performance comparison between I Bonds and the Vanguard 500 Index Fund. It compares the two based on monthly investments over the last 10 years. The index fund is not only below the I Bond, but it's near the black line which is the total money invested without interest. This was plotted at the start of the month, so it's likely below the black line now.

Thanks to the reader who mentioned this WSJ article in the Finding the Best Deals post.


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Comments
12 Comments.
Comment #1 by Anonymous posted on
Anonymous
What happens if we end up with deflationary numbers? Does that mean the I-Bond rate will be 0?

1
Comment #2 by gaelicwench (anonymous) posted on
gaelicwench
I just checked my I Bonds and their current value - I do all my bond purchases electronically. They're currently at 6.07%. Not sure if they'll get to that nearly 8% you mentioned either. Guess it's going to be another six months of waiting to see what next April will bring us.

In the meantime, I'll just stick to CDs. I managed to snag ING's 4.5% for 18 months without having to give up my right arm either.

1
Comment #3 by Anonymous posted on
Anonymous
Correction:

By April, I meant the last few days of that month, in order to determine whether it's wise to invest or not. I know the change of rates takes place on May 1st.

1
Comment #4 by savingeverything (anonymous) posted on
savingeverything
Deflation leads to 0 rate! (unless you purchased i-bond years ago with high fixed rate). As postd, new i-bonds are not a good rate IF you keep it only for short term. But, longer term may provide a good yield; depending on where inflation goes. You need to compare CD rates for 12 and 18 months to i-bond for 12 and 18 month with last 3 months penalty, and factor in that CD interest may be state taxable (i-bond interest may not be state taxable).

1
Comment #5 by Anonymous posted on
Anonymous
I bonds are state tax free.
Also, federal tax is deferred to year the bond is cashed.

1
Comment #6 by Anonymous posted on
Anonymous
But what does deflation do the base rate when it resets in november?

1
Comment #7 by Anonymous posted on
Anonymous
The wsj article is pretty lame.

> You can redeem the I Bond after the
> first year, but it costs you 3
> months of interest.

Not exactly... you can redeem the bond after 11 months and 1 day (if you buy the bond on the last day of the month). Also, it would be foolish to redeem it after a year. If you buy the bond today, you will have at least 12 months of high yields. If/when the rates go down, wait 3 months to redeem the bond. Then you will lose only 3 months of low interest.

1
Comment #8 by Anonymous posted on
Anonymous
The above poster is right. If you buy the bonds today (October 31) at a bank.

You will get 12 months worth of interest in 11 months 1 day.

1
Comment #9 by Anonymous posted on
Anonymous
there is no deflation, just deleveraging. hyperinflation is what you want to worry about with the trillions the govt is printing and the soon to be 0% interest rates. not sure how these bonds will do then...

1
Comment #10 by Anonymous posted on
Anonymous
Quote:

"there is no deflation, just deleveraging. hyperinflation is what you want to worry about with the trillions the govt is printing and the soon to be 0% interest rates. not sure how these bonds will do then..."

By Anonymous, at 6:43 AM, October 31, 2008

I truely believe you are right.
Financially wise, we are going to be sucked from one deep black hole right into another.

Our finanacilly system is broken and our own government refuses to take the painful steps neccessary to fix it.
At least not until after the elections. The politicians are too worried about loosing votes right now.

1
Comment #11 by rate (anonymous) posted on
rate
Studying the connections between financial markets is amazing. Understanding the dependency between different rates can only help you succeed and be financially healthy.

1
Comment #12 by rate (anonymous) posted on
rate
Unfortunately, not many people care about these things. It's our own ignorance that brought us in this situation.

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