The Labor Department released the March CPI-U numbers today, and with these numbers, the next I Bond inflation component can be computed. Due to the "low" inflation that the government reported late last year, the new I Bond inflation component is a little low. Higher gas prices helped increase the CPI-U in the last three months so that at least kept the new inflation component respectable. The new I Bond inflation component that will be announced in May should be 2.21%. This number is added on to the I Bond fixed rate to derive the I Bond composite rate.
I Bond Rates of Return for April 2012 Purchase
If you buy I Bonds before May, your I Bond will have a fixed rate of 0.00% and an inflation component of 3.06%. Thus, the composite rate is the same as the inflation rate of 3.06%. This rate will remain in effect for six months until October 1, 2012. The I Bond inflation component that the Treasury announces in May will take effect for your I Bond (purchased this month) in October. That will remain in effect for six months. Since we know the May I Bond inflation component, we can compute the I Bond return for the next year for I Bonds purchased in April.
The semiannual inflation rate announced in May is the change between the CPI-U figures from the preceding September and March
All previous CPI-U numbers are available from this government webpage. The CPI-U for September 2011 was 226.889. The March 2012 CPI-U was 229.392. This is an increase of 1.103%. The annualized version of this is about 2.21%.
If you buy before May, you'll receive the current I-Bond fixed rate of 0.00% for the life of the I Bond. The inflation component will be added to this rate and will change every 6 months. The current inflation component is 3.06%, and the composite rate is 3.06%. Here's an estimate of the return for the next year:
- 3.06% from April 2012 through September 2012
- 2.21% from October 2012 through March 2013
I Bonds increase in value on the first day of the month. So on May 1st, you'll earn the interest for the full month of May. So for maximum return, it's best to buy I Bonds near the end of the month and redeem them early in the month.
If you redeem an I Bond before 5 years, you lose the last 3 months of interest. So based on this and the above numbers, if you buy an I Bond on April 30, 2012 (best not to wait to the last day), the redemption value of the I Bond on April 1, 2013 would be about 2.08% higher. For 11 months, this comes out to an annualized yield of about 2.27%.
Below is an estimated annualized return for I Bond redemption from April 1, 2013 to July 1, 2013. It is assumed you will buy the I Bond on April 30, 2012 which gives you almost an extra month of interest. This effectively reduces the 3-month penalty to 2 months.
- 2.27% - redeem on 4/1/13, 6mo of 3.06%, 3mo of 2.21%, and 3mo of 0% (penalty)
- 2.27% - redeem on 5/1/13, 6mo of 3.06%, 4mo of 2.21%, and 3mo of 0% (penalty)
- 2.26% - redeem on 6/1/13, 6mo of 3.06%, 5mo of 2.21%, and 3mo of 0% (penalty)
- 2.26% - redeem on 7/1/13, 6mo of 3.06%, 6mo of 2.21%, and 3mo of 0% (penalty)
Note, it's best not to wait until the last day of the month to buy I Bonds at Treasury Direct. You probably want to give yourself at least two business days to ensure they are officially purchased before the end of the month. I did an experiment last year to see how close to the end of the month one could wait (see the middle of this post).
I Bond Purchases AFTER April 2012
We won't know the I Bond fixed rate until May. However, it's very likely to remain zero percent in this interest rate environment. So the worst case composite rate will be 2.21%. If inflation continues to increase this year, the November I Bond inflation component may be over 2.21%. That could make an I Bond purchase after April a better deal.
Remember the $10K Annual Purchase Limit
Before you get too excited, remember that the annual purchase limit is $10K (excluding the purchases using your tax refund). Also, remember that the Treasury ended offering paper savings bonds at banks. However, it did double the annual purchase limit at Treasury Direct (see post). So if you earn 2.26% APY for 14 months on $10K, the total dollar amount of interest is about $264. As a comparison, a $10K deposit into a 1.15% CD would return about $134 in 14 months. So you won't make that much more with the I Bond. Nevertheless, I Bonds have some nice features that CDs don't have such as being exempt from state and local income tax.
I Bond Features
Below is a summary of the I Bond features. More information is available at this Treasury I Bond page:
- Can't be redeemed within 12 months of issue date
- Lose 3 months interest if redeemed within 5 years
- Interest is composed of fixed and inflation-based rate
- Fixed rate remains for life of bond
- Inflation-based rate changes every 6 months after issue date
- New rates announced every six months on November and May 1st
- Federal tax can be deferred on interest until bond is redeemed
- Interest is exempt from state and local tax
- Some or all interest is tax exempt when used for educational expenses
- $10,000 maximum of I Bond purchases per year (excluding purchases using your tax refund) - total was $60,000 before 2008 (Treasury's press release).
For more details about the purchase limit, please refer to the Treasury Direct's FAQ on the new purchase limit.