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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Another Good Deal for I Bonds As Compared to CDs


Another Good Deal for I Bonds As Compared to CDs

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.

From Treasury Direct I Savings Bonds FAQs:

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.

Related Posts

Wil   |     |   Comment #1
My Dad just purchased an I Bond on March 29, 2012. If redeemed on March 1, 2013, would the annualized return also be 2.27%, or would it be slightly higher?
Anonymous   |     |   Comment #2
This works out great for people who purchased I bonds in October 2011.  They get 6 months interest at 4.60%, then 6 months at 3.06%, and then 6 months at 2.21%.
Melman   |     |   Comment #3
I have some I-bonds from 2001 with a 3% fixed rate which I've held.  Including the upcoming rate adjustment, those bonds have averaged 5.6% return.

But since the fixed rate has gone to 1% or less (wow... that's been since 2003), I've bought them on occasion whenever the inflation rate spikes up a little.  Like in late 2005 when a 1% fixed rate and 2.85% inflation rate gave us new bonds paying 6.7% initially.  I sold those after the minimum 12 months but in hindsight, I should have held those too since they would have had an average return of 3.8%.  I also bought some in Oct. 2011, had been planning to sell them after 15 months, assuming that the upcoming inflation rate would be almost zero (I'd get 6 months of 4.60% and 6 months of 3.06%).  But at 2.2% I guess I'll hold them.  Maybe also buy $10K at 3.06% before month-end, only because it's better than current CD rates, and probably will be for the next 12 months.
Melman   |     |   Comment #4
To Wil in comment #1: If your father held his bond for 11 months (3/29/12 - 3/1/13), earning 12 months of interest (March 2012 through Feb 2013), and forfeiting the last three months of 2.21% interest, then yes, his return will be as Ken says, "2.27% - redeem on 4/1/13, 6mo of 3.06%, 3mo of 2.21%, and 3mo of 0% (penalty)".

But you need to watch the next inflation rate in November, and compare it to CD rates or other options available at the time. 
Anonymous   |     |   Comment #5
Melman:   I have 1.6% and 3% base rate I bonds but I do not ever plan on buying I bonds with a 0% base rate, just doesn't work for me and especially since the amount you can buy is so small not like it was in the early 2000s.
Anonymous   |     |   Comment #7
I bought a over $100,000 worth of I-bonds in the early part of the 21st century. They have a fixed rate of between 2-3% plus an "inflation" component. But, then I learned about how inflation is calculated by the Bureau of Labor Statistics. Computed according to the 1980 government formula, before the government added a bunch of misleading statistical tricks, like "hedonic" value, and product substitution (replacing filet mignon with chopped meat when the price of filet mignon rises too much), true current inflation is running 10.2%. The I-bonds are better than current CD rates, but they still do not accurately reflect that true inflation rate.  I intend to get rid of them as soon as I see an opportunity to buy more precious metal at a lower price point. Meanwhile, I am using this useful website to find the best checking and money market accounts, because that is all banks and credit unions are good for at this point in time. I'd never buy a CD or more US bonds, given the rates now.
Anonymous   |     |   Comment #8
A very interesting fact is that the government refuses to allow more than $5,000 physical and $5,000 online of I-bond purchases now. When I bought mine, in the early 2000s, they let you buy buy $30,000 online and $30,000 physical per year, for a total of $60,000 per year. The government, apparently, is now frightened to death of paying interest based upon future inflation rates, which is smart, given that the Fed has more than tripled the monetary base in less than 4 years. And this, in spite of the fact that the I-bond inflation component is far from an accurate inflation measure, given that it uses data from the Bureau of Labor Statistics, whose statistical gimmickry understates the true inflation rate.
Anonymous   |     |   Comment #9
I have ee bonds that still pay me 4%.
J   |     |   Comment #10
Anonymous #8, you must update some of your knowledge about I-Bonds. Americans can purchase $10,000 in I-Bonds electronically each year. They can also elect to receive up to $5000 of their tax refund in paper I-Bonds, bringing the total possible I-Bond allocation per Social Security number up to $15,000/year. However, Americans can no longer directly purchase paper I-Bonds.

I purchased $10,000 electronically in I-Bonds under my Social Security number in January of this year. My spouse might purchase an additional $10,000 in I-Bonds before the end of this month. That way $20,000 of our emergency fund will be stored in a higher rate vehicle than a CD.
Mike   |     |   Comment #11
I'm a student and started my savings while working through college, still learning the basics of investment though and I found this site is very informative.  Thank you all for contributing your know-hows and useful information of personal finance.

Just a little question: Should I cash out my $10K I-Bond purchased in May/2011 on May/01/2012 (currently it earns 3.06%)?  Does this rate remain if I keep this bond?

Thank you.
Anonymous   |     |   Comment #12
You need more info.  It depends on if you need the money or have a better safe investment.  Basically to get the 2.21% you need to cash in on 8/1/12, since that absorbs the 3 mo penalty.  If inflation rises you may not want to cash it in.  Hope this helps.
Anonymous   |     |   Comment #13
#12, you are assuming that the inflation rate reported by the Bureau of Labor Statistics is the true inflation rate. From my studies, their current report is designed to understate true inflation by 5-6% less than what it really is. If true inflation is running much higher than the government-reported rate, I-bonds are not a good investment. That isn't to say that CDs are any better. There are true inflation hedges out there, but they are made of metal not paper...
Anonymous   |     |   Comment #14
Could you do an article on 5 year and 10 year TIPS?  thanks
mikek753   |     |   Comment #15
can account be opened for minor?

or can minor buy I- Bond?
mikek753   |     |   Comment #17
thanks for answer.

when I shoud re evaluate what to do with I Bond?

is 04/2013 the 1st date to look at new current CD and I Bond rates?

Should I Bond be hold till 05/2013 to maximize rate / minimize penalty?

what approximate CD rate has to be to be more attractive to move out of I Bond? 3%, 5%, etc as CD is taxed (~28% state rate), while I Bond is NOT.


I'm new to it, and would appratiate answers in simple way ;-)
elaine   |     |   Comment #18
try preferred stocks ?  i have JPMpC ,  LYGpA ......( scottrade tickers)
Anonymous   |     |   Comment #20
Doesn't the 3 month penalty apply to the FIRST 3 months of the bond?  Whenever I purchase I bonds they don't pay any interest until the 4th month, indicating that the 3 month penalty is front-loaded.  I assume then that after the 5 year period that initial 3 months interest would then be added to the value of the bond.  Can anyone clarify this?
Robert   |     |   Comment #21
@ Anonymous #20: The way I read Ken's summary is that it's the LAST 3 months' interest that is the penalty.
Anonymous   |     |   Comment #22
don't know if anyone else had this problem, but i was unable to login to my i-bond account on 8/21/12 and today 9/4/12.  got error message 'Internet Explorer cannot display the webpage'. per phone call to treasury direct (TD), they have had reports of this error.  to officially report the error, you have to contact TD using their website email or by uspo mail. unfortunately, i get the same error message when trying to send an email thru TD. so, guess i'll have to wait for them to fix the problem. a little frustrating to find that uspo is the only contact option when there's a problem with contacting TD by email. if anyone else resolve this problem, please let me know how. thanks.