The Labor Department released the September Consumer Price Index (CPI) numbers on Wednesday, and with these numbers, the next Series I Savings Bond inflation component can be computed. Higher inflation results in higher I Bond rates. As you might expect, inflation as reported by the government hasn’t been high. However, it’s high enough to still make the I Bond a good deal as compared to CDs. Of course the I Bond has a low annual purchase limit, so they can’t replace CDs for most savers.
This Reuters article provided a useful summary of the latest Labor Department release of the CPI data:
Inflation has waned in recent months after quickening in the second quarter, with a stronger dollar and slower economic growth in China and the euro zone dampening import prices. Sluggish wage growth has also helped keep a lid on prices.
I’ve done the calculations based on these latest CPI numbers, and the I Bond inflation component taking effect in November should be 1.47%. This is down from the current rate of 1.84%. The I Bond inflation component is added on to the I Bond fixed rate to derive the I Bond composite rate. The fixed rate is currently 0.1 percent, and it probably won’t change much if at all in November. We won’t know the November fixed-rate until Monday November 3rd.
If you buy I Bonds before the end of October, you can know the rate you'll receive for the next 12 months. The interest rate for the first 6 months will be based on the current inflation component (1.84%). The next 6 months will be based on this new rate (1.47%). After that, it'll depend on future inflation numbers. The current fixed rate component of 0.1 percent will stay the same for the life of the bond. Below are the details of calculating the expected return below.
I Bond Rates of Return for October 2014 Purchase
the inflation rate announced in November is the change between the CPI-U figures from the preceding March and September.
All previous CPI-U numbers are available from this government webpage. The CPI-U for March 2014 was 236.293. Last September 2014 CPI-U was 238.031. This is an increase of 0.7356%. The annualized version of this is about 1.4712%.
If you buy before November, you'll receive the current I-Bond fixed rate of 0.1% 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 1.84%, and the composite rate is 1.94%. Here's an estimate of the return for the next year:
- 1.94% from October 2014 through March 2015
- 1.57% from April 2015 through September 2015
I Bonds increase in value on the first day of the month. So on November 1st, you'll earn the interest for the full month of October. 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 October 31, 2014, the value of the I Bond on October 1, 2015 would be about 1.36% higher. For 11 months, this comes out to an annualized yield of about 1.49%.
Below is an estimated annualized return for I Bond redemptions from October 1, 2015 to January 1, 2016. It is assumed you will buy the I Bond on October 31, 2014 which gives you almost an extra month of interest. This effectively reduces the 3-month penalty to 2 months.
- 1.49% (11mo) redeem on 10/1/15, 6mo of 1.94%, 3mo of 1.57%, and 3mo of 0% (penalty)
- 1.49% (12mo) redeem on 11/1/15, 6mo of 1.94%, 4mo of 1.57%, and 3mo of 0% (penalty)
- 1.50% (13mo) redeem on 12/1/15, 6mo of 1.94%, 5mo of 1.57%, and 3mo of 0% (penalty)
- 1.50% (14mo) redeem on 01/1/16, 6mo of 1.94%, 6mo of 1.57%, and 3mo of 0% (penalty)
The highest guaranteed rate would be an annualized return of 1.50% for about 13 or 14 months. Note, it's best not to wait until the last day of the month to buy I Bonds at Treasury Direct. In 2011 I described my experiment in seeing how late in the month I could buy an I Bond. I found you should make sure the purchase is no later than the second to last business day of the month.
Compared to CD Rates
As you can see, the above rates are much higher than any short-term CD rate that you can get today. The best nationally available CD with a term of around one year is 1.30% APY for a 13-month term at USAlliance Credit Union. The table below provides a comparison between an I Bond held for 13 months and the best CDs with terms around one year:
|Interest Rate||Account Type||Institution|
|1.50% APY||~13 months (10/31/14 to 12/1/15)||I Savings Bond|
|1.30% APY||13-month CD||USAlliance Credit Union|
|1.25% APY||12-month CD||Citizens State Bank (FL)|
|1.21% APY||1-year Money Market Certificate||Pentagon Federal Credit Union|
These rates are accurate as of 10/25/2014.
To look for the best nationwide CD rates and the best CD rates in your state, please refer to our CD rates table.
Unfortunately, an exact comparison between I Bonds and long-term CDs is not possible. The reason is that the I Bond inflation rate changes every six months. For this short period of time from now to before November, we know the I Bond inflation rate for 12 months. We can only guess about the I Bond inflation rate after that. The best we can do is to make an estimate of the future inflation rates.
As an estimate, I've calculated the average I Bond inflation rate since the I Bond program began in September 1998. That average is 2.57%. Note, this takes into account the period in 2009 when the I Bond inflation rate was negative. Since the composite rate can never be negative, I used zero for this period in calculating the average.
If the future I Bond inflation rates match the past average, I Bonds should do well as compared to today's long-term CDs.
If you have older I Bonds, you probably have I Bond fixed rates much higher than zero percent, and if you're fortunate enough to have purchased I Bonds before 2001, you probably have fixed rates over 3.00%. So those I Bonds are especially good deals in today's environment.
Remember the $10K Annual Purchase Limit
Don’t forget 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).
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.