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Disappointing Series I Savings Bond Rates


Disappointing Series I Savings Bond Rates

The Labor Department released the March CPI-U numbers earlier this month, and with these numbers, the next I Bond inflation component can be computed. The declining gas prices late last year definitely impacted the numbers resulting in negative inflation. This is bad news for savers who have I Bonds or who are considering buying I Bonds. Based on September and March CPI-U numbers, the inflation component for the May I Bond should be -1.6% (annualized). This number is added on to the I Bond fixed rate to derive the I Bond composite rate. Fortunately, they have a floor for the composite rate of 0%. The composite rate can’t be negative. We’ll have to wait for May 1st before we know the next fixed rate. The current fixed rate is zero. The fixed rate hasn’t been above 1% since 2008, so it’s very likely that the composite rate announced on May 1st will be zero.

I Bond Rates of Return for April 2015 Purchase

In summary, an I Bond purchase this April will neither be a good short-term deal nor long-term deal.

If you buy I Bonds before May, your I Bond will have a fixed rate of 0% and an inflation component of 1.48%. Thus, the composite rate is the same as the inflation rate of 1.48%. This rate will remain in effect for six months until October 1, 2015. 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 2014 was 238.031. The March 2015 CPI-U was 236.119. This is a decrease of 0.8%. The annualized version of this is -1.6%.

If you buy before May, you'll receive the current I-Bond fixed rate of 0% 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 1.48%, and the composite rate is 1.48%. Here's an estimate of the return for the next year:

  • 1.48% from April 2015 through September 2015
  • 0% from October 2015 through March 2016

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, 2015 (best not to wait to the last day), the redemption value of the I Bond on April 1, 2016 would be about 0.74% higher. For 11 months, this comes out to an annualized yield of about 0.81%.

Below is an estimated annualized return for I Bond redemption from April 1, 2016 to July 1, 2016. It is assumed you will buy the I Bond on April 30, 2015 which gives you almost an extra month of interest. This effectively reduces the 3-month penalty to 2 months.

  • 0.81% - redeem on 4/1/16, 6mo of 1.48%, 3mo of 0%, and 3mo of 0% (penalty)
  • 0.74% - redeem on 5/1/16, 6mo of 1.48%, 4mo of 0%, and 3mo of 0% (penalty)
  • 0.68% - redeem on 6/1/16, 6mo of 1.48%, 5mo of 0%, and 3mo of 0% (penalty)
  • 0.63% - redeem on 7/1/16, 6mo of 1.48%, 6mo of 0%, 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 in 2011 to see how close to the end of the month one could wait (see the middle of this post).

I Bond Purchases AFTER April 2015

We won't know the I Bond fixed rate until May. The current fixed rate is zero, and as I mentioned above, the fixed rate hasn’t been above 1% since 2008. The highest it has been since 2011 is 0.20%, which was the fixed rate that took effect on November 2013. That was after three years of zero fixed rate. The Treasury doesn’t disclose how it makes its decision regarding the fixed rate. If they want to make the savings bond look at least a little bit attractive, you would think they would at the very least offer a fixed rate higher than zero. That’s another reason to hold off on an I Bond purchase. I think there’s a reasonable chance of seeing a higher fixed rate in May, although it may not be much above zero.

With a high negative inflation component of -1.6% in May, the composite I Bond rate will most likely be zero since the composite rate has a floor of zero. The only way that it won’t be zero is if the Treasury announces a fixed rate of more than 1.6%. The last time the Treasury announced a fixed rate that high was in 2003.

For a I Bond purchase in May, it’s very likely the rate will be zero for the first six months. We’ll have to wait until mid October to know the inflation component for the next six months. If the fixed rate rises considerably in May, it may be worthwhile to purchase an I Bond. The long-term benefit of the higher fixed rate will offset the six months of the zero rate.

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).

How It Compares to Today’s CDs

Even with the tax advantages of the I Bond, a 12-month CD is currently a better short-term deal than an I Bond. You can easily get 12-month CDs with rates much higher than what an I Bond will offer over the next 12 months. The best nationally available 12-month CD rate is 1.31% APY at Chartway Federal Credit Union. The best 12-month CD rate at a bank is 1.23% APY at Synchrony Bank. The CD rates are accurate as of 4/27/2015.

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

Anonymous   |     |   Comment #1
"Fortunately, they have a floor for the composite rate of 0%. The composite rate can’t be negative."
Not yet at least. Unless we start taking lessons from Europe. There is no such thing as "can't" when it comes to finances and governments.
Anonymous   |     |   Comment #6
You may be right on that call, but what is unusual is that nobody buys into those I bonds at 0% and the old bonds may be grandfathered if negative rates are introduced and that for sure will create panic among all bond buyers and that will chain react to even lower interest rates across all spectrum of savings.
primary   |     |   Comment #2
The only good thing to come out of a negative composite rate is that it gives you the opportunity to exit I Bonds.

Wait 3-months into the 0% rate for your bond (depends on when you initially purchased), then sell with no penalty. You can then move the money elsewhere - to a CD, online savings, etc. This may be especially appealing for those with 0% fixed rate I Bonds.
Anonymous   |     |   Comment #4
Explain this further and the purchase months......Please!
primary   |     |   Comment #8
Purchased / New Rate Begins / Sell No Penalty

January or July / July 1 / October-December

February or August / August 1 / November-January

March or September / September 1 / December-February

April or October / October 1 / January-March

May or November / May 1 / August-October

June or December / June 1 / September-November

See http://treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#change

You can always login to your Treasury Direct account to confirm 3 months have passed with $0 interest.
Anonymous   |     |   Comment #20
I think you're Sell No Penalty column is off by one month. For example, I got some i-bonds that were issued back in 5/1/2011. My understanding is my interest rate from 5/1/2015 - 10/31/2015 will be 0%. But I think I can sell on 7/1/2015 (instead of in August) and my penalty for selling early before 5 years will be the 3 months of 0%. Can anyone else double check this? Thanks.
Anonymous   |     |   Comment #3
Ken- I already have I-Bonds(for about 3 years)....If I hold them until September do I get 1.48%?......or do they go to 0.00% on May 1st? thx
Anonymous   |     |   Comment #5
Reread Ken's posting...your rate changes every six months from the issue date on your bonds.  Those with a Nov and May issue date will change on May 1st.   Other bonds will change to this new rate, again, six months from their issue date AND then this new rate will be effective for the six months FROM then.

I like comment #2.   The Treasury should be "really" thinking about "a lot" of redemptions if the overall rate goes to 0. 
Anonymous   |     |   Comment #7
I hope the Treas web page is in good shape....It may overload with all the people getting out of these.
scottj   |     |   Comment #9
This stuff is still confusing me? I got into these bonds a few years ago and have 2 at 0% fixed rate and one with .2% fixed rate. Does this mean starting in Oct that two will pay nothing  and the other .20%? Another question, I have yet to buy this year, If I buy $10k limit in November 2015 could I buy another $10k in January 2016?
Anonymous   |     |   Comment #10
I'm geting out.
DCGuy (anonymous)   |     |   Comment #11
Savings Bonds have never been a good investment when compared to other options. It did provide decent returns just before the dot com bust, but still lagged behind the current avaiable alternative options at that time.  With rates pushed to near zero for the recent years, people are focusing on them as opposed to regular Treasury securities (which also offer very low rates and are somewhat illiquid).  Then they changed the program to allow only $10K annual maximum per SSN because most of the buyers are purchasing small amounts anyway.  They cancelled the Payroll Savings Plan for Government employees several years ago.  I bought my last batch of Savings Bonds back in the early 2000s.  At least, I will get a decent minimum rate for the 30 year term.

I-bonds have a fixed guaranteed component rate and an inflation component rate.  If inflation is zero or below, then you get no inflation rate for the 6 month period.  The fixed guaranteed rate stays with the bond to maturity.  The $10K bond purchase maximum is based on the calendar year period.

$10,000 each calendar year for each Social Security NumberYou may buy up to $10,000 in electronic I Bonds, and up to $5,000 in paper I Bonds bought with your IRS tax refund.
Anonymous   |     |   Comment #12
You remind me "of the good old days" for US Bonds...started buying bonds for child college edu fund, filed a tax return when he was 2 or so and electing to go to an accrual tax accounting and, thus, recognizing for tax purposes the incremental increase (ie. interest) each year for taxes (never was over the filing amount in subsequent years).  Cashed them in as he went to college...cheaper then...with no income tax for 16+ years. 

"Gee our old LaSalle ran great" then!  But no more for it nor for the inventiveness of the tax code.
Anonymous   |     |   Comment #13
I just learned a way to get a 3% 12-month "CD" from the feds: do your income taxes wrong in their favor and submit a correction a year later. They added on ~$8 in interest to my ~$270 refund.
Anonymous   |     |   Comment #15
Doesn't always work that way.  My neighbor grossly overpaid his income tax last year.  He and his accountant both sent in quarterly tax payments virtually doubling the taxes due.  His accountant, not knowing this, filed his tax return as if no refund was due.  Well, within six weeks of filing this years tax return the IRS notified him by letter to expect a huge refund check in the mail within two weeks and he did.   
Anonymous   |     |   Comment #18
That's not a counter example since it's still just a tax refund from contributing too much--nobody gets interest for that, but apparently the IRS does pay for a correction in the amount of tax owed.
Anonymous   |     |   Comment #14
I never understood why anyone would buy an I bond with zero base rate.
Anonymous   |     |   Comment #16
Me neither.  With zero fixed rates, IBonds have become a "manipulated" free interest rate loan to the government.
Anonymous   |     |   Comment #17
Yields on sovereign bonds in Europe have edged so close towards negative territory this year that U.S. investment bank Goldman Sachs has called it the "new normal" in the region. Over 2 trillion euros ($2.1 trillion) of outstanding euro zone sovereign debt now has a negative yield, according to calculations by the bank. This means that investors with these assets are effectively paying for the privilege to hold what many see as a "safe haven" instrument, hoping that someone else will be willing to pay more for the asset in the future, rather than it expiring and them losing money.
Anonymous   |     |   Comment #19
This article was written by someone who does not understand the correlation of inflation and I bonds.  The zero percent is great news when the actual inflation is -1.6%. Holders of I bonds were guaranteed the rate of inflation plus a fixed amount.  Now we will be getting a bonus 1.6% above the inflation rate in November since the CPI-U has been reset to a lower amount.
The author does not understand this and write a very gloomy article that could not be further from the truth.  The author should be writing about the 1.6% bonus for every I bond holder.
The author should take some financial literacy classes.
Anonymous   |     |   Comment #29
You must be joking. Do you live and breath and buy stuff in the real world?  Even with the fall in gasoline prices, there has been no actual inflation of minus 1.6%.  The inflation rate, even in the midst of this depression, is closer to about 6%.  The only zero or negative inflation is in the fantasies promulgated by certain organs of the US government, and the Federal Reserve primary dealer banks who benefit from getting endlessly renewable "loan window" loans at nearly no interest. In short, I suspect it is you who need to take financial literacy classes, not the author of this article.
Anonymous   |     |   Comment #22
Wait until they start taking money out of your bank accounts like they did in Cyprus. Think you're safe? Think it wont happen here?  Ask the GM bondholders. Ask the Countrywide stockholders.......Ask elderly people about the Great Depression. It can and will happen here.
Anonymous   |     |   Comment #23
Well and don't forget the zombie apocalypse, Martian invasion, and your tin foil hat.
Cat Chance
Cat Chance   |     |   Comment #25
From Oct 2009-Mar 2010, the I-Bonds that I purchased in 2001 with a 3% fixed floor floor rate earned 0%. Is the author predicting that we will again be experiencing this 0% rate even for those bonds that have a non-existent guaranteed fixed rate? By non-existent I mean exactly that... if my bonds that I purchased way back when have a floor rate of 3% how did they earn 0%? It happened....
Anonymous   |     |   Comment #26
A 3% fixed would earn 1.4% for the next six months.  Not zero.
Cat Chance
Cat Chance   |     |   Comment #27
Very good, thanks for that. Actually 1.38% ;-) Cut by two-thirds from 4.5%....
Anonymous   |     |   Comment #28
I own about $120,000 worth of I-bonds, but haven't bought any new ones in years. The government basically lies about inflation now on a regular basis. Everyone who lives and breathes and buys stuff in America knows inflation is running at about 6%+ but the fantasy of government accounting lives on to the benefit of those who receive free money from the Fed (ie: Goldman Sachs, JP Morgan, etc.). I am lucky that the older versions also came with a fixed rate, regardless of the bogus amount of claimed inflation. I wouldn't buy them now, because they have a 30 year term and they DO NOT come even close to keeping up with inflation.

In fact, I will confidently say that I will redeem them some time this year. Probably, I'll buy some foreign farmland, or gold and silver with the money. Precious metals have depreciated a lot. They seem like a better investment than my I-bonds. It seems inevitable that the fantasy of US government accounting will eventually blow up. Sooner or later, it seems to me, the price of things like gold and silver will reflect true inflation rates, regardless of the intense effort of the US and UK governments to suppress this "canary in the coal mine".