The Labor Department released the March CPI-U numbers today, and with these numbers, the next I Bond inflation component can be computed. Inflation as measured by the CPI fell 0.1% in March due to lower gas prices. However, the Core CPI that excludes energy and food went up 0.2% which matched what economists had expected. The 12-month Core CPI rose 2.1%, which is its largest 12-month increase in more than a year. This inflation news should keep the Fed on track for at least two more rate hikes in 2018.
Based on September and March CPI-U numbers, the inflation component for the May I Bond should be 2.22% (annualized). This number is added on to the I Bond fixed rate to derive the I Bond composite rate. The current I Bond inflation component is 2.48%.
I Bond Rates of Return for April 2018 Purchase
If you buy I Bonds before May, your I Bond will have a fixed rate of 0.10% and an inflation component of 2.48%. Thus, the composite rate is 2.58%. This rate will remain in effect for six months until October 1, 2018. 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 CPI News Release Archive. The CPI-U for September 2017 was 246.819. The March 2018 CPI-U was 249.554. This is an increase of 1.11%. The annualized version of this is 2.22%.
If you buy before May, you'll receive the current I-Bond fixed rate of 0.10% 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 2.48%, and the composite rate is 2.58%. Here's an estimate of the return for the next year:
- 2.58% from April 2018 through September 2018
- 2.32% from October 2018 through March 2019
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, 2018 (best not to wait to the last day), the redemption value of the I Bond on April 1, 2019 would be about 1.87% higher. For 11 months, this comes out to an annualized yield of about 2.04%.
Below is an estimated annualized return for I Bond redemption from April 1, 2019 to July 1, 2019. It is assumed you will buy the I Bond on April 30, 2018 which gives you almost an extra month of interest. This effectively reduces the 3-month penalty to 2 months.
- 2.04% - redeem on 4/1/19, 6mo of 2.58%, 3mo of 2.32%, and 3mo of 0% (penalty)
- 2.06% - redeem on 5/1/19, 6mo of 2.58%, 4mo of 2.32%, and 3mo of 0% (penalty)
- 2.08% - redeem on 6/1/19, 6mo of 2.58%, 5mo of 2.32%, and 3mo of 0% (penalty)
- 2.10% - redeem on 7/1/19, 6mo of 2.58%, 6mo of 2.32%, 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 2018
We won't know the I Bond fixed rate until May. With the rising interest rates, it’s possible that we’ll see a slight increase in the I Bond fixed rate. Based on the fixed rate history, I doubt we’ll see any significant increase. If you think it’s likely that you’ll keep the I Bond for the long-term, a higher fixed rate will be more important to you. Thus, you may want to wait until May. You can review this history of I Bond rates at this TreasuryDirect page. Remember that this fixed rate lasts for the life of your I Bond.
If the fixed rate stays at 0.10%, the May I Bond composite rate will be 2.32%. That will be your I Bond rate for the first six months if you purchase in May. We’ll have to wait until mid October to know the inflation component for the next six months.
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
These I Bond yields for terms of 11 to 14 months are very similar to the I Bond yields from a year ago. The difference between now and then is that CD rates have risen substantially. A year ago, a top rate for a 1-year CD was 1.50% APY. Now, a top rate for a 1-year CD is around 2.25% APY. Thus, buying an I Bond now just for a short-term CD alternative isn’t a great deal. I Bonds do 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.