Update May 2020. The fixed rate will be 0.00% for I bonds issued from May 1, 2020 through October 31st, 2020. The variable inflation-indexed rate for this 6-month period will be 1.06% (as was predicted). The total rate on any specific bond is the sum of the fixed and variable rates, changing every 6 months. If you buy a new bond in between May 2020 and October 2020, you’ll get 1.06% for the first 6 months. See you again in mid-October for the next early prediction for November 2020.)
Original post 4/13/20:
Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.
New inflation numbers were just announced at , which allows us to make an early prediction of the May 2020 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a April 2020 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a May 2020 purchase.
New inflation rate prediction. September 2019 CPI-U was 256.759. March 2020 CPI-U was 258.115, for a semi-annual increase of 0.53%. Using the , the variable component of interest rate for the next 6 month cycle will be 1.06%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.
Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.
Buying in April 2020. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.20%. You will be guaranteed a total interest rate of 0.20 + 2.02 = 2.22% for the next 6 months. For the 6 months after that, the total rate will be 0.20 + 1.06 = 1.26%.
Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on April 30th, 2020 and sell on April 1, 2021, you’ll earn a ~1.55% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. Comparing with the , you can see that this is lower than a current saving rate or 12-month CD.
Buying in May 2020. If you buy in May 2020, you will get 1.06% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS. In the past 6 months, the has dropped to a negative value! My best guess is that it will be 0.00%. Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.
If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (total bond rate has a minimum floor of 0%).
Buy now or wait? In the short-term, these I bond rates will definitely not beat a top 12-month CD rate if bought in April, and most likely won’t if bought in May either unless inflation skyrockets. Thus, if you just want to beat the current bank rates, I Bonds are not a good short-term buy right now.
If you intend to be a long-term holder, then another factor to consider is that the April fixed rate is 0.2% and that it will likely drop at least a little in May in my opinion. You may want to lock in that higher fixed rate now, which is higher than the real yield on TIPS right now.
Honestly, I am not too excited to buy either in April or May, but if I liked the long-term advantages of savings bonds (see below), I would consider buying now in April rather than May due to my guess of a higher fixed rate. You could also wait, as things might change again during the next update in mid-October.
Unique features. I have a separate post on , including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.
Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my .
Annual purchase limits. The annual purchase limit is in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at , after making sure you’re okay with their and user-friendliness. You can also buy an additional $5,000 in paper bonds using your tax refund with . If you have children, you may be able to buy additional savings bonds by using a .
For more background, see the rest of my .
[Image: 1946 Savings Bond poster from US Treasury – ]
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