New Inflation Rate
March 2010 CPI-U was 217.631. September 2010 CPI-U was 218.439, for a semi-annual increase of 0.37%. (This was 1.1 increase over the last 12 months.) Using this official formula, the variable interest rate for the next 6 months will be approximately 0.74%, depending on the fixed rate. Here’s the math:
218.439/217.631 = 1.00371, or a semi-annual increase of 0.37%. Using a fixed rate of the existing 0.2% announced in May 2010:
Variable rate = 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
Variable rate = 2 x 0.00371 + (0.00371 X 0.002)
Variable rate = 0.00743, or 0.74%
Buying Now? If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.20%. You will be guaranteed a total interest rate of 0.20 + 1.54 = 1.74% for the next 6 months due to previous deflation, and 0.20 + 0.74 = 0.94% for the six months after that. The inflation component will continue to change every six months. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a 3-month interest penalty.
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. Let’s say we buy on October 31st. You’ll be able to sell on October 1st, 2010 for an actual holding period of 11 months. You have to be careful with transaction cut-off times, though, otherwise you may trip into the next month. (3-month interest penalty still applies.)
Buying Later? If you wait until November 1st, you will get a new unknown fixed rate + ~0.74% for the first 6 months, and an unknown rate based on ongoing inflation after that. Based on the tiny fixed real rates on the related Treasury Inflation-Protected Securities (TIPS) currently, my guess is that the new fixed rate is likely to remain very low, perhaps even zero.
Despite these yields not being especially attractive right now, I am thinking about buying some more I-Bonds for my emergency fund, and will probably split them between buying late in October and in November since to me there is not a clear choice to go with one over the other.
Existing I-Bonds? If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month to your original fixed rate + variable rate. I have some at 1.2% fixed rate, which will give me 1.94% for the next 6 months. Interest on savings bonds is not subject to state income taxes. Also, one of the benefits of I Bonds over TIPS is that the total rate (fixed + inflation) can ever go below zero, providing some protection from potential deflation.
Beware Low Purchase Limits
The annual purchase limit is now $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. For a couple, that’s a $20,000 total cap per year. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number (additional considerations apply).
Buy online at TreasuryDirect.gov. As for paper, here is a post on how to buy paper savings bonds from your local bank. According to this Pittsburgh Post-Gazette article, the Treasury has indicated that it plans to phase out paper bonds in the near future.
For more background, please see the rest of my posts on savings bonds.
