Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. With a holding period from 12 months to 30 years, 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 2021 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 2021 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a May 2021 purchase.
New inflation rate prediction. September 2020 CPI-U was 260.280. March 2021 CPI-U was 264.877, for a semi-annual increase of 1.77%. Using the , the variable component of interest rate for the next 6 month cycle will be 3.54%. 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 up to 3.60%.
Tips on purchase and redemption. You can’t redeem until after 12 months of ownership, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A simple “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 – same 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 2021. If you buy before the end of April, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 1.68 = 1.68% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 3.54 = 3.54%.
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, 2021 and sell on April 1, 2022, you’ll earn a ~1.88% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on April 30th, 2021 and sell on July 1, 2022, you’ll earn a ~2.24% annualized return for an 15-month holding period. Comparing with the , you can see that this is higher than a current top savings account rate or 12-month CD.
Buying in May 2021. If you buy in May 2021, you will get 3.54% plus a newly-set fixed rate for the first 6 months. The new fixed rate is officially unknown, but is loosely linked to the real yield of short-term TIPS, and is thus very, very, very likely to be 0%. Every six months after your purchase, 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? The question is, would you rather get 1.68% for six months and then 3.54% for six months guaranteed, or get 3.54% for six months plus an unknown value? If you think the next inflation adjust will be greater than 1.68%, then you may choose to buy in May. Either way, it seems worthwhile to use up the purchase limit for 2021 as the total rates will at least be higher than other cash equivalents. You are also getting a much better “deal” than with TIPS, the fixed rate is currently negative with short-term TIPS.
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. You can only buy online at , after making sure you’re okay with their and user-friendliness. You can also buy an additional $5,000 in paper I bonds using your tax refund with . If you have children, you may be able to buy additional savings bonds by using a .
Bottom line. Savings I bonds are a unique, low-risk investment that are linked to inflation and only available to individual investors. Right now, they promise to pay out a higher fixed rate above inflation than TIPS. You can only purchase them online at TreasuryDirect.gov, with the exception of paper bonds via tax refund. For more background, see the rest of my .
[Image: 1946 Savings Bond poster from US Treasury – ]
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