Inflation update of November 2015

Sure seems like we’ve had more inflation than this in the last year. Do you think the CPI-U is missing a lot of the real inflation that is occurring in the nation?

Hi Ken - There are a LOT of people who claim the CPI-U numbers aren’t accurate. On the other hand, a LOT of those people think the CPI-U measures something it isn’t designed to measure. There are lots of details to consider.

For one, the I bond rate is always based on the March-September difference in the CPI-U. In the chart on this page you can see lots of inflation between November 06 and June 07 - that move is going at an annual rate of 5.8%! But November was a low, June was a high, and they’re both just local stations on a line where the express train stops elsewhere.

Secondly, the CPI-U measures inflation in things that we use up - all that stuff they sell at WalMart. By design, it doesn’t measure changes in asset prices - gold, stocks and so on. Inflationary bubbles occur, and pop, in the assets area. In particular, the CPI-U measures rents, not housing prices. The housing bubble’s impact on the CPI-U is only through rents, which tend to rise or fall with personal income, not housing prices.

Finally, it’s hard to manipulate something as transparent as the CPI-U - the raw data isn’t hidden from anyone.

Tom Adams

Thanks for the info. I think people often focus more on things that have gone up in price rather than things haven’t gone up or have fallen in price (like lots of stuff from Walmart).

Tom, If the CPI-U does not account for the inflation in home prices, does it also not account for the increase in property tax amounts? I calculated a couple years ago for my first home (1984-2000) that my taxes increased on average at an 11.5 % annual compound rate, while during that same time frame the interest rates on my savings account plummeted. My property taxes since 2000 have nearly doubled again and if I plot this on a graph relative to my wages and extrapolate into the future (I know it’s dangerous to extrapolate, but I thought that 7 years ago too!) it appears my property taxes will exceed my wages before my expected lifespan is over! -Mike McCune

Hi Mike - interesting question. I checked what the Bureau of Labor Statistics, which complies the CPI, says about taxes.

They do include sales taxes and other taxes you pay when you buy an item (fuel taxes, cigarette taxes, and so on). They do not include income taxes.

They don’t specifically say anything about property taxes, but renters don’t pay property taxes. On the other hand, of course, landlords do pay property taxes, so the CPI would include property taxes to the extent that landlords change the rents they charge when their taxes change.

Tom Adams

Thanks Tom. The “disconnect” that everyone feels - that inflation is much higher than what the numbers say, I believe has to do with what I term “complexity inflation”. Nominal prices of goods and services are only part of “inflation”. The number of different goods and services one must consume to keep up with society is the other part of “inflation”. Price indexes only measure a change in price, they do not measure a cost-of-living. I like to compare my lifestyle with my grandfather’s. He got by with only an 8th grade education, kept a nice Buick in the garage, and had enough for a vacation home in the Ozarks to retire to. A simple price index only measures the difference in prices of: the 8th grade education, the Buick, and the vacation home. The price index will tell you that since computing power is getting cheaper, inflation is going down; it won’t tell you that grandpa never had to buy a computer, or update it every five years, and pay for an internet connection, or that an 8th grade education by itself won’t get you anything like what it once would, or, that the Buick is a better value (adjusted for inflation) than it used to be. “Complexity inflation” is all the different goods and services required just to play the game of life, and it’s a lot more than it used to be! In economic terms its a barrier to entry, and I don’t believe it’s captured by price indexes. -Mike McCune

Hi Mike - I agree with you. To be fair, I have to point out that there are people on the other side of this argument who say - look, if the price of strawberries goes up you can substitute grapes and your cost of living doesn’t change. But taking that to its logical conclusion has us living in cardboard houses and eating gravel.

So maybe the CPI is too hot, too cold, or just right. In any case, the real question here is - is the CPI something you want to tie your investments to?

If you are a conservative investor more interested in making sure you get your investment back than in making sure you earn as much as possible on your money, then in theory I bonds are for you because they protect you from inflation while other conservative investments don’t.

But I bonds are tied to the CPI, and if you believe the CPI isn’t accurate, then I bonds don’t work for you either. But at that point you’re left without any good investment choices that I know of.

Tom Adams

Tom,

It seems like there is a lot of negative talk going around about the I Bonds. As you know, I am holding mine for mortgage, vacation and education. Do I need to be looking somewhere else or should I ride the storm out? I was convinced that I Bonds where the correct choice, but now, not so sure anymore.

Hi Patrick - although it’s not obvious, there’s a hurricane hitting the world’s financial markets right now. In the last month there have been bank runs, multi-billion-dollar investment write downs, a falling dollar, inflationary commodity prices - including both grains and oil - and a Fed attempt to save the situation with an interest rate cut. And today we have the biggest US bank failure since days of the Savings and Loan scandal.

Note that depositors are insured up to $100,000, but this bank had $109 million in deposits over the $100,000 limit. “Those customers will become creditors in NetBank’s receivership, the FDIC said.”

Now is the best time ever to be in a safe investment like I bonds.

Tom Adams

Tom,

Just checking to see if that hurricane is still in effect or has it been downgraded to a tropical storm? I have done some reading on it and seems like there will be some type of storm for a long time. What has to happen for this to stop and if it does, is that a good thing for us I Bond investors?

Hi Patrick - The storm just keeps getting worse. It ties back to the housing bubble, which happened because our financial wizards encouraged individual borrowers to take out loans the borrowers had no real chance of repaying. But the wizards got big fees for making the loans, so what did they care?

Now housing prices are falling, adjustable-rate loans are adjusting so that monthly payments are much higher, and these borrowers aren’t able to repay their loans. The lenders are stuck with huge losses. If housing prices turn around so that the borrowers can sell (or borrow more) and repay the loans, the lenders will be saved. But there are a multitude of reasons why that is unlikely to happen.

As loan defaults continue to mount, all the big investment companies will take continuing large losses like the one Merrill Lynch booked last week. The Merrill Lynch CEO lost his job over that one, although they loved him when he was raking in those big fees the last few years.

The big investment companies like Merrill and Citibank will soon be bankrupt unless their buddies at the top levels of government can save them. One way it’s done is by accounting regulations that allow the banks to value the loans at far more than the market says they’re worth.

Where it will go from here is anyone’s guess, but the only reasonable investment strategy right now is a flight to safety, which still means US government securities like I bonds. Your goal is just to lose less than others over the next couple of years.

The kind of inflation that the CPI measures is heating up (oil hit a new record yesterday), although you may still hear pundits talking about deflation. But they’re talking about asset deflation - the value of real estate is tanking and, some suspect, stocks are soon to follow. But the CPI doesn’t measure that kind of deflation, so it’s of no consequence to I bonds.

Tom Adams

Hi Tom,

That 4.28% sure looks nice for the I Bond. I am thinking this is in direct reflection upon this hurricane we are going through. EE took a little bit of a hit, does this come from the storm also? As you commented before, this storm will last a while, so do you forsee the I Bond interest rate climbing over the next 12 months?

Hi Patrick - I’m a journalist, not an economist, but from my view in the cheap seats it appears inflation is going to be a real problem in the upcoming months, which means the inflation component of I bond rates will go up. Whether the fixed portion goes up in anyone’s guess.

People who buy fire insurance don’t expect a fire or want a fire - but they want to be covered in case there’s a fire.

You should think of I bonds the same way. They are inflation insurance. But you shouldn’t want inflation, because high rates of inflation can be very painful. However, if inflation occurs, I bonds protect you to the extent that the inflation is reflected in the CPI.

Tom Adams

Which is better at this time?
I Bonds now with the 0% interest component or a 19 mo. CD at 4.75%?

Thanks

Danny - If your only concern is getting the highest rate, then there’s no way to answer your question, as the rate of the I bond over the 19 month term of the CD is unknown.

But it also kinda sorta depends on whether the bank offering the CD goes under during the term of the CD, doesn’t it? You’re aware there’s a banking crisis going on, right?

To check on the bank’s rating, go to the Banks and Thrifts Screener on TheStreet.com and look up the bank offering the CD. If it’s rated lower than B-, I’d look for a different bank or stick with I bonds.

Tom Adams

According to the U.S. Treasury as per the Series I & Series EE bonds, “Interest earnings are exempt from State and local income taxes,…” but perhaps one may overlook a stipulation to this: “…but are subject to State and local estate, inheritance, gift, and other excise taxes.

This might not pose a problem early on but I’m not sure what the ramifications could be if one’s estate eventually lands up in Probate. I can certainly promise you that if there is a way for the City or State’s attorneys to figure out a scheme to get their hands on the interest money, they will certainly do so!

Richard - if you have assets of any kind in your own name your estate will end up in Probate. There’s nothing about this that’s specific to Savings Bonds. (Moreover, Savings Bonds with a co-owner or beneficiary avoid Probate, but don’t avoid estate taxes.)

States vary a great deal on the level at which estate taxes kick in, so the impact depends entirely on where you live.

And if you’re rich enough to owe Federal estate taxes (also due on Savings Bonds), then you’re rich enough to get professional advice on how to minimize the hit.

There’s a list of posts on these issues here, although the one that gets to the heart of the matter is the one on Savings Bonds and Living Trusts.

Tom Adams

Tom, I initially thought that the government bailouts would lead to inflation. But lately I have been reading that the current US economy is very similar to the Japanese economy about 15 years ago when their housing bubble burst. Despite radical efforts by the Japanese government, they ended up with at least a decade of steady deflation, although the first signs of it were delayed a few years after the bubble burst. I have also read that the US banks may hoard their bailout funds, which would create deflation by keeping the dollars out of circulation.

I know you do not have a crystal ball, but any insight you might have on this issue would be greatly appreciated.

Hi Hans - I think you’ve captured the problems with trying to predict what will happen pretty well. At this point, I can only make it more confusing.

Since the bailout was announced, the value of the dollar - which had been going up - has tumbled. This raises import prices and contributes to inflation. Likewise, oil prices have jumped since the bailout was announced.

I’m not saying that inflation is a given; I’m saying the future in terms of the kind of inflation that impacts I bonds and TIPS seems totally unpredictable to me at this point.

Tom Adams

Interesting conversation. I have not purchased bonds before, but will be purchasing some I bonds in October. Considering holding on to them for a few years, is this a good move considering today’s turmoil on Wall Street?

Hi Ralph - actually, the best move is probably just the opposite, but it’s a probability, not a certainty.

You should put your extra cash into I bonds when stock prices are high and into stocks when stock prices are low. That would be now, although they may not have bottomed yet.

Tom Adams

is now the right time to cash in i bonds, that are
relatively new, 2001, 2002-1999

thank you for a response

Peggy - absolutely not. I bonds of that vintage pay very high interest rates - you won’t find any alternative investments as safe and rewarding.

If you need some money, cashing in other investments would be better than cashing in these.

Tom Adams

I have 7 $10,000 I Bonds that were purchased in December 2005. Should I roll them over for better rate and if so, when? Thanks.

Jerry - the current fixed rate is 0%, so the ones you have are already a lot better than that. On November 1 there will be a new rate; come back and ask again after that.

Tom Adams

Thanks Tom for your assistance. I should have asked this question earlier….What happens when and if I attempt to rollover these $10,000 I Bonds…does this mean I can’t because they are more than the single social security number per year of $5,000 is allowed? Thank you in advance for your answer.

Jerry - Since “rolling over” means cashing in old bonds and buying new ones, the annual purchase limit is a big problem. On the other hand, there’s no reason to roll them over now.

Tom Adams

Tom: With the next adjustment looking flat, a person could sell some bonds after Aug 1 (3 months hence) and not lose any gain from this period. Is this correct? TIA, wtp

William - your basic idea is correct, but the best date would be August 1 only for bonds issued in May or November. The right date for bonds issued in other months would be later than that.

This is because interest rates for a bond change on its 6-month anniversary, not when the Treasury announces new rates in May and November.

Tom Adams

Since I’m not very knowledgeable about these things, I was wondering what effect a recession has on inflation. Thank you.

Mary - typically in a recession there’s pressure holding prices down, so there’s little inflation. However, in the 1970s we experienced a period of stagflation, which meant both a recession and inflation. Before that, economists said it couldn’t happen, but it did, and it could happen again.

Tom Adams

Over the last few years I buy an I-bond from time to time and have about $48,825 in bonds with one past the five year mark and this has grown to $54,606 as of the end of last month. What I am hearing here however is if inflation rates stay negative and ends up below where it was in the prior six months, that $54,606 will not begin to drop will it, not sure I like the idea of my funds bleeding away.

Harvey - The redemption value of a Savings Bond cannot go down, so you don’t need to worry about the value of your I bond bleeding away. The interest rate can go to zero, but since prices would be going down, in terms of goods it would be getting more valuable.

Tom Adams

Exactly when does an I bond start earning interest? The calculators that I have seen only require the month of purchase. If interest is calculated from the month of purchase then should we only buy I bonds at the end of the month?

Hi. Question. Assuming no big inflation increase over the next few months, and assuming that there is in fact a “negative” inflation factor come the next adjustment: Does the Fed really need to increase the fixed factor? Given the rule that there can never be a net negative interest rate, couldn’t the Fed just fix a low fixed rate and then let the rule adjust the yield interest back “up” to zero? I know it sounds crazy, but as the current market has demonstrated, there are plenty of people willing to buy US-backed instruments at a zero rate—especially if that rate could adjust up once the new administration really starts pumping money into the economy. Thanks again Tom for running such a fine page. Ethan.

Assuming on 4/1/09 the fixed rate is 0.70% and the inflation rate is -4.0%. The I bond would pay 0 (instead of -3.30%) Does the rate for 11/1/09 begin at -3.30% or does it start at 0?

Jeff - yes, you can purchase a Savings Bond at the end of the month and earn interest for that entire month.

Ethan - I think you are correct; the Treasury won’t necessarily raise the fixed portion high enough to overcome a negative inflation component. After all, the inflation component is just for six months while the fixed rate is forever.

Jeff - The fixed rate on various I bonds issued in the past ranges from 0% to 3.6%. If the inflation component comes in at -4.0%, all of these bonds will pay 0% for six months. The composite rate (fixed rate + inflation component) cannot go below zero. This sounds bad, but note that in real terms, the bonds are still making money. For example, if the fixed rate is 0% and the inflation rate is -4.0%, that bond is earning a real rate of 4.0%, since prices are declining but the value of the bond isn’t. Of course, in this case, with a non-inflation-protected security you would still get the entire interest rate, which is even better. But my point is that it’s not as bad as it looks and it’s way better than what happens with TIPS, where the value of the investment actually declines 4.0%.

Tom Adams

Tom - Love the website. Can you clarify / confirm the following:
Lets assume the following:
- I buy an I bond on 1/25/09.
- The fixed rate is 0.7%
- The inflation rate 5/1/09 is -4%.
Is it correct that my bond will earn 5.84% for the period 1/1/09-6/30/09 and then earn 0 for the period 7/1/09-12/1/09? If this is correct then my annual return will be 2.92% for the year 2009? Effective 1/1/010 do I start off in the red or do I earn 0.7% fixed plus the inflation rate effective 11/1/09? If the inflation rate is -4% 5/1/09 do you think the Gov’t would raise the fixed rate? Would you advise waiting until 5/1/09?

Hi Jeff - You’ve pretty much got it right. The current I bond rate is 5.64%, not 5.84%, and half of that is 2.82%, not 2.92%.

A little more than 11 months later, at the beginning of January 2010, you could cash the bond. In your scenario there would no early redemption penalty, since the most recent three months of interest would be zero.

If you kept the bond, you would earn the 0.7% fixed rate plus the inflation component, which at that point would be the difference between the March 09 and September 09 CPI numbers.

I’m not sure what you mean by “start off in the red,” but I’ve seen people express concern that I bonds won’t earn an inflation component again until after the CPI gets back up to where it was in September. This isn’t correct. The inflation component is always the difference between the Mar and Sep CPI. Period. And the I bond composite rate can’t be less than zero. Period.

This is an important difference between I bonds and TIPS. In repeated cycles of inflation-deflation that started and ended at the same CPI number, I bond owners would earn an inflation component during every inflation period and not lose those gains in the deflation periods, although they would lose their fixed-rate during the deflation periods. TIPS owners would always get their fixed rate, but would end up where they started in terms of the inflation component, just like the CPI.

We have new people coming into the Treasury and a new philosophy that makes it even harder to guess what the fixed rate will be on May 1. I have no idea what they’ll do and have no advice in that area.

Tom Adams

Tom - I have young children and would like to invest in US Savings Bonds as a long term investment. Can you advise if I am better off investing in Series I or Series EE.

Rob - Series I is better than EE, but you also need to consider setting up a Roth IRA. You should also look into Qualified Tuition Plans for your children. The advantages of those compared to Savings Bonds is that you don’t have to pay tax on what you earn.

Tom Adams

Tom,

Long time reader, and I love the site. Recently I found out an uncle of mine (who has no wife or children) has been buying iBonds with his SS# on them but placing me as co-owner, so that if he passed away they would go to me rather then an estate (not that he would be subject to estate tax). ALso, I have been buying about $5k a year of them for myself for 4 or 5 years. The question I have is that now that the $5k limit is placed do I have a problem as buying over the limit?

Jim - the limit is per Social Security Number - since the bonds are being purchased with different SSNs there’s no problem with the annual limit. Glad you like the site.

Tom Adams

Tom,
Correct me if I am wrong.

There are three opportunity windows to fill up my I bond bucket for the 2009 calendar year. Currently, there is a 0.7% fixed rate and a decent inflation component. May 1st, there will most likely be a six month 0% composite return as the inflation component looks to drag the fixed rate to the floor (but not underwater). The May 1st fixed rate, which lasts for 30 years, is unknown. November 1st, both inflation and fixed componenets are up in the air.

If you are planning to purchase the single SSN limit of $10k/year( $5k paper, $5k electronic), what strategy would you use to decide when to buy? I am assuming the $10k annual purchase limit per SSN limit will remain. Thanks!

With the Government needing almost a trillion dollars, do you think they will raise the limit of I Bond ownership back to $30,000 per year, or at least higher than the ridiculous $5,000 per year? Our investments in these vehicles over the years will certainly help us through these bad times, but if we were limited to $5K per year it would not have made a difference.

Michael

Mark - you are correct that during 2009 there will be essentially three offers of I bonds - the current 0.7% fixed rate bond, the May 1 bond of unknown fixed rate, and the Nov 1 bond of unknown fixed rate. I have no idea which of the three will be the best. Why not get some of each?

It’s also true that the current inflation component is relatively high, the May 1 inflation component is likely to be close to or below zero, the Nov 1 inflation component is a complete unknown.

And the annual purchase limit for I bonds is $5,000 per SSN per type - so $5,000 paper plus $5,000 electronic makes $10,000 per SSN.

Michael - your thinking makes sense to me but Savings Bonds aren’t a high priority to anyone in Washington.

Tom Adams

We never receive an interest statement from the govt. for the interest we make each year on I bonds. Do we only report that income when we sell the bonds? Or should we try to come up with an interest amount ourselves for each year and report it? We’ve never sold any, so I don’t a reference point. Thanks.

Harvey - income tax on the interest doesn’t have to be paid until the year in which you cash the bond or the bond stops earning interest, whichever comes first.

However, you’re allowed to pay the tax annually if you want, but in that case you have to calculate the interest earnings yourself and keep your tax returns as proof the tax has been paid.

In most situations (but not all - my book has examples of both) it’s better to wait until you cash the bonds to include the interest in your income.

Tom Adams

When you say it can wipe out the fixed rate, I assume you mean on any new bonds purchased after the fixed rate goes to zero and not on bonds purchased in prior periods that are paying 1% or more fixed. Please explain more thoroughly your term “wipe out the fixed rate.”

Bill - your assumption isn’t how it works.

All I bonds - including those issued since 1998 and those issued in the future - earn a composite interest rate that’s basically that bond’s fixed rate plus an inflation component based on the six-month change in the Consumer Price Index between March and September.

If the inflation component is negative by a larger amount than the fixed component is positive, then the interest rate on that bond for that six-month period will be zero.

Just to put this in context, six-month Treasury Bills are paying 0.48% today, which isn’t all that much different from zero. It’s not a problem with I bonds, it’s a problem related to current financial crisis.

Tom Adams

Hi Tom,

I am on-the-fence deciding when (in which of the three windows of opportunity to choose) to buy my 2009 I bonds. Since there is likely to be an eventual 6 month zero composite return window on ALL of my I bonds, I am seeking clues as to the I bond fixed rates going forward, north or south of the current 0.7%. I am expecting future inflation to increase and, as such, the 6 month zero window bothers me less. I appreciate your thoughts, rumours?

I am single (only one SS number). I assume the $10k/year limit still applies ($5k paper, $5k electronic) for 2009. Is there any way of registering I bonds that I can legally use to increase my purchase limit?
Thanks…Mark

Hi Mark - If there’s a way to even fix odds on where I bond fixed rates will be on May 1 and Nov 1 I don’t know what it is. I truly have no idea.

I agree with your thoughts on the inflation component.

The annual purchase limit is per SSN, so you’d have to do something drastic, like get married, then use your spouse’s SSN to buy another $10,000. It may not be worth it (smile).

Tom Adams

I’m worried that the Treasury won’t mind if the May composite I Bond rate is zero percent. That will allow them to maintain a low fixed rate even if the inflation component is a large negative number.

For example, if the inflation component is -4%, the Treasury may decide to keep the fixed rate at 0.70%, and they’ll just have a 0% composite rate for the May-October time period (since the composite rate can never be negative).

I hope the Treasury will have a fixed rate that would compensate for the negative inflation rate. They have done that the other way when inflation was high (with a 0% fixed rate). Why not provide some help to us small-time responsible savers?

Tom, you said, “The annual purchase limit is per SSN, so you’d have to do something drastic, like get married, then use your spouse’s SSN to buy another $10,000.”

So, some of those guys out in Utah are able to buy $100,000 worth of I-bonds per year?

Hi Tom - Do you really think an I bond with near-zero-fixed rate and negative inflation component will be marketable?

Your audience may understand how I bond mechanics work, but the general public, I imagine, will not step knowingly into a bond that offers zero total return for the first six months. Those that know the potential, given increasing inflation, that this I bond holds may buy. Most, I suspect, will take a pass.

Personally, I have yet to but a zero-fixed-rate I bond, an irrational aversion i suppose. Looks like I will be put to the test this year.

Thanks…Mark

Mark - I agree that there will be little interest in I Bonds that have a composite rate of zero.

What I’ve been telling my audience for years, however, is to ignore the composite rate and pay attention to the fixed rate. I don’t see the fixed rate going back to zero under current conditions and there’s a possibility (though not a probability) it could become sweeter than it’s been in years.

Tom Adams

Just a question on converting paper bonds to electronic on treasury direct. If I purchase $5,000 electronic and then $5,000 paper … can I convert the latter to be readable on TD ( or is this feature just meant for old I bonds issued before TD)? Thank you.

James

James - I’ve gotten two different answers to your question from the Treasury, yes and no. You can follow the saga in the comments here.

Tom Adams

Hello Tom,

Here I go again…ruminating over CD vs I Bond…really different animals…CD rates currently in the 2-3% range, Schedule B taxed in current year, etc…I Bond rates vary with CPI-U, tax deferred, etc…given the current I Bond purchase limit, one can more readily do both.

I am leaning towards holding off on buying my 2009 I Bonds until after 1 May as I hope there will be a boost to the current 0.7% fixed rate given the probable negative inflation component…so, will the powers-that-be care if the I Bonds have market appeal? Or will it be a don’t-care since the fixed rate looks unlikely to fully offset the negative inflation component (a negative composite pays the same 0% regardless of how negative)? …What is this administration’s position on personal savings? Perhaps the best indicator of such is the annual purchase limit (or modification thereof).

Also, as an aside…is it best (from an I Bond perspective) for all the negative inflation to be flushed out of the system in one six-month cycle…if it is going to be a negative composite, it might as well be grossly negative in a given cycle so as not to taint the following cycle? Each six-month inflation component snippet stands alone?

The concept of a negative I Bond composite is a first, I am trying to get a better understanding.

Thanks for all, Mark

Hi Mark - It’s not clear to me that the new administration will have any impact on Savings Bond policy this soon. From what I understand most of the high-level positions at the Treasury have the same people in them as before the election. We may have to wait until November to see if the change in administrations has an impact on Savings Bonds. I agree that a raise in the annual purchase limit would be a strong signal, but I suspect the smaller community banks - which are more likely to survive the financial crisis than the big banks - would be against it.

You are correct that if the composite is going to be negative, it’s best for I bond holders for it to be really negative, as each six-month cycle is independent.

Tom Adams

It looks like the next inflation component will likely be at least negative 5%. I’m afraid that’s too negative for any hope that the Treasury will try to raise the fixed rate to offset the inflation component. I’m sure they have no intention for a fixed rate of 5% or higher. Thus, they may have no incentive to worry about the offset, and just keep the fixed rate close to where it’s at now. The composite rate would then be zero percent. I really hope they raise the fixed rate to at least 3%, but my gut tells me they’re going to disappoint us again.

Ken - good thinking - a reasonable analysis.

Tom Adams

Tom, gives us your honest opinion on what you think the treasury department will do? Who would buy a bond paying 0% for six months? What would you recommend for a person that buys I Bonds every month. I have been doing that consistently for six years now. Thanks for your thoughts, enjoy the site.

Tom - my best guess today is that the next issue of I bond will have an interest rate of 0% for six months and that few will buy them.

I also suspect that during their second six-month term their rate will be relatively high and those who do buy them will come out just fine compared to the investment alternatives available.

Tom Adams

Hi Tom,

Is your inflation update page correct? Should not the March update contain February data? It reads that the latest datapoint (212.193) is from January.

Just curious, I am not sure of the CPI-U reporting delay, so I may be off by one month.

Also, regarding your 3/20 reply to Tom, any new thoughts on the future of the fixed rate?

Thanks…Mark

Mark - whoops - I forgot to update the month in the first sentence. Just fixed it. Nothing new on the fixed rate.

Tom Adams

I Wanted to buy an I Bond. SHould I wait for May to see if the fixed rate goes up or do you feel the fixed rate will drop to 0% and I should buy one now?

Ray - Sorry, but I don’t know what will happen.

Tom Adams

I’ve noticed that Series I fixed rates tend to be somewhat lower than the 5-year TIPS.

Based on your experience, would you agree that is a reasonable guess when trying to estimate future rates for the savings bonds ?

Steve - absolutely the Treasury looks at current TIPS rates when setting the I bond fixed rate. For several years they seemed to be aiming for 1 percentage point below the 10-year TIPS rate, but they have been much more selfish than that lately. Details are here. Make sure to scan the table at the bottom of that page.

Tom Adams

I agree with Ken’s analysis. I had been hoping that the Treasury would raise the fixed portion this May to keep the combined rate slightly positive or at least 0%, but the deflation over the last 5 months is too severe to make that happen. Your analysis of the I-bond versus 10-year TIP is very illuminating. Except for the latest “selfish” period, I agree that the subtract 1% rule seems to apply. I would suggest that if you apply the subtract 1% rule to 2 months before the rate change (February - August rather than March - September), you get a more accurate predictor. On this basis, it seems like the fixed rate in May will stay about where it is today (0.7%). However, if the Treasury uses savings bonds as an avenue for funding the stimulus that fixed rate could rise in the coming years to entice investors. Over the longer haul, I can’t see any way out of the current economic situation other than increased productivity (unlikely) or inflation (likely).

Chris - Nice analysis.

Tom Adams

As we can see from your chart showing the 10-year TIPS rates, the Treasury has been selfish in the last year with the fixed rate. It’s time for the Treasury to be a little generous to the responsible small-time savers by coming out with a decent fixed rate this May. Why not a fixed rate like we saw around 2000? With the new $10K caps, only a limited amount of money can go into I Bonds so banks shouldn’t worry about competition.

Is there a contact address that we can mail or email to let the Treasury know our feelings?

Ken - The best person to contact, I’m told, is the Under Secretary for Domestic Finance:

Karthik Ramanathan
Acting Under Secretary for Domestic Finance
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC  20220

Tom Adams

The 5-year TIPS being auctioned on 4/23 is offered with a 0.00% coupon. True the effective coupon is decided at auction, but if we can read anything in that is not to expect much in the way of Series I fixed rates on May 1st, I think.

One other consideration in “predicting” the fixed rate in May, is the potential for savings bond investors to flip their bonds (cash in and buy new ones). Three months into the six-month period beginning in May, savings bond investors can cash in their bonds with no penalty (since they earned 0% for the previous three months). They could use this to purchase bonds with a higher fixed interest rate. The 0% bonds are likely to be flipped (if the fixed rate in May is above 0%). A fixed interest rate of 1% or higher would encourage other bonds to be flipped. Depending on the number of bonds issued at each fixed interest rate, the Treasury has an incentive to set the fixed rate no higher than 1% (very little flipping) or 0% (absolutely no flipping).

Hi Tom,
Trying to get my head around whether it makes best sense to go for I bonds now at 0.7% fixed and a positive inflation rate. We now know that all I bonds will pass through the six month dark window of 0%. Does it make sense to grab six months of the current positive composite rate at the front end? Or best to hold out until November and hope for a positive composite rate? And what difference wil it all make over a very long, perhaps 30 year, baseline?

Eight days until new fixed rate is announced…
Thanks…Mark

Hi, Looking at TIPS my questions are 1. when the value of a tips changes are there tax liabilities then or upon the sale or expiration of the security? Also is income generated by from TIPS sent to the TIPS owner and taxable that year or is it rolled into the TIPS? Thanks! Greg

Steve - the coupon on the April 23 5-year TIPS was 1.25% and the auction resulted in an actual rate of 1.278%.

Chris - Not “three months into the six-month period beginning in May” but three months after the rate on your I bond changes - which could be any month from May through October (with three months later being Aug through Jan). Flipping is an issue for the Treasury every time it sets the rate - this time is no exception.

Mark - The one-year rate on I bonds bought before May 1 is better than what you can get on a one-year bank CD; even though you don’t earn anything for six months.

Greg - Half the coupon rate of your TIPS security is paid to you in cash every six months. This is taxable on the federal level and tax-free on the state level. It is reported to you and the IRS on a 1099-INT. Inflation gains and losses on TIPS also have to be declared every year. This is called Original Issue Discount and is reported to you and the IRS on a form called a 1099-OID.

Tom Adams

Tom,

I enjoy your collective responses.

A note regarding your reply to Chris, is it not true that the $10k/SSN/year I bond limit applys to the total annual purchase, which includes flips?

Flipping $10k/SSN means that your I bond bucket is full for the year?

Mark

Mark - Indeed, the amount of I bonds you can flip or roll over to obtain a higher fixed rate is limited by the annual purchase limits and you have to share the limit between roll overs and new investments.

Chris has a good point I failed to recognize yesterday, that I see today. Whenever the rate on your I bonds goes to zero, you can flip I bonds less than five years old without the three-month interest penalty by cashing after three months of zero interest. Since that will be true this time, there will be more interest in flipping, which may cause the Treasury to set the fixed-rate lower than it otherwise would, to reduce the interest in flipping. Although the ability to roll your I bonds into issues with higher fixed rates is great for investors, it costs the Treasury real money.

Tom Adams

Tom, are you saying all I bonds that we have purchased are going to make 0% interest in their next 6 month cycle?

April - yes, all I bonds have six months of zero earnings upcoming.

However, keep in mind that for the last six months you’ve been earning 4.92% to 8.61%, depending on when your I bond was issued, with complete safety and liquidity.

Split the difference and you’ve still got a terrific investment compared to what else is available.

Tom Adams

Tom, Murphty’s law rules at my house, I have an I-bond that will reach its 5 year mark in October and the way I figure this I will lose the three months they have held back,,,tell me I am wrong !

Harvey - an I bond that hits the 5-year mark in October will have a 5.94% rate from April through September. If you cashed it in September you’d lose three months of that interest. If you cashed it in October (when six months of 0% begins), you’d earn all of it. Sounds like reverse Murphy’s Law to me.

Tom Adams

Tom,

I bought I-bonds on line on 4/30 only to find that TreasuryDirect processed them the next business day and they now have a May 1 date. This does not seem right! Where is a 24-hour purchase processing time documented?

Thanks!
Larry

Hi Larry - TreasuryDirect dates the transaction on the day they get your money from your bank. It’s always best to allow day or two before the end of the month for the money to go through.

If you contact them (log on to your TreasuryDirect account and use the messaging feature) they may be willing to reverse the transaction if that’s what you’d prefer.

Tom Adams

Hi Tom,
Thanks for your suggestion of spreading my I bond purchases throughout 2009. I decided to buy some at the recent 0.7 rate as i figured “a bird in the hand…” I am holding out for buying more at the November rate, whatever that may be.

This zero rate situation puts a new spin on things, and brings up two questions:

1) Why would anyone purchase the current I bond (5/1 thru 10/31)?

2) Why the 0.1% fixed rate? I do not understand the logic, unless it is simply an algorithm and 0.1% is what the calculations resolved to.

Curious, Mark

Mark - I can see no strategy in which purchasing the current I bond makes sense.

If the I bond fixed-rate was set by an algorithm, someone should have figured it out by now. The Treasury says there’s no algorithm and there doesn’t appear to be one to me.

The only logic is the usual logic - the big banks control the political process and get what they want from the government at the expense of everyone else. For more on this see recent remarks of Simon Johnson, former chief economist of the International Monetary Fund; William Black, a regulator during the savings and loan scandal in the late 1980s; and Thomas Hoenig, President, Federal Reserve Bank of Kansas City.

Tom Adams

Tom - You need to revise the text above, which says the I-bond inflation component has never gone negative. It now has.

Mike

Mike - Thanks for the reminder. It’s fixed. - Tom

Tom, thanks for the links above; it made for quite interesting reading. -Mike.

If I cash in an i-bond which is less than 5 years old I lose “three months interest”. What “three months interest” is this? If it’s the next three months then there is no penalty.

Bob

Robert - it’s “the most recent three months” of interest. So you have to earn three months of zero before the penalty is zero.

Tom Adams

Hi Tom:

I have been making monthly I and EE purchases for the better part of this decade as a modest supplement to retirement.

Not to beat a dead horse, but I want to make sure I understand. In light of the May adjustment, should I hold off on further purchases of I bonds until after Nov. 1st to see if the fixed rate will go up?

Kurt - My opinion is that those who are making regular purchases of I bonds should continue making them. I don’t recommend investing in EE bonds.

The difficulty comes for people who want to make a one-time investment in I bonds. It might make more sense for those folks to wait, but we won’t know for sure until the present is the past.

Tom Adams

Will there be an inflation update for June?
Thanks

Kurt — To further back up Mr. Adams, my wife and I have regularly purchased I-Bonds since 2001, albeit we intend to wait until November 1st to see if the base rate improves somewhat. We are averaging 1.9% above inflation for all of our bonds. I take exception to the word “modest” in describing I-Bond performance. Since 2001, our I-Bonds have outperformed our other investments, and given the current economic environment, if Art Laffer is correct in his recent Op Ed piece for the WSJ, high inflation is around the corner. As Mr. Adams has stated in the past, I-Bonds protect us from inflation, and the inflated principle will never decline in value (like TIPS) — even in deflationary conditions.

Still, why buy now ? Even for somebody making regular purchases, I think it makes sense to hold on the cash for these 0% six months period and buy more later on. You can easily make 2% FDIC insured and the only thing at risk is this lousy 0.10% fixed rate. I wouldn’t buy now and instead wait the Nov1 announcement and then decide what do do.

It could have made sense to buy before May 1, but I think it goes against any logic to buy before Nov 1.

Alex - I was out of town and forgot to take the software needed to update the graph. It’s fixed now.

Steve - Those who are enrolled in a payroll savings plan that is a hassle to stop and start would have a reason to follow the plan, but in general you’re correct.

Tom Adams

Tom, Steve:
I think in light of your comments, holding off until November is the right move for me, as my purchases are not part of a payroll savings plan and I can set aside the funds at 1.6% in my savings account.

Rich:
I didn’t describe I-bond performance as ‘modest’, I described my purchases of them as such.

In any event thanks for your replies and for helping to educate me. I only came here to investigate when I noticed some of my bonds were suddenly earning 0%.

Tom thank you for your great site. I have learned a lot and now know to watch when May 1 and Nov 1 roll around.

5.61%, not too shabby! I was getting nervous about the prospect of another 6 months of 0% returns, so this is good news! (boy it feels strange to actually “root” for inflation….)

Tom,

It looks like the I-Bonds that we’re currently holding during the six-month 0% earnings period will return to fabulous interest rates for their next earnings period. Some purchased in the late 90’s may jump to more than 9% with the next adjustment!

Scott and Bill - Moreover, this is the second time you’re earning interest on the same CPI index points.

In the chart, where that big drop is, your rate dropped to zero. For TIPS, the rate went negative. Now, on the upswing, TIPS are earning back what they lost and you’ll earn the swing through that range a second time.

I bonds are the best investment around.

Tom Adams

Why is it some of my bonds are showing 0% while I know the fixed rates were about 1%?

Gordon - The 0% I bond rates are explained at length here.

Tom Adams

will be helping children with college in 2 years. Have I bonds 4-00-4-09 and ee bond 4-00- 4-05 and I am eligible for federal tax free earnings for tuition expenses. However the EE bonds will double 17 years from issue date and I bonds are very good earners. Might it be better to cash out My Thrift Savings Plan and traditional IRA as well as Cash assets and leave Savings Bonds alone? I will be retired and eligible for penalty free retirement asset liquidation when children begin college. My Saving bonds have out-performed my TSP and IRA accounts…

Greg - I’m not sure what you mean by a Thrift Savings Plan. Is this just a savings account or certificate of deposit of some kind? If so, that one should definitely be the first source of funds.

You need to find out if there will be any penalties for cashing out the IRA. There will certainly be income tax on all the money you take out.

With the Savings Bonds, the income tax is only on the interest, not the original investment. But there are lots of other things to consider in deciding whether to cash the IRA or the Savings Bonds. There’s no simple answer other than to take a little from each.

Tom Adams

Thanks Tom. TSP is 401k equivalent for federal employees. My EE bonds will need to earn about 4.75% to hit face value at maturity. The TSP gov bond fund currently pays around 2.4% is tied to interest rates,is state taxable upon withdrawl and out earns my EE bonds by 20% over the last 7 years. You are correct there is no simple answer and perhaps there is no sigificant advantage using Saving Bonds vs TSP/IRA for college tuition.

Greg - Can you get the money out of the TSP/IRA without a penalty other than taxes?

Typically that depends both on your age and whether your employment has ended. So, for example, if some of the IRA money came from a former employer and you’re old enough, you may be able to get that portion without a penalty.

Another issue is whether you’ll be able to hold on to the Savings Bonds until they reach face value. Your analysis of how much they will earn over that period seems sound to me.

Tom Adams

I understand the annual purchase limits for iBonds.

Assume annual max iBond purchase for a SSN of 5k paper + 5k electronic.

Can the buyer then send the 5k paper into TreasuryDirect and convert that 5k to electronic without violating the annual limit?

The TreasuryDirect FAQs seem to say “Yes” but I am wondering if anyone here has tried that recently.

Thanks!

Mike - this issue is covered in the comments on my post about converting paper Savings Bonds to TreasuryDirect’s electronic bonds. Read all the way to the bottom.

Tom Adams

A few months back I called Treasury Direct to complain about their odd “buy paper bonds…hold one year…convert to electronic” concept, and the person I was talking to laughed and said “We agree, and so now you don’t have to hold paper bonds for one year.”

I did purchase paper bonds after that conversation, mailed them in for conversion, and it works like a charm.

Leaving me to wonder… why can’t the limit be $10,000 electronic per year?

Robi - thanks for the update.

Tom Adams

Tom,

On September 1, I was planning to redeem my I-bonds issued 12/05 (fixed rate 1%) as they begin earning 0% interest after the 3-month interest penalty. In view of the recent inflation figures, do you now suggest I continue holding these bonds? I also have some I-bonds dated 1/06 which I was planning to redeem in October.

Alorac - My personal opinion is that cashing in I bonds because of one disappointing interest rate period after a long string of pleasant interest rate periods doesn’t make sense from the get-go.

I bond composite rates will revert to the mean. The current period is an outlier - a once-in-10-years kind of event. Just suck it up and think about how you were earning 6% a year ago while both interest rates and the stock market were crashing for everyone else.

Tom Adams

I read an article in the Wall Street Journal that … “The economists overall said they expect inflation excluding food and energy to average 3% from 2014 to 2018.”

I am still trying to figure out CPI-U, CPI and the factors that go into the inflation rate for I-Bonds. For example, if the economists are correct regarding the inflation rate of 3%, are they referring to a percentage that I-bonds use. Meaning my 1.4% fixed I-Bond would earn 7.44% during that time. Or is the economists reference to an inflation expectations a different animal than the CPI-U.

Thanks!
David

David - the I bond interest rate is based on the CPI-U, which includes food and energy. Economists like to talk about “core inflation,” which excludes food and energy, because it’s a lower, less volatile number. That’s what they’re talking about in your quote, but it’s not what I bond holders care about.

Over the last 50 years the average annual change in the CPI-U is closer to 4%. To estimate what your I bonds would earn using this number, you would add the 4% to your 1.4% and get 5.4%. I don’t understand how you got 7.44%, but it’s not correct.

At any rate, the primary reason to own I bonds isn’t to earn the highest possible interest rate available, it’s to earn a decent rate with “inflation insurance.” If the economists are wrong (and they’ve sure been wrong a lot lately) and we enter a period of inflation above 4% (yes, that’s happened before), the rate you earn adjusts to cover the additional inflation. With alternative investments that doesn’t happen.

Tom Adams

Tom, How do you rate new purchases of saving bonds as an investment vehicle? EE bonds look average at best short term and terrible if interest rates/inflation pick up. I bonds fixed rate got hammered and risk appears to be if rising interest rates curb future inflation. Also if us dollar falls apart and/or severe hyper-inflation occurs would I bond would hold up or could the govt. modify terms. Thanks Greg

Hi Greg - With EE bonds the government is just taking advantage of people. Today’s I bonds aren’t the best, but do have inflation protection.

At the extremes of hyper-inflation or dollar collapse, anything is possible. But at that point what alternative investment would you prefer to have? You could own gold, but that would make you a target. You could own land, but would your deed be honored? I don’t see how you can plan for extreme circumstances like the government not honoring I bonds, as at that point all investment bets are moot.

Tom Adams

Tom:

Just an idle question about fixed rate components. I have some older bonds and am curious as to the fixed component of them as I have forgotten. Where might this info be found?

And with the current fixed component being at .10% does it make sense to simply wait for the next rate announcement? It would seem so in that there is not much of a gamble even if they set it at 0%.

The next question I have may not deserve as answer as it is sort of far afield from the purposes of this site but I’ll ask anyway.

When inflation does start again, how does inflation in the U.S. affect the value of U.S. currency in relation to other currencies in general?

The reason I am asking this is that Everbank is offering a three year FDIC CD which invests the money in Brazilain, Russian, Indian and Chinese currency. This CD pays no interest but has a guaranteed return of principle. You get more back if the U.S. Dollar loses value against the others but all your money back should the dollar strengthen.

I understand that nobody can predict how these currencies will behave in relation to ours but am curious if our expected inflation would cause the Dollar to decline further.

Danny

Danny - See the table at the bottom of this page to find out the fixed rate of your I bonds.

I agree that there is no reason to invest in I bonds now rather than waiting until after November 1.

In theory, when inflation goes up the value of that currency in other currencies should go down, assuming the inflation rate of those countries is lower.

In addition to Everbank’s Forex CDs, if you have an account with a broker you can invest in a Forex ETF (Exchange Traded Fund; like a mutual fund that trades all day long) for individual curriences. See ticker symbols like FXA (Australia), FXB (Britian), FXC (Canada), FXE (Euro), FXF (Swiss Franc), FXS (Sweden), and FXY (Japanese Yen).

But Everbank’s BRIC currency CD is unique as far as I know. I’ve invested in Everbank CDs before but, like a mutual fund, you get the exchange rate from the end of the day rather than being able to pick price points for your trades like you can do with the ETFs. And the ETF expenses are lower.

Tom Adams

If we had a sudden and brief episode of hyperinflation, would it take 6-12 months before a Series I savings bond would regain its purchasing power?

William - I’m going to assume you’re asking about say a 20% jump in prices in one month, with a return to the normal rate of inflation right after that. Something like this might happen in a devaluation of the dollar - but since the dollar isn’t pegged to anything, it’s hard to see how it could be devalued in a single event like this.

But if this were to happen, it would take two to eleven months for that price jump to be reflected in the interest rate of your I bond (and another six months for it be totally reflected in the bond’s value). The exact number of months would depend on the exact month in which the event happened and exact month in which your bond was issued.

Tom Adams

Hi Tom:
I have been setting aside my regular monthly I bond contributions, waiting for November 1st. Since that date is approaching, I would like to know if there a particular fixed rate and/or inflation component that I should look for to determine if it will be a worthwhile investment this time around (in your opinion). And, what would those rates be?
Thanks again,
Kurt

Kurt - your question is really impossible to answer. Here’s the deal. You have to do something with the money, even if it’s just keeping it in cash or a checking account.

The question you’re asking is “what would make November I bonds better than other possible investments available to me?”

I bonds are different from all the other possible investments in that they earn the rate of inflation plus a small fixed rate. Historically the composite of the two has typically, but not always, created a higher rate than you could get in other investments with a similar amount of risk.

If the government is able to continue to provide backing for other investments, then there is no risk difference between Savings Bonds and, for example, bonds backed by home mortgages. On the other hand, if the government is no longer able to back everything, Savings Bonds will have a much better risk profile. I don’t know what’s going to happen in this regard.

In terms of inflation, while it will be a big surprise if the November rate was under 3%, that says nothing about the rate six months from now. With so many people unemployed, prices could decline. On the other hand, with the Fed pumping so much money into the system, prices could explode. Nobody knows what’s going to happen.

So, as I said, it’s impossible to answer your question.

Tom Adams

Hi Tom,
Is it still the case that an I Bond purchase at the end of November garners interest for all of November?

Is it still the case that one is allowed only $5k paper plus $5k electronic I Bond purchases per year per SSN?

Is “year” defined as calendar year?

Despite the potential of a 0% fixed rate, I am inclined to buy in November, assuming the inflation rate is decent. It appears that if the September inflation rate averages the past five months, the new rate may be better than what I can get with CDs. Plus I get I Bond tax deferral.

However, I am perplexed by what CD maturity term to use for I Bond comparison?!

Thanks…Mark

Mark - yes, Savings Bonds earn interest for the entire month of issue, even if you invest near the end of the month.

Yes, the annual investment limits are still in place.

Yes, a “year” is a calendar year, so you can invest your entire limit in December and again in January.

One way to do the comparison is to base it on how long you intend to keep the money invested, but even then you have to consider the penalty for “breaking” the CD if things don’t work out as planned. The penalty for “breaking” the Savings Bond during the first five years is the most recent three months interest.

Tom Adams

Does anyone have insight into how the Treasury decides the I bond fixed rate? I’ve never seen any discussion on what factors they take into account. Perhaps some Treasury official just wings it>

Martin - the information you’re looking for is here.

Tom Adams

Is there any indication that the Max purchase of I bonds will be increased? With the tremendous debt being racked up, one might think that might be a consideration?

What was the reason given for the current limits?

Tony - There’s no indication of that, but lowering the limits was a complete surprise, too. You can read the “reasons” for the current limits in this article and the following comments.

Tom Adams

This last inflation component is actually 3.06%, because of how the CPI-U index ratio is rounded.

Steve - you are correct. Thanks for pointing this out. It turns out they round the six-month change to two digits after the decimal point, then double it to create an annualized rate. I’ve fixed the above story and graph.

You state that if inflation continues at the October rate for the next five months, the next rate will be 1.16%. Does this mean it replaces the 3.06% or it is added to the 3.06% for a total of 4.22%? Makes a big difference in deciding whether to purchase more I-Bonds.
Thanks

Buzz - The 1.16% would be the next inflation component. It’s a great idea to understand how I bond interest rates work before you invest more money.

Tom Adams

Hi Tom,
That time again to do or die for 2009, fill up my I Bond bin for the year, did half early 09 at 0.7% fixed knowing that 6 month of 0% was certain, held off hoping for a better fixed rate late this year…tough call on doing 0.3%, never bought that low, CD rates hover low too, see buying 0.3% I bonds as inflation hedge, so far inflation looks tame, not sure what’s up with that…i also enjoy the tax deferral (for now, never know how things will change)…recall not long ago saying that i would never buy with fixed rate below 2%, and then 1%…

You state that if the next four months inflation rate tracks flat, we can expect 1.0% as next inflation component. I assume this is the 6 month inflation figure?

Thanks…Best Wishes…Mark

Mark - unless otherwise noted, all rates on this site are annual rates, including that one.

Tom Adams

Hi Tom. I’m 46 years old. If my employer is contributing 50% on the dollar up to 4% on my 401K, is this investment a good choice in these times or should I instead purchase U.S. Series I Savings Bonds for my retirement plan? Thanks.

Rick - Take the free money your employer is offering you. With most 401Ks, you have several options for what to invest the money in. If one of the options is a TIPS fund, it’s very much like investing in Series I Savings Bonds.

Tom Adams

Hi Tom,
Last week, last chance for 2009, could not bring myself to commit new funds to I bonds at 0.3% fixed rate…decided upon an FDIC CD (36m, 2.94%APY)…a tough decision as I really had only enough to do one or the other…

Do you find people readily buying at 0.3% fixed rate (or less)?

Is there much current market demand for I Bonds?

…diving into 2010, whatever it holds…Mark

Hi Mark - I agree that the banking industry has very effectively gotten Savings Bonds where it wants them - not competing with its own products.

Tom Adams

Recently looking to update I bond valuations, I went to both the US Savings Bonds “Redemption Values” and “Earnings Report” official sites…

How can I get the exact monthly valuations? I note that the “Series I Redemption Values” pages list each month, but the redemption value remains the same for many months at a time…

Should not these values be different for every month since the I bonds have been at play for different time periods?

Also, when I want to get a yield rate from issue (for rough growth extrapolation), i have in the past cited the right most “Yield From Issue” column of the “Redemption Values” pages. I plan to hold all of my I bonds greater than 5 years.

Is there a more accurate method? Are the published yields reduced for less than 5 year issues due the the three month interest penalty?

Thanks,
Mark

Mark - the redemption values you’re seeing - which are the exact monthly valuations - remain the same because I bonds recently had a six-month period of zero interest rates.

It’s correct that the yield from issue in the reports you’re looking at is reduced for the three-month penalty. What you want to do is theoretically possible, but way more work than the additional information is worth. Those numbers aren’t published anywhere.

Tom Adams

Hi Tom, umm, like a sliding 6 month window in which all bonds will “catch up” …upon marking time for 6 months, the first bonds in the window will exit and accelerate away from the later ones, thus re-establishing each month at a different valuation
…a big “slinky” so to speak…

As to the complexity of the numbers, I realize there are many factors in future I bond returns determination…CPI-U inflation is the gorilla in the room, tax deferral makes it easier…I Bonds, like all else, have both good and bad points

Probably old news, but I recently stumbled across an interesting I bond discussion regarding future individual tax brackets vs bond holding periods…found in one of the late “Boglehead” books, probably a section written by Mel Lindauer. The book awaits at my library, sure to fuel many future questions.

While my co-workers lust after old muscle cars, I long for a 3.6 fixed rate I bond and a 30k/yr purchase limit…dream on…Thanks, Mark

So Tom, are we looking at another 6 months of 0% ? Seems the rates are heading that way again.

Harvey - it’s too early to say.

Tom Adams

Hi Tom:
When you say the next rate adjustment will be -0.04 if the current CPI continues at the current level, does this mean:
1. The current fixed rate of 0.3% minus 0.04 will result in a rate of 0.26%; or
2. The rate for the next six month period will be 0.3%+ 3.06% minus 0.04%?
Thanks
Buzz

Buzz - It would mean I bonds would earn their fixed rate minus 0.04 percent.

I bonds being issued right now have a fixed rate of .30%, so after earning six months at 3.36% (.30 + 3.06) they’d earn .26% (.30 - .04) for the next six months. Then it would change again.

Tom Adams

if you are three years into the five year 3 month penalty and cash in a bond that has been paying nothing for five months the penalty would be nothing?

David - that is correct. The penalty is the most recent three months of interest. If the most recent three months is zero, the penalty is zero.

Tom Adams

If I buy an I bond during this month of February, will it earn the current composite rate for six months after the bond’s issue date or only until the next rate adjustment period begins in May which is three months away? Thank you!

Charles - Think of it this way - if you hold an I bond for 30 years, it will have 60 six-month rate periods. The first one, like all the others, is six-months long.

Even if you invest on the last day of April, the day before the May 1 rate announcement, you get the current (Nov-Apr) rate for six months.

Tom Adams

Hi Tom…sounds like others are considering to buy at the current 0.3% fixed rate?

I swore to never buy below 1.0%FR, then I lowered my standards and bought some at 0.7% last year…

Bogleheads allude to Treasury painted in the corner of not offering higher fixed rates due to the swapfest that would prevail…

Your thoughts on this? Is 0.3% as good as it gets!
Thanks…Mark

Mark - It all depends on how bad the government needs your money - and right now there seems to be a very ample supply of money available to the government for free.

Here’s an interesting page on TreasuryDirect that shows the average interest rates the government paid in January by security type. I bonds are in the Non-Marketable section and are called United States Savings Inflation Securities.

Note that holders of I bonds are, on average, earning quite a bit more than most.

Tom Adams

Tom,

What are the consequences if one exceeds the purchase limit for savings bonds?

Chuck - the Treasury has the power to not to pay interest on the amounts over the purchase limit (i.e, it could refund the purchase price without interest), although I don’t recall any instances where it actually did that.

Tom Adam

Tom,

Equally disturbing is the proposal to use a chained CPI-U (C-CPI-U). If enacted, it my have the potential for reducing our semi-annual inflation component by approx. 20 percent. ( There is extensive information on the C-CPI-U at: http://www.bls.gov/cpi/super_paris.pdf )

As for the attack on Savings Bonds — while we may be getting deferred interest, there is a quid pro quo for the government: they get to use our principle for up to 30 years! It is patriotic to own U.S. Bonds. I find this attack on the middle class disturbing.

One reason federal and state governments are in financial trouble is that they are taking in less tax receipts due to the abnormally low interest rate environment on bonds, notes and savings accounts that have been created by Fed market manipulation. Japan tried this a few years back, and the middle class took their money outside the country in search of hire rates. As a retiree, how long can I put up with this continued abuse before I, too, start to thing about taking my money outside of the U.S.? Who will want to invest in the U.S.? When that happens, we all will lose. Congress should think carefully and thoughtfully about the the full ramifications of their legislation before enactment.

thanks!

Rich

i bought several thousand dollars of double e bonds in oct. 1995 that will double in seventeen years.at the present rates without the bump they will not double anytime soon,what will the rate of return be at the seventeen year milestone?

David - if you hold them until Oct 2012 you will have earned 4.12% a year for the 17-year period.

A $1,000 face value 10/2012 EE bond currently has a redemption value of $856. So another way to look at this is that you’ll earn $144 by holding on to it for another 30 months, which works out to an annual rate of 6.32%.

Tom Adams

Hello,

I’m trying to do the math using your graph of variable rates (combined with your table of fixed rates on another page). But your variable rate numbers seem to differ from the table here:

http://www.ibonds.info/rates.html

(Your fixed rate table agrees with theirs.)

Also, from reading the comments, it sounds like you’re getting the total rate by simply adding fixed-rate plus variable-rate. Elsewhere I read that the total rate uses this formula:

totalRate = fixedRate + 2*variableRate + fixedRate*variableRate

Who has the right numbers, and what is the correct formula?

Thanks!

thank you,your advice saved a rather large mistake.

Any thoughts on whether to buy new I-Bonds before or after the next adjustment of the fixed rate? It is now .30%. What does experience tell us will happen at the next adjustment?

Paul - On this site the interest rates are quoted as annual rates. On the other site they’re quoted as six-month rates, which don’t make any sense to me. But given that difference, they’re the same (their rates are 1/2 our rates). The formula on that site is correct and you can find it on this site here, (see the beginning of the section I bond composite rates), where it is given in words rather in a formula). As a practical matter, however, simply adding the fixed rate and inflation rate together provides a very close approximation of the final rate - the adjustment factor doesn’t amount to much.

David - You’re welcome.

Ethan - Experience says that there’s no telling what the Treasury will do, however, if the level of TIPS rates is the same a month from now as it is today, which is unlikely, the I bond fixed rate might go up a tiny bit.

Tom Adams

I decided to buy my bonds for the year before the end of April. The next inflation component is probably going to be low, so by buying now I’ll get the current 3.36% rate for 6 months, then a low rate for 6 months, which means if I sell after a year the penalty will be low. If I buy something between May-October, I miss the 3.36% and start with 6 months at a (very probably) significantly lower rate.

I have also been trying to decide about buying more bonds now or wait until the May 1, 2010 rates are announced. Either way they pay more than a bank savings account pays right now - anywhere from just above zero to 1% (at best).

The only I-bonds I own were purchased back in 2001 & 2002 when the fixed rates were 3.4% and 3.6%. I’ve deferred the interest but since I’m not likely to be around when they mature and my beneficiary is in a high tax bracket, would it make sense for me to pay income tax on all the interest up though 2009 and then declare it annually?

Hi Tom…my two cents…i plan to buy I bonds in one or more of the three windows available this year…on the fence about doing some before 4/30…since i hold mine, i look more at the fixed rate than the inflation rate, although an immediate 3.36% for six months, followed by a much lower inflation rate, can offset the fixed rate some…

Tom, you mentioned a hint in the TIPS rate predicting the I bond fixed rate, any more light to shed?
Thanks…Mark

Gayle - If you are in a low tax bracket this can make sense, however, make sure your beneficiary knows you’ve paid the taxes, as the 1099 the beneficiary will receive when cashing the bonds will have all the interest the bonds have ever earned on it. Some beneficiaries end up paying the tax a second time because of this. The best way to do this is to give the beneficiary copies of your tax returns showing you’ve paid the tax.

Mark - more info on I bonds and TIPS rates here.

Tom Adams

Will the CPI-U increase after the Chinese currency is allowed to increase in value against the dollar?

William - It would probably have an impact.

Tom Adams

Hey Tom,

Got any guesses for the next fixed rate?

Hi Tom, Wow, only 1.54% inflation! I suppose we all should be jumping for joy with an inflation rate that low. I remember the late ’90’s when we also had not only low inflation, but low unemployment too, and it was termed the Goldie-locks economy (not too hot, not too cold; just right). Maybe now, in 2010, we find the Phillips curve not quite dead yet.

The treasury probably thought the Federal Reserve had mastered inflation enough to start issuing inflation-linked bonds by 1998 as a low-cost alternative to finance public debt. Maybe in 1998 I thought I had it made too as I paid off my first house, bought my first new vehicle (a minivan) since 1985, became eligible for a third week of vacation at work, got a decent raise, was happy with the growth rates of my retirement account, and we had $10 / bbl oil! Life was good. All my assets were up, and the costs and liabilities were down - Goldi-locks.

Today, it seems we are heading just the opposite. Your company gets bought out, you lose your seniority (if not your job) start over putting in time to be eligible for a week’s vacation, watch the retirement accounts drop, and take a 22% pay cut - back to about 1998’s level! All the assets have or are dropping, but the costs and liabilities are still rising. It averages out, but it’s the worst of both worlds. It’s like living in that place where the average temperature is 75 degrees year round, and that sounds great, but you find it is Death Valley where the night time temps are below 40 and the daytime temps are above 110, but the average is 75. That is what our CPI is -an average. Our biggest assets (our jobs) have gone down along with our houses and retirement accounts, but our costs have not. But, it sure feels like inflation when an hour of my labor now buys 25% less than it did a year and a half ago.

If 1998 was Goldi-locks, then this must be the Big Bad Wolf (Bear?) economy (He huffs and puffs and blows your house down).

I wonder if my other “asset”, future social security payments, will be lower if my wages are lower for the next dozen years? And I sure hope my pension’s fund is still solvent then too! - Thanks, Mike M.

jdj - None.

Mike - Nice analysis. Thanks for the additional perspective on the weaknesses of the CPI.

Tom Adams

Any guess on what the Fed will do with the I Bond fixed rate in May based on their past increases/decreases?

Thanks for your “Savings Bond Advisor.” I have been using it this month to learn about how I-bonds work. If I understand the nuances of how I-bonds work correctly, then if I buy an I-bond before the end of this month, it will earn the current 3.36% (annualized) rate for new bonds. It would earn this for the first six month rate period of 1 Apr 2010 to 30 Sept 2010. Interest on I-bonds is earned starting on the first day of the month in which it is issued. The next six month rate period of 1 Oct 2010 to 31 Mar 2011 for a bond purchased this month will then earn a composite of the fixed rate and the new (May 2010) inflation rate component. Based on your 14 Apr 2010 article above (Inflation update of April 2010) the new (1 May 2010) inflation rate component is 1.54% (annualized) which is based on the difference between the March 2010 and September 2009 levels of the CPI-U. The fixed rate for newly issued bonds changes every six months on the first day of May and November and remains “fixed” for the life of the bond. An I-bond bought this month has an annualized 0.30% fixed rate so the composite rate (annualized) for the second six month rate period will be a composite of 0.30% and 1.54 which is %1.84% [0.3% + 1.54% +(0.3%*1.54%)/2] Do I have my facts straight?

Should buy I-Bonds this month: APRIL or Next month MAY based on your information. I have about $500 which can invest now or 15 days from now.

Joe & Charles - The past changes have been fairly random, so I have no idea what the Treasury will do with the fixed rate on May 1.

Dave - You get an A. You’ve got it!

Tom Adams

Joe & Charles: My best guess is that the fixed rate for Series I bonds on May 1 will remain relatively unchanged. If it were me Charles, I would buy that Series I bond sometime before the end of this month.

Buy toward the end of the month and sell after the 1st - that is the way to reduce the 3 month penalty. The 2009 fall was a real wake-up call. Now things are on a more even keel. Still better rates than CD’s and offer greater flexibility. Buy greater quantities of smaller denominations rather than one larger denomination. This also gives you more flexibility when you need to sell them.

Tom,
Replying to 4/19 comment from Chuck, I agree regarding paper holdings as they are individually denominated…but my electronic TD holdings appear to be summed and lumped, does this eliminate my ability to “break” and sell part of the lump?

Also, the next I component of 1.54%…is this the annualized rate, meaning that my bond will earn half of that (plus half of the fixed rate) for the next 6 months? Thanks…Mark

Mark - In TreasuryDirect you can partially redeem your holdings to the penny. For example, this provides a way to spend the interest your bonds are earning while keeping the principal intact.

If you prefer to think of your earnings as one-half of the rate you can. I prefer to think of it as the annual rate for six months (dividing the time by two rather than the rate by two) but it amounts to the same thing.

Tom Adams

Re May 2010 Treasury Direct data:

FYI: Treasury Direct’s ‘Savings Bond Wizard’ returns a current interest rate of “NA” for I-Bonds issued in May 2000. Similarly, your calculator here reports “Coming Soon” for that data for those bonds.

‘Savings Bond Wizard’ returns a current interest rate of 6.72% for I-Bonds issued in July 2000; ergo, the current interest rate for I-Bonds issued in May 2000 must also be 6.72%. SavingsBond.com data confirms this.

Nik - the rates on I bonds issued in May changed today. It takes a few hours to a few days to get everything updated. That’s what “coming soon” means (smile).

The logic of your final paragraph is false. The rate on July bonds doesn’t change until July; the rate on May 2000 bonds changed on Saturday to 5.17%. However, it took until today to get the official numbers.

I doubt SavingsBond.com has this wrong, but if they do, they do.

Tom Adams

Tom (and Nik),

One possible source of confusion is that the May 2010 interest is added to the bond on June 1, not May 1. I did not realize this until fairly recently. If Nik used the increase in value on May 1 as the interest for May, he or she would have gotten 6.72%, since that was the rate for April, paid on May 1.

Mike B.

Mike - what you have noticed is an effect of the penalty for cashing an I bond before it’s 5th anniversary, which is the most recent three months interest.

A May 2000 bond is over 5 years old, so you wouldn’t see the “late addition” of interest in this case.

Tom Adams

Treasury Direct makes it too difficult to attach your bank to your TD account. Most banks refuse to put their signature guarantee on the required form.

Rich - I haven’t experienced that. Could you name names of a few banks that have refused to link to TreasuryDirect? It seems like a way to drive away customers.

Tom Adams

I tried a couple credit unions where I live (1 local, 1 national). They told me they ONLY sign paper stocks/bonds or their own bank forms. They say they’re insured & bonded… liability risk… blah blah. Maybe if the US Treasury Dept would send a general memo to all banks saying their form is legit, it would be easier. I hate to “bank hop” just for this.

You also couldn’t attach your bank if it’s an internet only bank or if they only have branchs out of state.

I opened a TD account about three years ago. At the time, it was relatively simple to enter my local checking account info on the TD website. I had a fall-out with my local bank and switched to an online checking account. Overall, the online checking account is much better (USAA Federal Savings), but I ran into two problems in regards to savings bonds purchases. 1) You can not purchase paper bonds from an online bank. So, I opened a checking account at a different local bank for the sole purpose of buying paper bonds. 2) You can no longer change your checking account info directly on the TD website. You have to print out a form and fill in personal info including account info and SSN. Then you have to take the form to your bank to have a high-ranking bank official verify your identity, sign it, and put an official stamp on it. I do not remember the official’s title, but a notary public is definitely not acceptable. Obviously, an online bank can not preform this service. Luckily, I had already opened the local account to buy paper bonds, so I was in that system. The high-ranking official does not work at my regular branch, so I had to go to a different branch. The high-ranking official only worked during the day, so I had to take some time off from work. Ironically, when I got there, the high-ranking official was too busy and asked the regular teller to do it. I was extremely uncomfortable putting the form containing all of my personal info, account info, and SSN in the mailbox. In the end, I did get both my local and online checking accounts into the TD system using one form. It seemed like a lot of work to verify the identity of someone who was already purchasing online bonds on a regular basis.

Rich and Mary Ann - It’s hard for a reason - to keep someone who has secretly gotten your password info from changing the bank account your TD account links to and draining your TD account.

On the other hand, I suspect if you call an internet-only bank like USAA and ask how to link a TD account with your bank account, that the bank will have a process for this. Surely USAA isn’t going to tell all its customers that they can’t link a USAA account to a TD account.

Tom Adams

Tom:
The I-bond fixed rate is currently 0.20% and the inflation rate is declining. Some commentators have said that we may see deflation if the economy slides back into a recession. Deflation will wash out the I-bond’s fixed rate, and cause the total return to go to zero.
Do you think that the series E bond, with its fixed interest rate, is a worthwhile investment in this environment?

Steven - The questions you need to ask yourself center on how long you intend to keep the money in Savings Bonds and what you expect to happen during that whole period, not just the part now coming up over the horizon.

Tom Adams