I-Bonds Discussion Thread (continuation of the FW thread)

I-Bonds Discussion Thread (continuation of the FW thread)
0

#1

Estimated rate for November 1 (assuming no inflation September 2017 and no fixed rate): 1.32%

I-Bond facts: (https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm)

How does Treasury figure the I bond interest rate?

The interest on I bonds is a combination of a fixed rate, and an inflation rate.[…]

Fixed rate

You know the fixed rate of interest that you will get for your bond when you buy the bond. That fixed rate does not change during the life of the bond.

Treasury announces the fixed rate for I bonds every six months (on the first business day in May and on the first business day in November). That fixed rate then applies to all I bonds issued during the next six months.

The fixed rate is an annual rate. Compounding is semiannual.

Inflation rate

Unlike the fixed rate which does not change for the life of the bond, the inflation rate can and usually does change every six months.

We set the inflation rate every six months (on the first business day of May and on the first business day of November), based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.

However, the change is applied to your bond every six months from the bond’s issue date. (The dates for these changes might not be May 1 and November 1.)

Bond rate formula: [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]

Index values (source: https://data.bls.gov/cgi-bin/surveymost) Table CUUR0000SA0
September 2017: ??? (release on October 13)
August 2017: 245.419
July 2017: 244.786
June 2017: 244.955
May 2017: 244.733
April 2017: 244.524
March 2017 (base for next period): 243.801

I-Bond fixed rate history: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#past

Key points:

  • Always buy a bond towards the end of the month and redeem at the beginning of the month. Purchases and redemptions are always dated on the first day of the month regardless of when in the month they are purchased. Generally make an order in Treasury Direct two business days prior to the last day of the month in order to allow proper time for ACH to occur.
  • You can purchase $10,000 a calendar year per social security number and $5,000 with a tax refund of a timely filed return. (If you do not file the return timely, including extensions, and fill out the form they will send you a check instead.)
  • There is a minimum 12 calendar month holding period and for the first five years the last three months of interest are withheld as a penalty. You can redeem bonds before the 12 months if you are in a Federally declared disaster area (regardless of whether you personally suffered from the disaster).
  • I Bonds pay interest for 30 years. Interest is taxable on redemption, unless you choose to declare interest annually (keep records to reconcile with the 1099-INT that is inevitably issued at redemption). They are generally exempt from state income tax.
  • EE Bonds function as a 3.5% interest rate bond when held for exactly 20 years, but with a hefty early withdrawal penalty since the base rate is extremely low (0.10% at current writing). In high income tax states, they can function as “substitute pensions” for those who desired more fixed income in retirement. Older EE Bonds pay at a different formula and were market adjusted and may still be good investments to hold.
  • From 1998 to 2003, one could purchase I Bonds with credit cards, and the maximum was $30,000 a year. This was the original dollar coin deal and the bonds purchased at that time have a minimum of 1.1%, and in some case 3%, fixed rates. However few people took advantage of it because of the skyrocketing stock market.

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#2

To compare EE bonds to treasuries, look at the current 20 year rates vs the 3.5% effective doubling time rate for EE bonds. Treasuries are about 2.65% now:

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

You can also compare them to 1-5 year treasury rates, but broadly these are less attractive. However, EE bonds do have a put option and can’t lose money while real treasuries will if rates rise, ie if rates rise a lot, you can redeem your EE bond early and invest instead in a bank account or new, higher rate EE bond at prevailing market rates.

Said another way, you control the maturity/duration of an EE bond, which is potentially valuable if interest rates ever rise a lot (not holding my breath). If you wanted to be really fancy, you could try to get paid for this optionality by writing covered calls on treasuries regardless of whether rates rose or not.


#3

For I bonds, you can compare their fixed base rate, currently 0%, to the yield on inflation protected treasuries, TIPS.

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

5 year TIPS pay 0.2% roughly, slightly better than I bond’s current base rate, while 20 year TIPS pay almost 1%. I bonds do have several favorable features over TIPS:

  • tax deferral, if desired (TIPS interest is taxable annually, plus their inflation adjustment to their principle is too).
  • can’t lose money in any 6 month period. If deflation occurs and is more negative than the I bond fixed rate, you just earn 0% but not give back prior interest earned or principle. TIPS have no such optionality.
  • put option after 1/5 years. You can redeem your I bond when you want, giving you control over the duration/maturity. If redeemed before 5 years, you can minimize the penalty by redeeming it during a low interest period such that the 3 month’s interest you lose is often minimal.

#4

calwatch, thanks for opening topic :slight_smile:
Your estimation quoted below is slightly wrong, if September has no inflation and no fixed rate we will have 1.4%
I guess you made a typo in the August reading …

Estimated rate for November 1 (assuming no inflation September 2017 and no fixed rate): 1.32%

August 2017: 245.419
July 2017: 244.786
June 2017: 244.955
May 2017: 244.733
April 2017: 244.524
March 2017 (base for next period): 243.801


#5

Glad to see this thread and MoneyOCD posting here. I always followed this thread on FW.


#6

Awesome this was the main thread I followed on FW Finance. Also glad to see MoneyOCD here.

So if I am reading above info correct, the next 6 month rate would be 1.4%? If so, I should have loaded up on that 1.96% last interval.


#7

I too am glad this is over here along with you MoneyOCD. Thank you.


#8

We will know Friday. You would still have time to buy the 1.96 by the end of the month if you wanted. HTH


#9

My math was ((245.419)/(243.801)-1) * 2 = 1.327%. Is there another way I should be doing this?


#10

Your formula is correct, but you used wrong number for August

https://www.bls.gov/news.release/cpi.nr0.htm

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.9 percent over
the last 12 months to an index level of 245.519 (1982-84=100). For the month, the
index increased 0.3 percent prior to seasonal adjustment.


#11

So by this Friday we will know the next 6 months and still have time to load up on 1.96%? That is good news to hear. Will wait for the update :slight_smile:


#12

We will know the variable rate then. The fixed rate is set Nov 1, but it will most likely stay at 0%, if I was guessing.


#13

September CPI-U = 246.819
Base for the next change (March) =243.801
Total Inflation for Apr+May+Jun+Jul+Aug+Sep=1.24%
If fixed part is 0%, I-bonds will be earning 2.48%, starting in November.


#14

Fantastic news. Thanks for the update!


#15

THANKS MoneyOCD for continuing this topic!

For folks new to I-Bonds, if you buy your bonds before the end of the month, you lock in 6 months of 1.96% interest and then the next 6 month rate of 2.48 % is locked in.You can sell if holding for one year, so this helps guarantees your first year earnings rates. That is what I did (by accident) when I bought my first I-Bonds in Oct. 2001.I always know my rate going forward for 6-11 months. This helps in periods of 0% inflation to help you time getting out of your I bonds.


#16

Side note - we have all data needed to calculate following limits for 2018 and
some crystal ball predictions for 2019:

  • 401k contribution limit will increase to $18.5k (crystal ball says it will go to $19k in 2019)
  • 401k catch up limit will stay the same at $6k (crystal ball says no change in 2019)
  • IRA contribution limit will stay the same at $5.5k (crystal ball says it will go to $6k in 2019)
  • IRA catch up limit will stay the same at $1k (crystal ball says no change in 2019)
  • HCE limit will limit will stay the same at $120k (crystal ball says it will go to $125k in 2019)

#17

Remember if you have 12 good months of interest coming and might need to redeem early, you can wait until 15 months so you lose 3 months of the bad/unknown interest instead of 3 good months. Of course if those next 6 months are good ones (13-18), maybe you can find a way to keep the bonds and reconsider. Point is if you’re not hard up for the cash, you can dump them and only lose 3 low interest months and you’ll know in time to make a good decision.


#18

Thank for you for keep this thread alive, it keeps me alive in some strange way :innocent:


#19

Summary of the 1 year I bond strategy with the current rates. Looks like you can lock in a 1.75-2% rate, roughly, depending on how long you hold, if you buy before Nov.


#20

So it is better to buy now to get first 6 months: 1.96% and then next 6 months 2.48%?

Or are most people waiting for 11/1 and buying the 2.48% for first 6 months and then hoping for the best for later on?