The U.S. Treasury just announced that I Bonds purchased from Nov. 1, 2013, to April 30, 2014, will pay a fixed-rate of 0.20%, along with an inflation-adjusted rate of 1.18% (annualized) over the next six months. That means I Bonds purchased during this period will pay 1.38% annualized.
The inflation-adjusted rate will change again on May 1, 2014, but that fixed rate of 0.20% will remain with these new I Bonds for 30 years.
This is big news because the fixed rate on I Bonds has been zero since May 2010, and it appeared almost certain that the Treasury would keep the rate at zero, given the recent decline in TIPS yields. The yield on a 10-year TIPS for example, peaked at 0.92% on Sept. 5. But then the Fed backed off on tapering and the yield has dropped a nasty 52 basis points.
So this makes these I Bonds a screaming good buy. I’ve been looking at the spreads between the I Bond yield and a 10-year TIPS. It looked to me that it would take a yield of 1.2% on the TIPS to cause Treasury to move the I Bond above zero. With a 10-year TIPS currently trading at 0.40%, that squeezes the spread down to 20 basis points.
|Date||I Bond fixed interest||TIPS yield||TIPS spread over I Bond|
|Nov 1 2013||0.20||0.40||0.20|
|May 1 2010||0.20||1.32||1.12|
|Nov 1 2009||0.30||1.41||1.11|
|May 1 2009||0.10||1.80||1.70|
|Nov 1 2008||0.70||3.09||2.39|
|May 1 2008||0.00||1.52||1.52|
This is a deal because I Bonds are a much more flexible and investor-friendly product than TIPS. Taxes are deferred until the I Bond is sold (for TIPS, both interest and inflation adjustment is taxable each year), and I Bonds can be sold after one year with a minor penalty and after five years with no penalty.
Should I sell my zero-rate I Bonds to buy these?
I would say definitely not, especially if you are trying to build a large cache of I Bonds by buying to the maximum each year ($10,000 per person at TreasuryDirect). If you haven’t bought your 2013 allotment because you were waiting to see if you could get a fixed rate, you just got a very nice present from the Treasury. Buy now.
Otherwise, the rest of us will be able to grab this 0.20% interest rate in January, when we can again buy I Bonds up to the limit.
Selling your I Bonds is not a good idea, I think, unless you need the cash. Because you can only buy $10,000 a year, you can only swap $10,000 a year, old for new, but your total investment in I Bonds then would be stable, not growing.
Here is the Treasury’s statement, which includes some nice information:
I Bond Earnings Rate of 1.38% includes a Fixed Rate of 0.20%
The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate. The 1.38% earnings rate for I bonds bought from November 2013 through April 2014 applies for the first six months after the issue date. The earnings rate combines a 0.20% fixed rate of return with the 1.18% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 232.773 in March 2013 to 234.149 in September 2013, a six-month increase of 0.59%.