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%.
Treasury Inflation-Protected Securities 
BTW, I-bonds bought any day in a month earn as though bought on the first day of that month.
Mark, normally I would buy I Bonds to the max in January, but I might wait a bit this year. If the 10-year TIPS yield rises much above 1%, it’s possible the I Bond rate could also rise.
With January fast approaching, I wonder if you will invest your yearly $10k I-Bond allotment on Jan 1 or take a bet on the Treasury increasing the fixed rate from .2% in May.
You can specify any I Bonds that you want to redeem, so you can choose to redeem the zero-interest bonds at any point after one year, in any amount above $25.
I would think that you MUST SPECIFY the I-bond(s) to be redeemed.
Thanks for update. The problem is that imho actual interest rates will go up in the years to come. These zero percent permanent rates will fare poorly as the years march on even with the inflation kicker. The other thing: as you do redeem these ibonds, does the treasury use “first in first out” or some other method for redemptions? On a “first in first out” basis, you could redeem some of the older zero interest ibonds as interest rates go higher. I may have to look at short term regular tips. Thanks again. Joe
Melissa:
It took me a long time to understand I-bonds and how to use them in a portfolio. Hopefully, you will be smarter than me and you will be able to understand them and therefore, be comfortable to use them in your portfolio. I wish I had purchased them years ago.
The author states they are a good buy. You can purchase 10,000 for your 2013 allotment before January 1st and they another 10,000 after January first. That totals to 20,000 in your fixed income assets. True you are not getting anything near the old returns bonds use to give, but THE TIMES HAVE CHANGED. I one can just break even with inflation these days he/she is doing great. For example, I have quit a bit in just cash. I know I have to move it ,but I have been almost too careful. That means inflation is wearing away my cash.
I am mentioning I bonds just in case Allen Roth brings it up. Therefore, you would have a little knowledge. Remember, the stock market is very easy to understand when compared to the bond market. The types of fixed income out there (=the bond market) really is challenging. It is very difficult to understand, so don’t become frustrated. Also, you must really understand the RISKS YOU TAKE IF YOU STRIVE FOR RETURN.
Good Luck,
Jeff
My wife and I have each bought 20k in ibonds over the last two years. Does this mean these ibonds will have a zero percent coupon rate for 28 and 29 years? I was under the assumption that as interest rates went higher, the interest rates on older ibonds woul go higher too…am I wrong? Thanks. Joe keenan
Joe, yes the fixed rate stays with the I Bond forever, while the variable rate changes each six months.
I presume that this still applies. One can buy up to $5000.00 more I-bonds with U.S. income tax refund?
Correct. http://www.treasurydirect.gov/indiv/research/faq/faq_irstaxfeature.htm
Some people – not me – have a strategy of overpaying estimated taxes to allow an extra $5,000 paper I Bond purchase. More people might be considering this now with the fixed rate available.