The May 2014 I-Bond Rate

[JPatrick]

It's that time again, when we play guess the new inflation component that will take effect May 2014.
From what I've read, the expert guessors are looking for a variable rate of 1.83%, which when added to the fixed rate of .20 gives us a fairly sweet rate exceeding 2%.
Will the current fixed rate carry over? Will it be dropped or even raised?
Good questions if you are trying to decide if buying today and capturing the fixed rate, or taking your chances on what May could bring.
Myself, I bought a few $$ worth today for the safe and secure portion of my portfolio. These new bonds will pay 1.38% for six months retroactive to April 1, after which the new 2% plus will kick in for 6 months. The payout is tax free at the state level, and in general beats current CD rates.
Of course all of the above hinges on the May rate matching the guesstimate.
As always YMMV.
Anyone else keep some I Bonds on hand?

 

[karluk]

From what I've read, the expert guessors are looking for a variable rate of 1.83%, which when added to the fixed rate of .20 gives us a fairly sweet rate exceeding 2%.

As you may already know, the only guesswork is in the fixed rate. The variable rate for the next six months is set in stone. It's calculated to be twice the change in CPI over the last six months. The most recent CPI reading is from March, 2014, when it was 236.293. Six months before that, it was 234.149 as of September, 2013. So the calculated variable rate is 2*(236.293-234.149)/234.149 = 1.83%, as you indicate.

Will the current fixed rate carry over? Will it be dropped or even raised?
Good questions

Good questions, indeed. Unlike the variable rate, I have yet to see a convincing explanation of how the US treasury decides on the semiannual fixed rate adjustment. My overall impression is that they perform some secret calculation that is designed to keep i-bond interest rates roughly competitive with TIPS. Since TIPS have been rallying recently, that would increase the risk that the new fixed rate might go down.

Myself, I bought a few $$ worth today for the safe and secure portion of my portfolio. These new bonds will pay 1.38% for six months retroactive to April 1, after which the new 2% plus will kick in for 6 months.

Unless the US treasury decides to set a negative fixed rate, (which they've never done before) it's certain that you would be getting a better interest rate for the next six months by waiting until May 1 to purchase. On the other hand, as I said above, I think there is a very good chance the fixed rate will be reduced on May 1. So the wisdom of buying now is dependent on your holding period. If you are likely to sell them after a year or so, you should probably wait. If you intend to hold long term, it might be better to lock in a positive fixed rate, even a paltry 0.2%.

Anyone else keep some I Bonds on hand?

I try to monitor the variable rate each April and October to see if there will be a big increase or decrease. I've made some very good investments by keeping track of the fluctuations, but I currently don't own any ibonds. The 1.83% variable rate is good, not great, so I probably won't be buying any for a while.

 

[JPatrick]

Good points one and all Karluk.
I look at the bonds as a subsitute for short to midterm CD's. If and when they fail to impress in that category, then I'm out with no reservations about the penalty.
As part of the overall financial plan, these bonds are a income gap filler for DW. My reading of the tea leaves tells me that I'll be checking out before her and taking with me a good chunk of the monthly pension payout. The 4% withdrawal from the portfolio stash will cover the bulk of that, but there's no guarantee. Sooo, what could be easier than a monthly trip to the bank (or a few keystrokes) to cash an I Bond or two?

My reason for jumping in today versus May, is to ensure I lock in that fixed rate, however paltry. The only way I'll feel bad is if they actually raise the fixed in May.

 

[FIREd]

For us, I-bonds will serve as an income gap filler until we can start accessing our IRAs. So we'll keep on buying them, up to the limit, until DW retires completely.

 

[Mulligan]

I admit I know nothing but that doesn't keep me from offering my opinion. I just recently bought my quota after inflation component was released and to ensure that I capture the big .2% fixed rate. I do not see how they would add a fixed component this time when the inflation part is already going to be higher than the 5 year treasury rate currently is. I will take my 1.38% for 6 to ensure the 2% plus the following 6 months. I do not like the majority portion of my money in the stock market, so I will continue to stack nickels from my IBond purchases.


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[MBSC]

Anyone else keep some I Bonds on hand?

I always buy $10k at the end of April. I made my purchase last Friday. I like the tax deferred interest combined with the exemption from state income tax. They will substitute for annuity payments when I get older. I am a fairly conservative investor.

 

[imoldernu]

While we definitely missed out on better rates over the years, our IBond purchases from the early years, when you could buy $30k/person/yr... have produced an average yield of from 4.4% to 6.0% cumulative to date. Our mistake was taking out $60K of the highest interest bonds to buy our current home in 2004.
...but no complaints... slept well through the 2008/09 years.

 

[Alan]

Anyone else keep some I Bonds on hand?

I bought I Bonds during the 8 year run up to us retiring and have been spending them to help bridge the gap until we get access to Tax advantaged accounts, pensions and SS.

I very much like the Savings Bond Wizard you can download from the website to keep track of your bonds. Makes it very easy to select which bonds to sell each year.

 

[Mulligan]

I bought I Bonds during the 8 year run up to us retiring and have been spending them to help bridge the gap until we get access to Tax advantaged accounts, pensions and SS.

I very much like the Savings Bond Wizard you can download from the website to keep track of your bonds. Makes it very easy to select which bonds to sell each year.

Alan, I have read frequently the benefit to the savings bond wizard, but I am missing what it helps over just looking on the TD site as it already shows my bonds and what each one is worth with the interest included. Is it because some people accumulate so many? I just buy once in bulk each year so I do not have that many accumulated over the years.


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[Alan]

Alan, I have read frequently the benefit to the savings bond wizard, but I am missing what it helps over just looking on the TD site as it already shows my bonds and what each one is worth with the interest included. Is it because some people accumulate so many? I just buy once in bulk each year so I do not have that many accumulated over the years.


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We do have a lot of bonds and I like the wizard because it shows all the bonds in a very easy to read matrix, and you can enter future dates. It also allows me keep a history, so when I cash a bond I mark it as cashed rather than delete it. The wizard also shows the current interest rate for each bond so it is easy to see which bonds I want to cash in.

To log onto TD is pretty tedious with a very long user number and 2 step authentication, although not nearly as difficult as it used to be with that card you used to have handy.

ETA
I also have both mine and DW's bonds listed in the wizard, so can see the whole picture rather than having to log on twice.

 

[Mulligan]

We do have a lot of bonds and I like the wizard because it shows all the bonds in a very easy to read matrix, and you can enter future dates. It also allows me keep a history, so when I cash a bond I mark it as cashed rather than delete it. The wizard also shows the current interest rate for each bond so it is easy to see which bonds I want to cash in.

To log onto TD is pretty tedious with a very long user number and 2 step authentication, although not nearly as difficult as it used to be with that card you used to have handy.

ETA
I also have both mine and DW's bonds listed in the wizard, so can see the whole picture rather than having to log on twice.

Thanks, Alan. Yes, bypassing the login process saves a bunch of time for a quick look. As mine is actually a three step process. With the first being, "where is my book that has all my passwords at".


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[Alan]

Thanks, Alan. Yes, bypassing the login process saves a bunch of time for a quick look. As mine is actually a three step process. With the first being, "where is my book that has all my passwords at".


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Exactly

 

[audreyh1]

It's that time again, when we play guess the new inflation component that will take effect May 2014.
From what I've read, the expert guessors are looking for a variable rate of 1.83%, which when added to the fixed rate of .20 gives us a fairly sweet rate exceeding 2%.
Will the current fixed rate carry over? Will it be dropped or even raised?
Good questions if you are trying to decide if buying today and capturing the fixed rate, or taking your chances on what May could bring.
Myself, I bought a few $$ worth today for the safe and secure portion of my portfolio. These new bonds will pay 1.38% for six months retroactive to April 1, after which the new 2% plus will kick in for 6 months. The payout is tax free at the state level, and in general beats current CD rates.
Of course all of the above hinges on the May rate matching the guesstimate.
As always YMMV.
Anyone else keep some I Bonds on hand?

Nice to know. I bought some (as usual) in Jan and nice to see a rate increase which will apply to my new ones in July.

 

[Chuckanut]

As always YMMV.
Anyone else keep some I Bonds on hand?

No, but I may.

Thanks for posting this information.

 

[Mulligan]

No, but I may.

Thanks for posting this information.

If you Chuck, a few details in case you do not know... If you want to be 100% sure you get the fixed .2% they probably need to be bought today as it takes a day or so to process. Some people in past have complained they didn't get the previous rate but received the next 6 month rate because of slow processing. Interest is credited to you from beginning of month even though you can buy at the end of the month. If you do not keep them 5 years, you will forfeit last 3 months of interest, and they cannot be redeemed at all the first 12 months.


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[MBSC]

May 1, 2014

Effective today, Series EE savings bonds issued May 2014 through October 2014 will earn an annual fixed rate of 0.50% and Series I savings bonds will earn a composite rate of 1.94%, a portion of which is indexed to inflation every six months. The EE bond fixed rate applies to a bond’s 20-year original maturity. Bonds of both series have an interest-bearing life of 30 years.

Rates for savings bonds are set each May 1 and November 1. Interest accrues monthly and compounds semiannually. Bonds held less than five years are subject to a three-month interest penalty.

I Bond Earnings Rate of 1.94% includes a Fixed Rate of 0.10%

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 1.94% earnings rate for I bonds bought from May 2014 through October 2014 applies for the first six months after the issue date. The earnings rate combines a 0.10% fixed rate of return with the 1.84% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 234.149 in September 2013 to 236.293 in March 2014, a six-month increase of 0.92%.

 

[Mulligan]

Well then, I am glad I bought last month to get the higher fixed rate. Not that the difference is going to get me a piece of bubble gum. But I was buying anyways, and I like to get the opportunity occasionally to fool myself into thinking I actually know what I am doing.


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[JPatrick]

Well then, I am glad I bought last month to get the higher fixed rate. Not that the difference is going to get me a piece of bubble gum. But I was buying anyways, and I like to get the opportunity occasionally to fool myself into thinking I actually know what I am doing.


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Yes, it turns out the bird in hand was indeed worth more than the two in the bush, or however that saw goes.
Now off to daydream about how I'm going to spend that extra .10%.

 

[Mulligan]

Yes, it turns out the bird in hand was indeed worth more than the two in the bush, or however that saw goes.

Now off to day dream about how I'm going to spend that extra .10%.

Ya, I miss the good ol days where I wouldn't bother to waste my time moving a CD for 1%. Now I am reduced to rejoicing over a
.10 of a percent victory.


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[FIREd]

Ya, I miss the good ol days where I wouldn't bother to waste my time moving a CD for 1%. Now I am reduced to rejoicing over a
.10 of a percent victory.

I too am rejoicing over my purchase on 04/29... Karluk's post convinced me to go ahead with the purchase before 05/01. Thanks karluk!

Good questions, indeed. Unlike the variable rate, I have yet to see a convincing explanation of how the US treasury decides on the semiannual fixed rate adjustment. My overall impression is that they perform some secret calculation that is designed to keep i-bond interest rates roughly competitive with TIPS. Since TIPS have been rallying recently, that would increase the risk that the new fixed rate might go down.

 

[imoldernu]

Fiscal Service Announces New Savings Bonds Rates, Series I to Earn 1.94%, Series EE to Earn 0.50%

up .1 better than down .1

Savings bond wizard not yet updated. Yield on 2001 Bonds to date 6%.

 

[karluk]

In recent years I have been evalutating I-bonds the same way I would evaluate a one year CD. Using that criteria, now is not the time to buy I-bonds IMHO, regardless of whether the purchase was made in April or May. A purchase in April would have gotten a slightly higher fixed rate in exchange for a much lower variable rate. On the other hand, a purchase in May would get the higher variable rate, but without the slightest clue as to what the variable rate will become after six months. One can wait until October and make a truly informed decision, because the variable rate for the second six months will be public information then.

Using this strategy, my most recent I-bond purchase was in October, 2011. I knew I would be getting 4.6% interest for the first six months and 3.06% for the second six months. That was much superior to the interest rates available on competing fixed income investments. I ended up holding these I-bonds until earlier this year, then redeeming them when the interest penalty was very low.

Applying the same strategy to 2014, I will be looking at I-bonds quite seriously in October. I already know that I will be getting 1.94% for the first six months and will be able to calculate the interest for the second six months. With even slightly elevated inflation numbers between now and September's CPI, there's a good chance that I-bonds will be a good 15 month investment, even after paying the interest penalty for early redemption.

 

[Mulligan]

In recent years I have been evalutating I-bonds the same way I would evaluate a one year CD. Using that criteria, now is not the time to buy I-bonds IMHO, regardless of whether the purchase was made in April or May. A purchase in April would have gotten a slightly higher fixed rate in exchange for a much lower variable rate. On the other hand, a purchase in May would get the higher variable rate, but without the slightest clue as to what the variable rate will become after six months. One can wait until October and make a truly informed decision, because the variable rate for the second six months will be public information then.



Using this strategy, my most recent I-bond purchase was in October, 2011. I knew I would be getting 4.6% interest for the first six months and 3.06% for the second six months. That was much superior to the interest rates available on competing fixed income investments. I ended up holding these I-bonds until earlier this year, then redeeming them when the interest penalty was very low.



Applying the same strategy to 2014, I will be looking at I-bonds quite seriously in October. I already know that I will be getting 1.94% for the first six months and will be able to calculate the interest for the second six months. With even slightly elevated inflation numbers between now and September's CPI, there's a good chance that I-bonds will be a good investment 15 month investment, even after paying the interest penalty for early redemption.

I think we are in agreement we will not get rich on these no matter when purchased. Unless I am missing something, I don't see the benefit of what you are saying. Buying last month will ensure about a 1.71% rate for 12 months. That compares favorably to a one year CD. If CPI does indeed go up in fall, you continue to hang unto them. Where is the money that is waiting to be used in October sitting at? At least it would be drawing 1.38%. It takes so long to get an appreciable amount of money into these due to the low limits, I would never consider bouncing in and out of them. But, I probably use them for a different reason. Now, if the TIPS fixed on the 10 year would ever go up appreciably, I would probably cash them all in and park them there for good.


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[karluk]

Unless I am missing something, I don't see the benefit of what you are saying. Buying last month will ensure about a 1.71% rate for 12 months. That compares favorably to a one year CD. If CPI does indeed go up in fall, you continue to hang unto them. Where is the money that is waiting to be used in October sitting at? At least it would be drawing 1.38%. It takes so long to get an appreciable amount of money into these due to the low limits, I would never consider bouncing in and out of them.

The vast majority of my fixed income investments reside in the stable value fund in my retirement account. Its current yield is 1.72%, so buying I-bonds in April would have been a really bad move for me. I would have had to sell stocks from my taxable account to raise money for the I-bond purchase and simultaneously move money from the stable value fund to stocks in the retirement account. The net result would have been to decrease the after tax yield of my fixed income investments and lose the possibility of realizing stock profits as 0% LTCG.

That may be different in October. A spike in inflation to, say, 3 or 4 percent would make I-bond yields higher than what's available in my stable value fund and might, possibly, more than make up for the unfavorable tax treatment and early redemption penalties of I-bonds. That's what happened in October, 2011, and the current relatively high variable rate makes a repeat possible.

 

[Mulligan]

The vast majority of my fixed income investments reside in the stable value fund in my retirement account. Its current yield is 1.72%, so buying I-bonds in April would have been a really bad move for me. I would have had to sell stocks from my taxable account to raise money for the I-bond purchase and simultaneously move money from the stable value fund to stocks in the retirement account. The net result would have been to decrease the after tax yield of my fixed income investments and lose the possibility of realizing stock profits as 0% LTCG.

That may be different in October. A spike in inflation to, say, 3 or 4 percent would make I-bond yields higher than what's available in my stable value fund and might, possibly, more than make up for the unfavorable tax treatment and early redemption penalties of I-bonds. That's what happened in October, 2011, and the current relatively high variable rate makes a repeat possible.

I see where you are coming from, unfortunately for me I don't have a stable value fund. But I certainly respect your desire to scratch out a few more shekels whenever possible, as I am doing the same thing. I am going to be approaching a pension income exemption limit in a couple of years, so I am throwing everything I can into some sort of tax differed vehicle to extend this $2500 tax credit for a couple extra years. I have a bank that doesn't report your CD income until maturity, so that will be my last stop before I butt up to that limit then load up on 5 year CDs.


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