U.S. Bonds @ inflation

[zzyp]

8.0% interest, what I have been making making for the last 6 months on some series I bonds purchased in October 2001. That is the good news, the bad news is that next month the rate on these same bonds goes to 0.0% and stays there for 6 months. Why, mainly because in late 2008 gasoline prices were high, and they dropped by May of 2009.

Not everyone has found about series I bonds, perhaps you heard of series E or EE bonds that pay a fairly low fixed rate of interest. Series I bonds pay a small fixed rate for the life of the bond, plus the Consumer Price Index (CPI-U) for the prior 6 month period, ending in November or May.

Even if you have Series I bonds you may not realize rates can change drastically, and you likely may not be making any interest at all now. Some good news, if you have some series I bonds less than 5 years old, and you want out the three month interest penalty can be $0.00, thus no penalty at all.

Looking into the future, I am keeping some of my I bonds, Ones that have a 2% or 3% fixed rate look very good if inflation comes back. With an inflation rate of 3%, those bonds will pay 5% and 6%, respectively, not bad rates for 100% safe bonds, for sure better than any CD you can purchase today, and they are not inflation adjusted.

Actually the monthly interest rate of the first mentioned bonds was only 7.99%, but that would give a APY yield over 8%.

Discussion or questions anyone?

 

[Notmuchlonger]

I got nothing. Other than in 2001 you were a genius. I am waiting for what you will do in the future. Let me know. Keep this thread updated.

 

[CuppaJoe]

8.0% interest.... next month the rate on these same bonds goes to 0.0% and stays there for 6 months....

Some good news, if you have some series I bonds less than 5 years old, and you want out the three month interest penalty can be $0.00, thus no penalty at all.
....

Discussion or questions anyone?

Thanks, I bought a small amount of I-bonds in Dec. '05. What is the best time to sell, should I wait until January to get a 0.0 penalty? I want to sell them ASAP just because I'm closing out small accounts and see no reason to keep them.

 

[zzyp]

Cash in in Dec., go to 0 interest

Thanks, I bought a small amount of I-bonds in Dec. '05. What is the best time to sell, should I wait until January to get a 0.0 penalty? I want to sell them ASAP just because I'm closing out small accounts and see no reason to keep them.

Januaary is too late, will begin paying interest again in December.

I used the Savings Bond Wizard, a download from USBONDS.gov, assuming a $1000 bond purchased in Dec '05, it has yielded 4.29% since purchase and worth $1,172.40. It is within the 3 month penalty period, but began earning 0% interest since June 1st, and will do so for the following 6 months, Becasue of the 3 mo. penalty, it gained value in June, July, and August, because of reduced penalties each month, but may NOW be cashed in with 3 months of 0% interest penalty, so penalty at all. In November, you can find out what the inflation adjusted rate will be for the 6 months beginning in December 2009.

Other denominations prchased at that time are proportional, a $5K bond would be woth 5 times as much, a $500 bond worth half as much.

A little more digging on the I Savings Bonds Rates & Terms page I found out a bond purchaed in Dec, '05 pays 1% plus CPI inflation rate, recalculated each 6 months.

You asked for advice on when to sell, I can only tell you what I did.
I sold $90K face value (+ int) of I bonds purchased in Dec '05 on Sep. 2nd of this year on finding out next 3 more months of 0 interest and my guess that the next 6 months of low interest, only 1% more than inflation calculations based on official CPI-U figures for May '09 to Nov '09. (The actual inflation calculation is complex, but if near zero CPI-U increase, then rate set in Nov. is near 1%). For sure that $1K bond will still be worth only $1,172.40 on December 1st.

All this information was gained from web pages and downloads from the USBONDS.GOV site, but it took hours. Anyone interested in details can ask, but probably of interest only if you already own I bonds.

 

[CuppaJoe]

Thanks, Zzyp, I came to the same number on its value today per $1,000 + interest, and your post inspired me to look up the grim details. Once I overcome the inertia of doing nothing, I’ll go ahead and sell them.

What brings you to joining a retirement forum, Zzyp?

Welcome.

 

[IndependentlyPoor]

I too, have some old iBonds, but I haven't sold them because I don't know what I would do with the $$$.

How are you guys going to reinvest the bucks?

 

[CuppaJoe]

....

How are you guys going to reinvest the bucks?

I'll just put it into "bucket number one" for 4% withdrawals. That was one of the reasons I was planning to wait until December as I just dissolved another small account and put it in my checking account to be used as monthly living expenses; I may just put it into savings to get their current passbook rate (1.3%) for a few months instead of 0% in the checking account.

Zzyp has been retired for some time according to his profile. But his amount sounds sizeable; good question, IP.

 

[haha]

I may be missing something but I can't see an across the board reason for selling I-bonds. Wouldn't that decision want to be based on the embedded real rate?

Inflation will go up and down, but it is not likely to go down much from present levels, whereas it might go up a lot.

I don't have much in I-bonds, but my bonds have 3-3 1/4 real rates which is very good and hasn't been offered in long while and my never be offered again. The bonds have other nice traits, such as tax deferral, redemption liquidity, etc.

I also have some E-bonds from back in the 80s when these bonds had much nicer provisions also.

Ha

 

[brewer12345]

I agree, Ha. Cashing in I bonds with above market real rates is not a great idea.

I wish they made savings bonds a decent deal for retail holders again. They have been really unattractive for the last few years.

 

[Alan]

I don't plan on cashing in any this year as I'm in a high tax bracket, but that will drop down significantly next year. Then I'll probably sell bonds from recent years that have a very low fixed rate. I'll use the proceeds as income since I will be in the first year of drawing income from ER investments.

 

[CuppaJoe]

The I-bonds I sold today had a fixed rate of 1%, purchased when the inflation rate was 2.85%, now 0% (-2.78 inflation rate). It was a small account and just a matter of house cleaning to reduce my number of accounts. This year is fine for paying the small tax on them. I'm using the proceeds exactly as Alan describes.

 

[Alan]

The I-bonds I sold today had a fixed rate of 1%, purchased when the inflation rate was 2.85%, now 0% (-2.78 inflation rate). It was a small account and just a matter of house cleaning to reduce my number of accounts. This year is fine for paying the small tax on them. I'm using the proceeds exactly as Alan describes.

HOO AHH !!!!

looking forward to joining you shortly in the big wide world of ER

 

[CuppaJoe]

HOO AHH !!!!

looking forward to joining you shortly in the big wide world of ER

Soon!!

 

[zzyp]

Why I bonds today?

I got nothing. Other than in 2001 you were a genius. I am waiting for what you will do in the future. Let me know. Keep this thread updated.

Since I bonds do not have interest rates, even the fixed rate, printed on the bonds, I think most do not know what they are getting, it may be good, or may be bad. Since with current rules you can only purchase $10 per I's per year per person, and I bonds bought now through October earn 0%, why bother now.

When "official" inflation rates go up again, beginning in Nov, I will take another look. Because I expect inflation, I am keeping currently owned bonds that have a fixed rate over 1%, even if now paying 0%.

I think many are looking for safe investments that will rise in value if inflation. I bonds are that, just with no official inflation figures going up, not worth much.

I thought my insights mightr be useful. I put the 8% interest in there (it is true) not to brag, but to show the vast differences betweeen different bond purchase dates.

 

[zzyp]

Where to replace I bonds.

I too, have some old iBonds, but I haven't sold them because I don't know what I would do with the $$$.

How are you guys going to reinvest the bucks?

Good question, but most anything in safe investments pays more than 0.0% which is the I Bond rate for 6 months of 2009, and the next six months may not be much better.

In my fixed rate funds I have CD's laddered over 5 years, and some I bonds. I bought a USAA bank online 5 year CD at 3.5%. A low rate that I hated to tie up for 5 years.

 

[zzyp]

Some don't know about 0% I bonds yet

No matter what the fixed fixed rate of your I bonds, you are now getting 0.0% or soon will be getting 6 months of zero composite rate. In other words, if you have an I bond, you get 6 months of 0% beginning sometime in 2009.

You may, or may not, want to cash in your I's, as there is still a long term inflation return potential. but you have, or will have, 6 months of 0% return.

I bond interest changes on the 6 month anniversary of their purchase. Any I bonds purchased in May thru September, and November through March are paying 0.0%, regardless of the fixed rate, even my I bonds that have 3% fixed rate add-on.

Bonds purchased in October or April have another month of high interest left, but drop to 0% next month for a 6 month period starting at some time in 2009.

This is hard to figure out from the I bond rate descriptions, but easiest to figure out using the Savings bond wizard program, downloadable from the USBONDS.GOV site.

Also, if you want to cash out your I bond which is between 1 and 5 years old, there is now no penalty if you time it right during 2009. Tell me date of your bond purchase and I will tell you whether to do it now, or wait a to 3 months for the no-penalty sales.

 

[zzyp]

I too, have some old iBonds, but I haven't sold them because I don't know what I would do with the $$$.

How are you guys going to reinvest the bucks?

Quick answer, a 5 yr jumbo CD paying a bit over 3.5%. Will have to pay some deferred taxes, but would eventually would have to pay those anyway.

 

[zzyp]

Just looking and found it

What brings you to joining a retirement forum, Zzyp?

Welcome.

I Googled something about variable annuities, and one of the hits was this forum, looked interesting.

I had some hard-found and little known info on I Bonds and thought I would like to share it.

-Dale-

 

[zzyp]

Your 3%-3.25% pays, or will pay 0%

I may be missing something but I can't see an across the board reason for selling I-bonds. Wouldn't that decision want to be based on the embedded real rate?
[...]

I don't have much in I-bonds, but my bonds have 3-3 1/4 real rates which is very good and hasn't been offered in long while and my never be offered again. The bonds have other nice traits, such as tax deferral, redemption liquidity, etc.

[...]
Ha

Ha! to you, have you checked lately. You are missing "something", a NEGATIVE inflation adjustment of -5.56%.

You evidently don't know, you should have said your I bonds pay 0 to 3.25%. Don't know what you mean by "real rate", but I bonds have a fixed rate + an inflation rate adjustment = composite rate, recalculated every 6 months. The calculation of the composite rate is complex on the inflation rate adjustment portion, but if you tell me the purchase month and year, I will tell you your fixed rate and the 6 month period that you will receive 0% interest, beginning some time in 2009. For those 6 months there is no gain in value. It is because the CPI-U was much lower in May than last November, thus a negative number in the inflation adjustment that more than cancels out the fixed rate when added together, thankfully never adjusted to less than 0.0%.

The following 6 months you may get more than 0%, but I think unlikely to get 6% so as to average 3%, as the next inflation adjustment calculation is in November.

I agree there is not an across-the-board reason for redeeming I bonds, and in fact am keeping some of mine, the ones with a higher fixed rate, even if now paying 0.0%. I like the inflation protection as serious inflation may be coming. Deferred taxes that will have to be paid should be considered.
-ZZYP-

 

[clifp]

I am not selling my I-bonds with real rates interest rates of between 3.4 to 3.6%, with tax free compounding, until 30 years is up or I die which ever comes first.

 

[brewer12345]

Ha! to you, have you checked lately. You are missing "something", a NEGATIVE inflation adjustment of -5.56%.

You evidently don't know, you should have said your I bonds pay 0 to 3.25%. Don't know what you mean by "real rate", but I bonds have a fixed rate + an inflation rate adjustment = composite rate, recalculated every 6 months. The calculation of the composite rate is complex on the inflation rate adjustment portion, but if you tell me the purchase month and year, I will tell you your fixed rate and the 6 month period that you will receive 0% interest, beginning some time in 2009. For those 6 months there is no gain in value. It is because the CPI-U was much lower in May than last November, thus a negative number in the inflation adjustment that more than cancels out the fixed rate when added together, thankfully never adjusted to less than 0.0%.

The following 6 months you may get more than 0%, but I think unlikely to get 6% so as to average 3%, as the next inflation adjustment calculation is in November.

I agree there is not an across-the-board reason for redeeming I bonds, and in fact am keeping some of mine, the ones with a higher fixed rate, even if now paying 0.0%. I like the inflation protection as serious inflation may be coming. Deferred taxes that will have to be paid should be considered.
-ZZYP-

You seem not to uderstand the difference between nominal and real bonds andssimply semto be chasing the highest nominal yield you can find. That is up to you: its your money. However, most of us are trying to earn the highest real (after inflation, plus or minus) return we can get for a given level of risk over the long term. So a transitory period where I bonds with relatively high real coupons (fixed component) of north of 3% earn no interest because if a negative inflation adjustment is easily outweighed by the attractive real return over time. Now if you have a bunch of I bonds with a low (sub 1.5%) real coupon (fixed component), I can maybe see a case for turning them in, but most of us would not have bought such bonds in the first place because they are not that attractive an investment after inflation even when the nominal yield is high (periods of higher inflation).

And I think it is fair to say that most of usunderstand how inflation adjusted bonds work. You wouldn't happen to be looking to sell us anything, would you?

 

[Gone4Good]

So a transitory period where I bonds with relatively high real coupons (fixed component) of north of 3% earn no interest because if a negative inflation adjustment is easily outweighed by the attractive real return over time.

Here, Here!!!

I'd never, ever sell an I Bond with a 3+% real rate. Don't care what the near-term inflation adjustment is.

 

[zzyp]

I agree on high fixed rate I's

Here, Here!!!

I'd never, ever sell an I Bond with a 3+% real rate. Don't care what the near-term inflation adjustment is.

I agree because I too am keeping my I Bonds with high fixed interest, and did not advise anyone different. I just pointed out that a feakish inflation rate adjustment brought even high fixed rate bonds to 6 months of zero interest.

Why freakish, who would have worked through the math example, likely guessed that a 2.78% 6 month CPI change would lower I interest twice as much (or or to 0% if that is higher) to give 6 months of 0% interest rate to everyone I's, even yours.

Future potential is a different story. However, if you "never, ever" cash in that bond, what good is it, other than sort of pretty. The only way that I know of to get that good interest out is to redeem the bond.

 

[ziggy29]

I'd never, ever sell an I Bond with a 3+% real rate. Don't care what the near-term inflation adjustment is.

Well, I hope you would after 30 years, since they won't earn any more interest after that.

It'll be a sad day for me in 2030 when I have to redeem mine (3.4% fixed).

 

[zzyp]

An error in my message, corrected $10K, not $10

[...] Since with current rules you can only purchase $10 per I's per year per person, and I bonds bought now through October earn 0%, why bother now.
[...]
.

Should be:

Since with current rules you can only purchase $10K I's per year per person ($5K paper and $5K direct), and I bonds bought now through October earn 0%, why bother now.