The Bureau of the Public Debt Tuesday announced the new earnings rate of 3.06% for Series I (for Inflation) savings bonds issued from November 1, 2011 through April 2012.
Series I Bonds, or i-bonds, are a low-risk, liquid savings product. While you own them they earn interest and protect you from inflation. You may purchase I Bonds here and at most local financial institutions.
Earnings rates for i-bonds are set each May 1 and November 1. Interest accrues monthly and compounds semiannually. I-bonds held less than five years are subject to a three-month interest penalty. I-bonds have an interest-bearing life of 30 years. When the inflation rate is less than zero, a bond's earnings rate is less than its fixed rate, but the earnings rate is never less than zero.
The composite 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 3.06% composite earnings rate combines a 0.00% fixed rate of return with the 3.06% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U (Table) increased from 223.467 in March 2011 to 226.889 in September 2011, a six-month increase of 1.53%.
Inflation Bond Facts:
- I Bonds earn interest from the first day of their issue month.
- You can redeem them at any time after a twelve-month minimum holding period
- They are an accrual-type security
- They increase in value monthly and the interest is paid when you redeem the bond
- I Bonds are sold at face value; i.e., you pay $50 for a $50 I Bond
- I Bonds grow in value with inflation-indexed earnings for up to 30 years
- If you redeem I Bonds before they’re five years old, you’ll forfeit the three most recent months’ interest; at or after 5-years old, you won’t be penalized.
- Annual rates compounded semiannually
- Maximum purchase (per calendar year): $5,000 in TreasuryDirect and $5,000 in paper bonds
- Note: Paper savings bonds will no longer be available for purchase at financial institutions as of January 1, 2012. Electronic savings bonds in Series EE and I will remain available for purchase at treasurydirect.gov
I bond fixed rates are determined each May 1 and November 1. Each fixed rate applies to all I-bonds issued in the six months following the rate determination.
More information:
- New Earning Rates for Older I-Bonds
- CPI Table 2000 to September 2011
- Best Time to Buy I Bonds: Near the end of the month. Make sure you leave enough time for funds to clear.
- Best Time to Sell I Bonds: At the start of the month since interest for the prior month is computed on the first of each month. You don't earn interest for fractional months so sell only after the new interest shows up in your account, usually the first of the month.
- I Bond Composite rate = [Fixed rate + (2 x Inflation rate) + (Fixed rate x Inflation rate)]
Alternatives: Currently, you can only invest $10,000 a year into I bonds per Social Security number and that drops to only $5,000 in 2012. You can get a higher base rate with individual TIPS (Treasury Inflation Protected Securities) with no limit on how much to invest. Unlike I-Bonds, TIPS are not tax deferred so they are best for IRA and 401K accounts. You can also buy the TIP exchange traded fund if you want simplicity for a fee of 0.20% a year. I'd rather not pay a fee of any type with rates so low while it is so easy to buy new issue individual TIPS at my broker for no fees at all.
Disclosures: I own Series I Bonds in my personal account with base rates between 1.10% and 3.00%. That means I get as much as 3.00% if inflation falls to zero percent! Thus, I have no plans to sell these 3.00% i-Bonds until they stop paying interest in 2031 or I see a chance for deflation greater than their base rates. I own individual TIPS in my ROTH and regular IRAs. I am long individual TIPS, not the ETF TIP that has a management fee.
