US Series I Savings Bonds are a sleepy little investment - super safe and boring - that attract a lot of attention from wealthy and 'near wealthy' investors. Why? Because I Bonds can push inflation-protected, tax-deferred money into the future, with zero risk and zero investment fees.
The idea with I Bonds is to build a large inflation-protected cache, as part of an overall portfolio that includes stocks, bonds, nominal Treasurys, TIPS, bank CDs, mutual funds. The difficulty is that there is a $10,000 per person per year purchase limit on I Bonds, so to build a large stockpile you have to buy them every year. And then the question is: When do you make the purchase?
In 2017, a key date will be April 14, when the Bureau of Labor Statistics releases the March inflation report at 8:30 a.m. EDT. That will finalize the I Bond's new variable rate to be reset on May 1, and investors will have a few days to decide to buy I Bonds before May 1, or after.
But first, some background: An I Bond is a security that earns a 'composite' rate of interest based on combining a fixed rate and a variable inflation rate.
- The fixed rate will never change. So if you bought an I Bond in 2014 with a fixed rate of 0.2%, it will continue to have a 0.2% fixed rate for the life of the bond. Purchases through April 30, 2017, will have a fixed rate of 0.0%.
- The inflation-adjusted rate changes each six months to reflect the running rate of inflation. It will adjust again on May 1, 2017, for all I Bonds, no matter when they were purchased. (The effective start date of the new interest rate will vary depending on the month you bought the I Bond, a Treasury oddity.)
The current fixed rate is 0.0% and the variable rate is 2.76%, for a composite rate of 2.76%. If you buy before May 1 you get 2.76% for six months (annualized) and then the next variable rate for six months. The fixed rate will remain at 0.0% for the life of the I Bond.
The I Bond's next variable rate will be determined by non-seasonally adjusted inflation from September 2016 to March 2017, and that number is currently 0.90%, with one month remaining. It translates to a variable rate of 1.80% if inflation is zero in March. If March inflation rises 0.2%, the variable rate would jump to 2.20%.
Buying before May 1. Let's say the variable rate drops to 1.80%. If you buy $10,000 of an I Bond today, you would earn $138 of interest in the first six months and then about $90 the second six months, for a total of $228. If the variable rate rises to 2.20%, you'd earn $248 over 12 months.
But ... will the fixed rate rise after May 1? What if you wait until May 1 to see if the Treasury raises the fixed rate above 0.0%? A higher fixed rate is coveted because it stays with the I Bond until it is sold or matures.
My guess - and it is a somewhat educated guess but still a guess - is that the Treasury will raise the I Bond fixed rate to 0.1% on May 1. I have tracked the Treasury's fixed rate decisions for many years, and they can be somewhat mysterious. My analysis is based on the spread between the I Bond fixed rate and the 10-year TIPS yield, which as of March 31 was 0.43%.
Last year, on November 1, the 10-year TIPS yield was 0.11% and the Treasury lowered the fixed rate to 0.0% (which I predicted). But on May 1, 2016, the Treasury set the I Bond fixed rate at 0.1% when the 10-year TIPS was yielding 0.30%. That move last May is a pretty strong indication that the rate could rise to 0.1% on May 1, 2017.
Could it rise to 0.2%? It's possible, because on November 1, 2013, the Treasury set the I Bond fixed rate at 0.2% when the 10-year TIPS was yielding 0.40%, lower than it is today. But I think 0.2% is less likely that 0.1%, and there is always a possibility that the rate will stay at 0.0%.
The reset in November 2014 is troubling, because the Treasury set a fixed rate of 0.0% when the 10-year TIPS was yielding 0.42%, about where it is today. That one worries me.
But let's assume it rises to 0.1%. That translates to only $10 a year on a $10,000 investment. If you buy before May 1 and grab the 2.76% fixed rate for six months, you will probably earn about $30 to $40 more in the first year of that investment. That cancels out three to four years of the 0.1% fixed rate.
Buying advice. First of all, wait until April 14 and see numbers from the March inflation report to make any decisions. You will then know the new variable rate and have a better idea of the possible fixed rate. You would then have a week or so to comfortably decide to buy before May 1, or after.
Key questions to ponder:
Do you view this I Bond as a short-term investment? You should probably buy before May 1 and get the 2.76% fixed rate. You can sell after one year, pay three months' interest penalty, and still get a return of about $183 for one year, better than you can do with any one-year bank CD.
Do you view this I Bond as a long-term investment? You should probably wait until the May 1 rate reset, because the difference in variable rates isn't going to be enough to offset the 0.0% fixed rate in the long term.
However, my advice on I Bonds is to hold them until 1) they mature, 2) you need the cash, or 3) you can roll them over to a much better fixed rate. It's likely that an I Bond with a fixed rate of 0.0% or 0.1% is going to be a target for a future rollover when fixed rates rise.
So honestly, maybe a fixed rate of 0.1% makes no difference. (I hear this a lot from readers, but then again ... most I Bond investors want a higher fixed rate. Period.)
Do you think interest rates will rise sharply later in 2017? Then you might want to wait until the November 1 rate reset, which could have a higher fixed rate. Keep in mind, though, that you will still be able to buy the November fixed rate in January when the purchase cap resets for 2018.
I will be writing on the March inflation report on April 14, and I hope to post the new variable rate number within an hour of that news. And soon afterward, I will be writing again on this topic. Follow me if you want to get the email notices!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.