March CPI down 0.2%: May I Bond Rates Announced

March_CPI_Down_May_I-Bonds_Rates_AnnouncedOn Tuesday, the labor department announced the latest CPI-U numbers.  With these numbers, you can calculate the upcoming inflation portion of I bonds and determine whether it’s better to buy your bonds now or wait until May.  As you may know, I bonds are composed of an inflation rate and a fixed rate.  The fixed rate is expected to be zero again but the inflation rate actually went down from 1.76% to 1.18%.  According to the labor department, the decrease is due mainly to a decrease in gas prices(I didn’t even notice!).

Buy Your I bonds Now

Even though the rate will be decreasing to 1.18% on May 1st, you can lock in the 1.76% rate for 6 months by purchasing before the end of this month(April).  You would receive the higher rate for 6 months until October 2013 when you would receive the new 1.18% rate for 6 months giving you a net yearly return of 1.47%.  Even though that may not seem like a lot, it’s a pretty good return for a risk-free investment.  Assuming the fixed portion will be 0%, your I bond interest rate would change every 6 months according to the CPI-U.

I bonds increase in value on the first day of the month so you can actually buy your I bonds on the last day of the month and get a full month’s interest.  Alternatively, when you redeem your I bonds, you want to redeem them early in the month in order to get a free month’s worth of interest.

Better Than a CD?

I own $6,000 worth of I bonds(5k purchased in 2012, 1k received as a gift in 2013) but I don’t include them in my overall retirement allocation.  Since I have plenty of tax advantaged space for my bonds, I don’t feel the need to invest in bonds in after-tax accounts.  Instead, I use them more like a CD or fixed rate investment.  So how do they compare to the best CD rates?

Ally 1 year CD’s are currently(4/17/2013) paying 0.90% but remember you should always invest in their 5 year CD’s since there’s only a 2 month interest penalty.  Ally’s 5 year CD’s are currently paying 1.54%, so if we were to invest in a 5 year CD with Ally and redeem it after one year our effective rate after the 2 month interest penalty would be 1.28%.

You should always purchase an I bond towards the end of the month but I would give yourself at least a 2-3 day cushion to make sure you get your order in on time.  Assuming we buy our I bonds on Monday April 29th, 2013 that would give us an interest rate of 1.76% from April to September and a 1.18% rate from October to March.  But since we can buy at the end of April and sell at the beginning of March we only need to hold the I bond for just over 10 months to get a full years worth of interest.  Our net annual return after the 3 months interest penalty would be 1.40% which is a bit better than the return on a CD.

There is a mandatory 1 year holding period on I bonds so if there’s any chance you might need the money, you should probably go with an Ally CD.  I like I bonds though since they’re tied to the inflation rate, which minimizes the interest rate risk and they are exempt from state and local taxes.

Readers, have you bought any I bonds this year?  Does it make sense to buy now or would you wait and hope that interest rates go up in September/October?

-Harry @ PF Pro

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Hi, I'm Harry, the owner and head writer for Your PF Pro. I started this site back in 2011 in order to create a place where young professionals could come and get all of their financial questions answered. On the site, you'll find articles on everything from asset allocation for retirement to saving money at Chipotle! So enjoy..

Comments

    • says

      I work in a poorer area of San Diego, which also means gas prices are around the lowest in the county. I don’t even look at the prices very often since I know I’m paying the lowest price around, just fill up and see the total damage haha.

  1. says

    I set up an order to buy another $5k on April 29th. That’ll be my $10k for the year. I wanted to get them in pretty quickly so that the year deadline is up faster. I foresee needing to add more than the 401(k) contribution limit in bonds each year and it would be nice to have some extra room. I bought some this year to see how it goes and whether it’s something I want to contribute to in the future. Pushing the taxes off for 30 years is a pretty nice idea when I could hit the 33% tax bracket in another few years.

    I’m not sure that I’ll buy any more until the mortgage is paid off, but this wasn’t a bad move for part of my 12-month emergency fund since I was considering CDs. This is a better plan since at least they keep up with inflation. So now I have 6 1/3 months’ expenses in savings, 3 1/3 months’ expenses in i-bonds, and another 4 months’ expenses in stock index funds.
    Leigh recently posted…Challenge: No Manual Money Moves in AprilMy Profile

    • says

      Nice I’m still waiting to see what my fiance’s student loan package will look like. That will determine a lot about what I do with my savings this year.

      12 month EF is pretty solid but I’m not sure I would consider the 4 months worth of stock funds in my EF since you never know when you’ll need to cash that out.

      • says

        Psst it’s fiancé for a guy and fiancée for a girl. So if you only use one e, it means you’re marrying a guy ;)

        I really only see myself as having a 6 month EF with an extra 3 months’ expenses as backup and then the stock funds are really just the next step that I would access since the rest of my money is tied up in retirement accounts or in my condo. I really only count the stock funds as 2 months (half of value).

        Sounds like you’ll just be piling up cash for a few months until you know more what’s going on? Are you going to max out your 401(k) for 2013?
        Leigh recently posted…Challenge: No Manual Money Moves in AprilMy Profile

        • says

          Wow really?! I never knew that, I’m so ashamed of my poor grammar.

          Ok that makes sense, I think 6-9 months is plenty for someone in your situation anyways.

          That’s exactly what I’m doing, saving up cash(stockpiling!). I’ve been debating over whether to max out 401(k) or not. I don’t know if I could fully get there, but I would get pretty close if I make the change within the next paycheck or two. Decisions, decisions…

          • says

            It’s French! They do gendered stuff, unlike English.

            If it was me, I would totally max it out, haha. I don’t know all your numbers and it would depend on how much cash I had stockpiled already, but you can never get that room back! By July or so, I should have little enough left to put into the 401(k) that I could finish maxing it out with one paycheck!
            Leigh recently posted…Challenge: No Manual Money Moves in AprilMy Profile

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