Zero Interest Rates on I-Bonds

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Dutchgirl
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Zero Interest Rates on I-Bonds

Post by Dutchgirl » Sat Aug 01, 2015 7:31 pm

I just had a look at my I-bonds on the Savings Bond Calculator and saw that the interest rate on bonds bought in January 2006 and January 2003 is now 0.00%. A bond issued in February 2002 is now at 0.38%. At first I thought it must be a mistake -- but probably not. Are people holding on to these bonds which are now paying nothing at all? I could sell them and use the money for living expenses instead of selling other investments, since I am now retired and in the withdrawal stage. I could use my Required Minimum Distribution to buy additional stock and bond index funds in my taxable account. Any advice?

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Re: Zero Interest Rates on I-Bonds

Post by #Cruncher » Sat Aug 01, 2015 7:58 pm

Dutchgirl wrote:I just had a look at my I-bonds on the Savings Bond Calculator and saw that the interest rate on bonds bought in January 2006 [1.00%] and January 2003 [1.60%] is now 0.00%. A bond issued in February 2002 [2.00%] is now at 0.38%. ... I could sell them and use the money for living expenses instead of selling other investments ... Any advice?
Hold on to them. The low interest rates will last for only six months.

These three I Bonds have fixed rates between 1.00% and 2.00%. (I've indicated this in the quote from your post along with links showing the earnings history of a $100 denomination bond.) These fixed rates are much better than the 0% fixed rate on currently purchased I Bonds.

The reason your I Bonds now have low rates is that all I Bonds are adjusted every six months for the latest change in the Consumer Price Index (CPI). This CPI change is combined with the fixed rate to determine the overall earnings rate for the next six months. The latest change in the CPI was negative. (This has happened only once before since I Bonds were introduced in 1998.) This causes their overall earnings rate to be less than their fixed rates. But, to repeat, this will last only six months.

The next CPI change adjustment will almost certainly be positive. So, after the current six month period is over, their overall earnings rate will almost certainly exceed their fixed rates. For more information consult How does Treasury figure the I bond interest rate? on the TreasuryDirect web site.

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Re: Zero Interest Rates on I-Bonds

Post by Rainier » Sat Aug 01, 2015 9:14 pm

If your holding period is less than 5 years you can sell without a three month interest penalty during this period (just check the calculator to ensure the right timing).

Actually, you still pay the penalty, in this case it is $0.
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Re: Zero Interest Rates on I-Bonds

Post by livesoft » Sat Aug 01, 2015 9:29 pm

I think one has to be unemotional about all this. If you can get a better return elsewhere, then cash them in and spend the money. Low interest rates could last quite a long time.
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Re: Zero Interest Rates on I-Bonds

Post by market timer » Sat Aug 01, 2015 10:19 pm

I agree with #Cruncher. Those I bonds have good rates relative to the market, we've just had a temporary downturn in CPI due to the oil slump.

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Re: Zero Interest Rates on I-Bonds

Post by Kevin M » Sat Aug 01, 2015 10:27 pm

With the 5-year TIPS rate not much above 0% (it was less than 0% earlier in the month), I Bonds at 0% are still a good deal for an inflation-protected investment, since they have much less term risk than a 5-year TIPS. Due to the relatively low annual purchase limit, I prefer to hold onto my I Bonds--at least until TIPS rates are more favorable. However, I am holding off until November to buy this year's allocation, hoping for a rate > 0%. In the meantime, I'm earning 1%-2% on the money that could be used to buy I Bonds in November.

We did sell my daughters I Bonds today though, since these were part of her education fund, and with a May purchase date, the 3-month penalty is $0, so I figured it was a good time to sell them. Her other education-fund investments are earning a higher rate, like 3.09% in the Colorado Stable Value Plus fund, so selling the lowest-yield investment seemed like the right choice.

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Re: Zero Interest Rates on I-Bonds

Post by rca1824 » Sat Aug 01, 2015 10:54 pm

Are people holding on to these bonds which are now paying nothing at all?


The most direct competitor to an I-bond is a HY savings account which is now yielding 1%. The problem is the HY savings account is not protected against unexpected inflation nor will that 1% yield persist if interest falls even further. So in some future outcomes of the world I-bonds will outperform HY savings. I think that means they're worth holding in a small slice.
Last edited by rca1824 on Sat Aug 01, 2015 11:14 pm, edited 1 time in total.
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Re: Zero Interest Rates on I-Bonds

Post by dodecahedron » Sat Aug 01, 2015 11:08 pm

rca1824 wrote:
Dutchgirl wrote:A bond issued in February 2002 is now at 0.38%.


Now that you pointed this out I am a bit confused how the composite rate is 0.38%. The fixed rate was 2.0% and the inflation rate is -0.8%. The formula is 2 x fixed rate + 3 x inflation rate. 1.6%, not 0.38%? Is the Treasury trying to screw us and hope we don't check their math?


I am not sure where you are getting your formula, but the math checks for me. The Treasury Department says the formula is

Treasury Direct website wrote:Composite Rate= [Fixed Rate + (2xInflation Rate) + (fixed rate x inflation rate)]


2.0% + 2x(-0.8%) + 2.0%x(-0.8%) = 0.38% (rounding to two decimal places)

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Re: Zero Interest Rates on I-Bonds

Post by rca1824 » Sat Aug 01, 2015 11:16 pm

dodecahedron wrote:
rca1824 wrote:
Dutchgirl wrote:A bond issued in February 2002 is now at 0.38%.


Now that you pointed this out I am a bit confused how the composite rate is 0.38%. The fixed rate was 2.0% and the inflation rate is -0.8%. The formula is 2 x fixed rate + 3 x inflation rate. 1.6%, not 0.38%? Is the Treasury trying to screw us and hope we don't check their math?


I am not sure where you are getting your formula, but the math checks for me. The Treasury Department says the formula is

Treasury Direct website wrote:Composite Rate= [Fixed Rate + (2xInflation Rate) + (fixed rate x inflation rate)]


2.0% + 2x(-0.8%) + 2.0%x(-0.8%) = 0.38% (rounding to two decimal places)


Gotcha, I missed a parenthesis. Since inflation is doubled, does this mean in an inflationary environment, I-bonds will return double the inflation rate? This seems too good to be true.

An I-bond issued May 2000 at a fixed rate of 3.6% would have returned 8.61% in Nov 2008 when inflation was 2.46%. That's just incredible.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB

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Re: Zero Interest Rates on I-Bonds

Post by Kevin M » Sat Aug 01, 2015 11:20 pm

rca1824 wrote:The most direct competitor to an I-bond is a HY savings account which is now yielding 1%.

Only in the very short term, which is why it makes sense to hold off until November for purchasing one's 2015 allocation to I Bonds.

Longer-term, the most direct competitor is a TIPS, since it hedges inflation like an I Bond, although we can argue about the appropriate maturity to use in the comparison.

As mentioned above, 5-year TIPS yield is wandering around 0% lately, so an I Bond at 0% real is a good deal, given the much lower term risk (limited to the 3-month early withdrawal penalty in the first five years, and nothing after that). The low annual purchase limit decreases the usefulness for larger portfolios, but also is a reason not to sell I Bonds unless TIPS yields are more competitive, and to max out annual purchases in the meantime.

Years ago I sold all my I Bonds because I could earn a higher rate on safe nominal investments, like a money market account. If I knew then what I know now, I think I would have kept the I Bonds, which I'm sure had decent fixed rates. Although I may have done about as well with the nominal investments (at least until recent years), I would've loved to have a bigger I Bond stash at this point in my life for additional hedging against unexpected inflation.

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Re: Zero Interest Rates on I-Bonds

Post by Dutchgirl » Sat Aug 01, 2015 11:26 pm

Thank you for the replies. I think I will wait and see whether the rates go up when they are next adjusted. As I explained, I am in the withdrawal phase, so I could sell these and buy some more Total Bond Index and/or Total Stock Market Index with some of my RMD or five year CD's. An extended period of 0.0 percent seems idiotic. In the mean time I'll do nothing, an approach which can't do too much harm . . . . Thank you again.

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Re: Zero Interest Rates on I-Bonds

Post by dodecahedron » Sat Aug 01, 2015 11:30 pm

rca1824 wrote:
Gotcha, I missed a parenthesis. Since inflation is doubled, does this mean in an inflationary environment, I-bonds will return double the inflation rate? This seems too good to be true.


The inflation rate used in the formula is a 6-month inflation rate, but the composite interest rate is quoted as an annual rate.

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Re: Zero Interest Rates on I-Bonds

Post by Kevin M » Sat Aug 01, 2015 11:36 pm

Dutchgirl wrote:Thank you for the replies. I think I will wait and see whether the rates go up when they are next adjusted. As I explained, I am in the withdrawal phase, so I could sell these and buy some more Total Bond Index and/or Total Stock Market Index with some of my RMD or five year CD's. An extended period of 0.0 percent seems idiotic. In the mean time I'll do nothing, an approach which can't do too much harm . . . . Thank you again.

Of course the reason to keep the I Bonds is to hedge against unexpected inflation. How large a portion of your portfolio is your I Bonds, and what other inflation-hedged investments do you have?

I think an extended period of 0% inflation is unlikely, given that the Fed target is 2%, and the breakeven inflation for 5-years is 1.36% and for 10-years it's 1.74%, but my crystal all is no less cloudy than anyone else's. You'll probably be glad you held your I Bonds if inflation hits 2%, 3% or even higher in the next few years. And if not, that's what your nominal fixed income is for; this is what diversification is about.

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Re: Zero Interest Rates on I-Bonds

Post by Dutchgirl » Sun Aug 02, 2015 12:05 am

The I-Bonds are 22% of my bond allocation. Total bond allocation is 72.3%, so 22% of 72.3%.
In addition, I have Vanguard Inflation Protected Securities Index Fund, 15.7% of that same
72.3%. So about 38% of my bond allocation is kind of inflation protected.
Maybe my bond allocation is a little high, but I am 80 years old now, and there have been some bubbles in the recent past.

I have about a 26% allocation in Stock funds, according to Vanguard. The rest is cash in Prime.
Thanks again for your feedback.

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Re: Zero Interest Rates on I-Bonds

Post by #Cruncher » Sun Aug 02, 2015 6:39 am

rca1824 in this post wrote:An I-bond issued May 2000 at a fixed rate of 3.6% would have returned 8.61% in Nov 2008 when inflation was 2.46%. That's just incredible.
Yes, it did earn at an 8.61% annual rate for the six months beginning November 2008. Even Durchgirl's January 2006 purchase with a lowly 1.0% fixed rate (lowest of the three I Bonds she mentions) earned at an annual rate of 5.94% for the six months beginning January 2009 when it was adjusted for the same 2.46% semi-annual inflation rate.

Code: Select all

0.0861 = 0.036 + 2 * 0.0246 + 0.036 * 0.0246
0.0594 = 0.010 + 2 * 0.0246 + 0.010 * 0.0246
By the way, an I Bond purchased May 2000 earned at an even higher 9.40% annual rate for the six months beginning November 2005 when it was adjusted for a 2.85% semi-annual inflation rate. This rate triangle shows the fixed rates, semi-annual inflation rates, and composite rates for all six month periods for all I Bonds since they were first issued in 1998

It should be noted that, because of the 0% floor on the composite rate (see FAQ Can I ever lose money in I bonds?), most I Bonds actually benefit from six month periods with negative inflation rates. [1] For example, take a $25 denomination [2] of the original poster's January 2006 bond with a 1.0% fixed rate. It will grow in value at an average annual rate of 3.29% (compounded semi-annually) for the ten years through January 2016. This includes two six month periods (-2.78% July - Dec 2009 and -0.80% July - Dec 2015) with negative inflation rates. However, without the effect of the 0% floor, this bond would have grown at only a 3.03% average annual rate. Here is the actual growth and what its growth would have been without the 0% floor:

Code: Select all

                  --- Actual ---      -- No Floor --
        Infl      Comp                Comp
Period  Rate      Rate     Value      Rate     Value
------  -----     -----   ------      -----   ------
   1    2.85%     6.73%   $25.84      6.73%   $25.84
   2    0.50%     2.01%   $26.10      2.01%   $26.10
   3    1.55%     4.12%   $26.64      4.12%   $26.64
   4    1.21%     3.43%   $27.10      3.43%   $27.10
   5    1.53%     4.08%   $27.65      4.08%   $27.65
   6    2.42%     5.86%   $28.46      5.86%   $28.46
   7    2.46%     5.94%   $29.31      5.94%   $29.31
   8   (2.78%)    0.00%   $29.31     (4.59%)  $28.64 <-----
   9    1.53%     4.08%   $29.91      4.08%   $29.22
  10    0.77%     2.55%   $30.29      2.55%   $29.59
  11    0.37%     1.74%   $30.55      1.74%   $29.85
  12    2.30%     5.62%   $31.41      5.62%   $30.69
  13    1.53%     4.08%   $32.05      4.08%   $31.32
  14    1.10%     3.21%   $32.56      3.21%   $31.82
  15    0.88%     2.77%   $33.01      2.77%   $32.26
  16    0.59%     2.19%   $33.37      2.19%   $32.61
  17    0.59%     2.19%   $33.74      2.19%   $32.97
  18    0.92%     2.85%   $34.22      2.85%   $33.44
  19    0.74%     2.49%   $34.65      2.49%   $33.86
  20   (0.80%)    0.00%   $34.65     (0.61%)  $33.76 <----
                           -----               -----
Overall growth rate        3.29%               3.03%

Code: Select all

3.29% = 2 * ((34.65 / 25) ^ (1 / 20) - 1)
3.03% = 2 * ((33.76 / 25) ^ (1 / 20) - 1)

The growth without any negative periods or without the 0% floor can also be approximated (not accounting for rounding) as follows:

Code: Select all

3.02% = 2 * ((1 + 0.01 / 2) * (236.119 / 193.3) ^ (1 / 20) - 1)
where 193.3 (March 2005) and 236.199 (March 2015) are the beginning and ending Consumer Price Indexes used to adjust this bond over its life. (See CPI-U since 1961.)

  1. Compared to a scenario with the same overall change in the CPI, but where the change every six months is positive.
  2. Using $25 I Bond since the Treasury rounds its value off to the nearest penny and then extrapolates to get value of larger bonds.

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Re: Zero Interest Rates on I-Bonds

Post by gclancer » Sun Aug 02, 2015 1:40 pm

market timer wrote:I agree with #Cruncher. Those I bonds have good rates relative to the market, we've just had a temporary downturn in CPI due to the oil slump.


To the extent you came looking for advice, this is a question with an easy answer - keep these I Bonds. They're better than any other after-tax fixed income investment to be had right now.

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Re: Zero Interest Rates on I-Bonds

Post by Kevin M » Sun Aug 02, 2015 1:51 pm

Dutchgirl wrote:The I-Bonds are 22% of my bond allocation. Total bond allocation is 72.3%, so 22% of 72.3%.
In addition, I have Vanguard Inflation Protected Securities Index Fund, 15.7% of that same
72.3%. So about 38% of my bond allocation is kind of inflation protected.
Maybe my bond allocation is a little high, but I am 80 years old now, and there have been some bubbles in the recent past.

I have about a 26% allocation in Stock funds, according to Vanguard. The rest is cash in Prime.
Thanks again for your feedback.

I like I Bonds much better than the Vanguard IP fund (VIPSX/VAIPX), because they don't have the interest-rate risk, and the yield on the fund is only slightly higher than 0%. The interest-rate risk has showed up a bit in the last year, resulting in the negative 1.37% return over the last year (I Bonds never have negative returns). I would sell the fund before selling the I Bonds.

What other bond fund(s) do you own?

I don't think your bond allocation is too high at all for your age. If it were me, it probably would be even higher (except I'd be using mostly CDs instead of bond funds), but that depends on our overall ability, need and willingness to take risk. I'm 63 and have only 30% allocated to stocks because of low need to take risk.

As a tangent, Prime Money market is earning about 0%, has been for some time, and is not inflation hedged. Perhaps at age 80 the simplicity of having everything at Vanguard is worth it, but it only takes a few minutes to set up an online savings account somewhere like Ally Bank or Synchrony Bank, set up an electronic transfer link with Vanguard, and transfer your cash to a savings account earning about 1%.

At least that's the case for a taxable (e.g., individual, joint, trust) account. For an IRA, you have to fill out a little more paperwork, and complete a 1-page IRA transfer form--probably not worth it for a small amount in an IRA.

For a taxable account, once the link is set up, you can use an online savings or checking account almost like a money market account. You do same-day purchases of mutual funds, have dividends deposited to the bank account, and have proceeds from sales deposited to the bank account.

However, according to your numbers, this is less than 2% of your portfolio, so not a big deal.

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Re: Zero Interest Rates on I-Bonds

Post by tyler_cracker » Sun Aug 02, 2015 5:15 pm

Thx for an excellent post, #Cruncher!

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Re: Zero Interest Rates on I-Bonds

Post by Mudpuppy » Sun Aug 02, 2015 7:48 pm

Dutchgirl wrote:Thank you for the replies. I think I will wait and see whether the rates go up when they are next adjusted. As I explained, I am in the withdrawal phase, so I could sell these and buy some more Total Bond Index and/or Total Stock Market Index with some of my RMD or five year CD's. An extended period of 0.0 percent seems idiotic. In the mean time I'll do nothing, an approach which can't do too much harm . . . . Thank you again.

Keep in mind that those I-Bonds have a 1-2% fixed interest rate. The only reason your composite rate is so low for this 6 month period is because the current inflation rate is negative. This is the first time the inflation rate has been negative since 2009, so this is a rare event, historically speaking. Of course, historical results aren't a guarantee, but all indications are that November inflation rate will be positive.

As soon as the inflation rate is >= 0%, you'll be back to earning at least 1-2% on those I-Bonds. You can't really beat that in the long-term anywhere else.

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Re: Zero Interest Rates on I-Bonds

Post by Dutchgirl » Mon Aug 03, 2015 11:26 am

Kevin,
My other bond investments are as follows, again as part of that 72.3% allocation, and also as part of other some funds:
Wellesley 15.5%
Total Bond Market 14.8%
Inflation Protected
Securities 14.5%
Target Retirement 11%

After looking at this, I am beginning to think that it would be easier to just put everything into
Target Retirement Fund, since its allocation is similar to mine, and it earns slightly more.
Only 4.6% of my Vanguard investment is in a taxable account. The rest is in a Roth and a Traditional IRA, so I can change it without paying taxes.

Again, thank you very much for your helpful replies.

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Re: Zero Interest Rates on I-Bonds

Post by Kevin M » Mon Aug 03, 2015 11:55 am

Dutchgirl wrote:After looking at this, I am beginning to think that it would be easier to just put everything into
Target Retirement Fund, since its allocation is similar to mine, and it earns slightly more.

Yes, if the only choices you'd consider would be keeping your existing funds in your IRAs or using the Target Retirement Income fund, then the latter would be simpler and probably as good in terms of risk/expected-return trade-off. Or, consider using LifeStrategy Income fund, which is a bit less risky, with a 20/80 stock/bond allocation.

However, I personally much prefer CDs purchased directly from banks or credit unions ("direct CDs") to the Total Bond fund (and would prefer not to own Total International Bond or any inflation protected bond fund). I explain most of the reasons I prefer direct CDs in this blog post, Synchrony Bank 5-Year CD, which also discusses the process of doing a partial IRA transfer (in this case, from Fidelity, but it works the same transferring from Vanguard, which I've also done).

Having said that, there definitely is additional complexity involved in setting up and maintaining an additional account, and this may not be worth it to you, even if you understand and agree with the financial reasoning for doing this.

No matter what you decide to do within the IRA, I would hold onto your I Bonds for the reasons that everyone has shared in this thread. I Bonds are the best deal for including a safe inflation hedge in your portfolio, and you have some good I Bonds (all of mine are 0% or 0.1% fixed rate).

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No I Bond Interest Until May 1, 2016?

Post by hudson » Sun Jan 31, 2016 10:27 am

Dutchgirl wrote:I just had a look at my I-bonds on the Savings Bond Calculator and saw that the interest rate on bonds bought in January 2006 and January 2003 is now 0.00%. A bond issued in February 2002 is now at 0.38%. At first I thought it must be a mistake -- but probably not. Are people holding on to these bonds which are now paying nothing at all? I could sell them and use the money for living expenses instead of selling other investments, since I am now retired and in the withdrawal stage. I could use my Required Minimum Distribution to buy additional stock and bond index funds in my taxable account. Any advice?


This is an August 2015 discussion. I'm trying to make sure that I understand after noticing that my I Bonds have not earned a penny of interest since October 1, 2015. I don't plan to cash out. I understand that I Bonds are probably worth keeping because of their tax advantages and inflation protection.

From the discussion, that means 0% interest for 6 months...October 2015 through March 2016? I won't be seeing any interest on my savings bond calculator until May 1, 2016?

I've looked at the Treasury Direct (TD) website. I can't find where it addresses six months of no interest. The charts at TD don't show no interest. The Inflation Rate chart shows: May 1, 2015 -0.80% It looks like they would have some kind on idiot-proof notice about that. Maybe it's there but I didn't see it.

http://www.treasurydirect.gov/indiv/res ... s.htm#infl

Are my above statements correct?
No I Bond interest until May 1, 2016?

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Re: Zero Interest Rates on I-Bonds

Post by tibbitts » Sun Jan 31, 2016 10:34 am

I can see retaining bonds with a 1% or higher base rate. Ones with a 0% base, and I have a few, aren't (for me, at least) worth the hassle of converting from paper to TD, which you need to do for any registration changes.

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Re: No I Bond Interest Until May 1, 2016?

Post by Mudpuppy » Sun Jan 31, 2016 2:56 pm

hudson wrote:This is an August 2015 discussion. I'm trying to make sure that I understand after noticing that my I Bonds have not earned a penny of interest since October 1, 2015. I don't plan to cash out. I understand that I Bonds are probably worth keeping because of their tax advantages and inflation protection.

From the discussion, that means 0% interest for 6 months...October 2015 through March 2016? I won't be seeing any interest on my savings bond calculator until May 1, 2016?

I've looked at the Treasury Direct (TD) website. I can't find where it addresses six months of no interest. The charts at TD don't show no interest. The Inflation Rate chart shows: May 1, 2015 -0.80% It looks like they would have some kind on idiot-proof notice about that. Maybe it's there but I didn't see it.

http://www.treasurydirect.gov/indiv/res ... s.htm#infl

Are my above statements correct?
No I Bond interest until May 1, 2016?

Not quite correct. You've overlooked exactly how the current interest rate is applied to an I-Bond, and it's a fairly crucial concept.

As previously mentioned, there are three interest rates associated with I-Bond: the fixed rate, the inflation rate, and the current rate. The fixed rate never changes. The inflation rate changes every 6 months. The current rate is generated out of the fixed rate and the inflation rate, and uses the formula [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]. But the current rate can never be below 0%, even if the formula calculates a negative value.

Treasury Direct only announces the fixed rate and the inflation rate for each time period because each I-Bond holder could have a different fixed rate. The fixed rate is determined at time of purchase, and there's 30+ years of purchases out there. That would be too many combinations for them to publish in a simple table. I use this website, developed by a fellow Boglehead forum member, to track the current value instead: http://eyebonds.info/ibonds/rates.html. That shows the complexities that one has to undertake to list all the combinations of fixed and current rates.

Back to the 6 months of 0% current interest situation. The inflation rate announced for May 2015 was -0.8%. That means the current rate for most people was 0% for the corresponding 6 month period, as the formula above calculates a negative value for most of the recent fixed interest rates. It was only people who bought the >= 2% fixed rate bonds over a decade ago who still got some interest during the time period.

Now here's where things get a bit tricky. The inflation rate is set every 6 months, but the "clock" on the inflation rate for your particular I-Bond begins when you buy the I-Bond. So let's say you bought the I-Bond in July. Your I-Bond would start the 6 months of the -0.8% inflation rate in July, not in May. So we can't say when the 0% current rate will end for your particular I-Bond without knowing what month you purchased it.

Thankfully, our fellow Boglehead also has a part of his website for this: http://eyebonds.info/ibonds/index.html. You can select the month and year in which you purchased the I-Bond to see when the 6 month 0% current interest period will end for that I-Bond.

And there's one final wrinkle. If you bought this I-Bond within the last 5 years, you automatically forfeit the last three months of interest when you cash it in. That means the Treasury Direct website will only show you its current value as of three months ago. So let's say you bought the I-Bond in July 2014. Even though the 0% period began in July 2015 for your bond, you wouldn't have seen the 0% rate take effect on the Treasury Direct website until October because it's showing you the value as of 3 months ago. Likewise, even though it will enter the current inflationary period this month, you won't see new interest on Treasury Direct until 3 months from now.

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Kevin M
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Re: No I Bond Interest Until May 1, 2016?

Post by Kevin M » Sun Jan 31, 2016 6:00 pm

Mudpuppy wrote:If you bought this I-Bond within the last 5 years, you automatically forfeit the last three months of interest when you cash it in.

So if want to liquidate it, you don't lose any interest if doing so after a 3-month period with 0% interest!

About a month ago, I Bonds weren't looking so good to me, since the 5-year TIPS yield was around 0.5%. So if you wanted to hold an inflation-protected investment for at least 5 years, and you had the space in an IRA, the 5-year TIPS looked better. Now with the 5-year TIPS yield down to 0.14% as of Friday, I Bonds at 0% or 0.1% real look relatively attractive again.

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hudson
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Re: No I Bond Interest Until May 1, 2016?

Post by hudson » Sun Jan 31, 2016 6:14 pm

Mudpuppy wrote:
hudson wrote:This is an August 2015 discussion. I'm trying to make sure that I understand after noticing that my I Bonds have not earned a penny of interest since October 1, 2015. I don't plan to cash out. I understand that I Bonds are probably worth keeping because of their tax advantages and inflation protection.

From the discussion, that means 0% interest for 6 months...October 2015 through March 2016? I won't be seeing any interest on my savings bond calculator until May 1, 2016?

I've looked at the Treasury Direct (TD) website. I can't find where it addresses six months of no interest. The charts at TD don't show no interest. The Inflation Rate chart shows: May 1, 2015 -0.80% It looks like they would have some kind on idiot-proof notice about that. Maybe it's there but I didn't see it.

http://www.treasurydirect.gov/indiv/res ... s.htm#infl

Are my above statements correct?
No I Bond interest until May 1, 2016?

Not quite correct. You've overlooked exactly how the current interest rate is applied to an I-Bond, and it's a fairly crucial concept.

As previously mentioned, there are three interest rates associated with I-Bond: the fixed rate, the inflation rate, and the current rate. The fixed rate never changes. The inflation rate changes every 6 months. The current rate is generated out of the fixed rate and the inflation rate, and uses the formula [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]. But the current rate can never be below 0%, even if the formula calculates a negative value.

Treasury Direct only announces the fixed rate and the inflation rate for each time period because each I-Bond holder could have a different fixed rate. The fixed rate is determined at time of purchase, and there's 30+ years of purchases out there. That would be too many combinations for them to publish in a simple table. I use this website, developed by a fellow Boglehead forum member, to track the current value instead: http://eyebonds.info/ibonds/rates.html. That shows the complexities that one has to undertake to list all the combinations of fixed and current rates.

Back to the 6 months of 0% current interest situation. The inflation rate announced for May 2015 was -0.8%. That means the current rate for most people was 0% for the corresponding 6 month period, as the formula above calculates a negative value for most of the recent fixed interest rates. It was only people who bought the >= 2% fixed rate bonds over a decade ago who still got some interest during the time period.

Now here's where things get a bit tricky. The inflation rate is set every 6 months, but the "clock" on the inflation rate for your particular I-Bond begins when you buy the I-Bond. So let's say you bought the I-Bond in July. Your I-Bond would start the 6 months of the -0.8% inflation rate in July, not in May. So we can't say when the 0% current rate will end for your particular I-Bond without knowing what month you purchased it.

Thankfully, our fellow Boglehead also has a part of his website for this: http://eyebonds.info/ibonds/index.html. You can select the month and year in which you purchased the I-Bond to see when the 6 month 0% current interest period will end for that I-Bond.

And there's one final wrinkle. If you bought this I-Bond within the last 5 years, you automatically forfeit the last three months of interest when you cash it in. That means the Treasury Direct website will only show you its current value as of three months ago. So let's say you bought the I-Bond in July 2014. Even though the 0% period began in July 2015 for your bond, you wouldn't have seen the 0% rate take effect on the Treasury Direct website until October because it's showing you the value as of 3 months ago. Likewise, even though it will enter the current inflationary period this month, you won't see new interest on Treasury Direct until 3 months from now.


Thanks Mudpuppy!! I understand. I bought an I Bond in April 2009. Eyebond's calculator creates a chart that shows there are 6 months with no interest...November through April.

I Bonds are complex!

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Who is the Boglehead that created the charts and calculator?

Angst
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Re: No I Bond Interest Until May 1, 2016?

Post by Angst » Sun Jan 31, 2016 6:41 pm

hudson wrote:Who is the Boglehead that created the charts and calculator?

He (#Cruncher) already posted early on in this thread, right here.
viewtopic.php?f=10&t=170745&newpost=2782993#p2574476

Here's his website: http://eyebonds.info/ibonds/index.html

Be sure to explore his "Links" link as well.

hudson
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Joined: Fri Apr 06, 2007 9:15 am

Re: No I Bond Interest Until May 1, 2016?

Post by hudson » Sun Jan 31, 2016 7:12 pm

Angst wrote:
hudson wrote:Who is the Boglehead that created the charts and calculator?

He (#Cruncher) already posted early on in this thread, right here.
viewtopic.php?f=10&t=170745&newpost=2782993#p2574476

Here's his website: http://eyebonds.info/ibonds/index.html

Be sure to explore his "Links" link as well.


Thanks Angst! #Cruncher gets an A!

Mudpuppy
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Re: Zero Interest Rates on I-Bonds

Post by Mudpuppy » Sun Jan 31, 2016 9:17 pm

Perusing #Cruncher's post history can also be enlightening on how to become a number cruncher yourself. And I use his I-Bonds site every month to check the value of my I-Bonds. Much quicker than logging in to Treasury Direct.

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