While visiting Clark Howard’s website to find out where I could recycle my computer, I saw an alert saying to hurry and buy Series I Savings Bonds and earn 6% interest. Since my PayPal and ING accounts are earning less than 3%, that sounded pretty good. Of course, there’s a catch. The big catch is that 6% is only available if you buy bonds before the end of the month, which is just a few days away. The second is the 6% rate won’t last forever and in fact it won’t even start until November. The last is that if the rate then goes down and you want to sell your bond before its 5 year maturity, then you forfeit 3 months of interest.
In order to buy the bonds you have to visit a bank or buy online. For a person finding out about this on the evening of April 25, this presents problems. The bank doesn’t sell the bond directly but just applies for a bond.
The date of sale is once the Treasury Department executes the order, which is done by mail and can take a couple of weeks (not true; see comment below). The electronic purchase method has a big drawback as well: You have to open an account and then receive a card in the mail before you can buy anything. The card can take two weeks to arrive. However one person on Clark’s website said he ordered his card on a Friday and received it on a Monday, so anything is possible. Even if I get it on Monday (unlikely since I applied in the evening) there is still a delay as the government doesn’t issue the bond until the funds are received from your bank account, which can take a couple of days. The good part is that if this works, I will get interest for the entire month of April since Treasury doesn’t do partial months.
The deal with the 6% return is tricky. The rate consists of two components. The first is a fixed component which is currently 1.2%. Once you buy a bond, the fixed part stays the same for up to 30 years (when the bond stops earning interest). This rate has gone as high as 3.6% but is expected to drop to 0.5% on May 1. The second component varies with inflation. It is currently 3.06% (giving a combined rate of 4.28%) but on May 1 will rise to 4.84% since the consumer price index rose by that amount from the determining period of September 2007 to March 2008 (to further complicate matters, the Treasury’s website shows the fixed interest rate as a yearly yield, but the inflation rate as a six-month yield, so they actually show 1.53% as the current inflation rate). In another six months that rate will change again. By buying by April 30 you lock in the 1.2% fixed rate, but you also lock in the current 3.06% inflation rate. When the bond turns one half year old in October, the rate will reset to the current inflation rate which will still be 4.84%. If you buy on May 1, you get the new fixed rate as well as the 4.84% inflation rate right now. In November the May 1 bond’s inflation rate would change to the Nov 1 inflation rate. For a while inflation has been pretty low and yields on these bonds have been fairly miserable. You could have done better with money market accounts or CD’s. But now that interest rates are very low and inflation is up, the bonds start looking a lot better.
If I can get the Treasury Direct card on Monday or Tuesday and if PayPal transfers to the $5,000 to my checking account in time (that’s the maximum you can buy per year electronically, though you can get another $5,000 worth through a bank), then I will try these bonds out. If inflation goes back down in the next few years, I will need to wait until the inflation component drops for three months and then sell the bonds, taking the 3-month penalty, but keeping all of the interest earned when rates were higher.