0% Savings Bonds

You may remember that last April I bought some I Series Savings Bonds that promised to pay 6% interest, though not for another six months. It turned out to be a great investment, not just because of the high interest rate, but because it prevented me from investing that money in the stock market, which I would have done otherwise, what with me being tapped out by October when the market was still pretty far off the bottom it hit in November and well before falling to new lows just last month.

By November I was earning 6.07% interest and starting next month I will be at 6.15%. This is because I bought the bond in April and so I am lagging the actual inflation rate by six months while also earning a fixed rate of 1.2% (the fixed rate dropped to 0% a few days after I bought my bond, but I am locked in at 1.2% for the life of the bond plus inflation; it is now 0.7% and due to change again May 1).

The latest Consumer Price Index was released yesterday and it showed a negative inflation rate during the past year for the first time since 1955. It was pretty small, just -0.38%. But during the last six months, which is what the Treasury Department uses to calculate interest rates on I Series Savings Bonds, it is down 5.55% (the website Savings Bond Advisor keeps up with all of this). This means that when the -5.55% inflation component is combined with my 1.2% fixed return, I would actually lose money except that savings bonds are guaranteed not to go negative. Since I am lagging the market, I won’t start “earning” 0% interest until November. The nice thing about that is it gives me a great excuse to sell the bonds in January, forfeiting 3 months of interest as a penalty for cashing the bonds before 5 years (thus a penalty of $0).

8 thoughts on “0% Savings Bonds

  1. You’ve inspired me to finally read up on savings bonds. They’re neat! TIPS were my favorite low-risk investment, and now I have a good alternative.

    The thing I’ve always wondered, though, is this: If everyone in the U.S. owned inflation-protected U.S. obligations, and inflation surged one year, would it spiral out of control as the bonds flooded the economy with inflated interest payments?

    And what if there was a minority without any inflation protected securities. They’d be totally broke with regard to purchasing power, even if they were nominally millionaires.

    It’s a thought experiment, but a compelling one for me.

  2. Savings bonds, and particularly the I Series bonds, are a government sponsored savings program. That’s why they limit how much you can buy in any one year. For the past year the government was borrowing money for much lower interest rates through regular bond sales than through I bonds. So it is one of those deals that you just have to take advantage of when the time is right. And that time seems to be over for a little while right now.

  3. In mid-October the Consumer Price Index for April to September will be released and that is what is used for the inflation-adjusted part that will be posted November 1. So you don’t have to wait for Treasury Direct to post it (Savings Bond Advisor posts it). Since I bought at the end of a cycle, I am 5 months behind that schedule. So I won’t even start earning 0% until November. Then I will be able to make an informed decision about whether it will be better to tough out the next 6 months at 0% or just redeem the bonds.

    Lately I’ve been putting spare cash in Vanguard’s Short-Term Investment Grade Bond, VFSTX, fund which is yielding a 4% dividend (annualized) and has gone up 4% in value over the last 2 months to boot.

  4. I see, thanks. I hope I can remember Savings Bond Advisor. They have an RSS feed that I’ll subscribe to, and that should help.

    I’m going to add two sections—one on increasing risk and one on decreasing risk—to my new Buy-Only Rebalancing pages:


    … and I plan to mention I-Series Savings Bonds in the decreasing-risk section.

    VFSTX seems similar to LQD, which I have shares of in my Roth IRA account.

  5. Well, I’m in my fourth month of earning 0% interest so if I sold now I would forfeit the 0% interest of November, December, and January and wouldn’t get anything for the partial month of February. So the question is to sell now, or earn 0% for two more months before the rate changes to 4.28%?

    VFSTX has been issuing a dividend at a 3.6-4.0% rate lately (the price has been pretty steady). Not only is the savings bond interest exempt from state taxes which helps some, but the interest is all deferred until I cash the bond, whereas I have to pay taxes on the VFSTX dividends every year. Everybody is forecasting higher inflation over the next few years, so maybe I will leave the bond alone.

    I could also sell the bond now and buy a new one which would earn the new interest rate now, but the fixed component for I bonds is 0.30% whereas my bond has 1.20% which is about what most CD’s are paying, plus I get inflation when there is any. I think I’ll hang in there, but I’ll be kicking myself if I sell it later in the year and forfeit real interest in addition to getting 0% for this six month period.

  6. I forgot to pay close attention to the rates. On May 1 the inflation component dropped to 1.54%, giving a composite rate of 2.75% per year on my bond, starting Nov. 1 of this year. But I am earning 4.28% per year until then. So the question became, do I continue to take the good interest rate now and then possibly sell after 3 months of the bad rate, or do I sell now and forfeit one month of good rates and two months of 0%? I decided to sell now (would have been better to have sold May 1, or really on Feb 1 when I first had 3 months of 0% interest). I had already converted my paper bond to an electronic one, so I was able to do it online and they should transfer the money to my bank account. So I held the bonds for 26 months and drew an average return of 3.78%. That’s nothing like the 6% that drew me in, but it is pretty decent I guess. If I had sold Feb 1, the effective rate would have been 4.47% and that money would have been earning interest for four and a half months. Oh well.

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