Think the mention - jdopple I think - was suggesting waiting until as close to the next interest rate announcement as possible - requires a guess from then short term rates to whether the next rate period is going to be around 4.8.

However if the money is in emigrant or ing I think it's quite arguable that you'll lose more with the 4.8-Emigrant difference than you might make by doing a good job guessing in a few months.

I bought some at the end of July, but I usually manage to float them out the 5 years - and with the tax deferral will probably keep them past that point.

Good info. The only thing I didn't see mentioned (please correct me if I'm wrong) was one negative regarding buying I-bonds the day before new rates are announced. While it will get you interest for the whole month, this will lock you into a particular fixed rate for the life of the bond. Historically, this fluxuation may be anywhere from 0.0 to 0.5%. So short term it might not be a big deal but over 10-30 years it could add up being stuck at a lower fixed rate.
I bought some I-bonds on Oct 31, 2003 and they were not processed until Nov 1st.(made the same mistake as a previous poster) My current rate is 4.7%, since the fixed rate at the time was 1.1% and not 1.2%.
Anyone who bought these in May-Oct 2000 is sittin on a nice 7.201 % right now thanks to that high 3.6% fixed rate.

My comment about wating till the last minute, was specifically targeted at a 1-year hold. Obviously, if you plan to hold for the 5 years or even 2-3 years, waiting is not as important.

With 1 year rates already as high as 4,5 (Corus), Buying I-bonds and cashing them in before a few years have passed is NOT such a good deal. The fixed rate is very low, and if rates escalate, then short term bank CD's will ALSO escalate. The 2 month hit is about .8 %, assuming another 4.8 combined rate, So you will make less than a 1 year CD, excluding state tax exemption.

Hot New Rates!
The new numbers are out, and the semiannual component for the May-Oct period (calculated as the increase from CPI-U Mar'05 to Sept'05) is 2.85% semiannual or 5.69% annual. With the current fixed rate of 1.2%, this means that a bond bought between now and the end of the month will pay 4.8% for the first 6 months, and then 6.92%(!) for the next 6 months.

A Modified Strategy - 14 months
Since the rates are so good, the best short term strategy is to think of this as a 14 month investment (rather than 1 year like I suggested in OP). Buy at the end of this month (get a free month's interest), hold for the next 11 months and earning 12 months interest at the above rates, and then wait 3 extra months before cashing out, for a total of 14 months. The extra 3 months waiting at the end guarentees that the 3 month penalty for cashing out doesn't come out of those nice 6.9% months, but rather from whatever the new inflation rates are for the next period (we don't care about the new numbers, since we are forfeiting that interest anyway).

Annual Returns of 5%+ are Easy!
What we have here is a 14 month investment, paying one year's interest at an average rate of approximately 5.86%. Even ignoring the state tax issue, this corresponds to an annual return of 5.00%, which is a full 1% better than ED's 4% savings account and 0.5% better than the best 1-1.5 year CDs currently paying around 4.5%.

Compute Your Own Returns
Since I bonds are state tax and local tax free, they are even better for those subject to these income taxes. Look up your marginal state and federal income tax rates, and use the (approximate) formula below to compute an annual pretax equivalent return:

Annual Pretax Equivalent Rate =~ 5.86%*(6/7)*(1 - Federal Tax)/(1 - Federal Tax - State Tax)

The 6/7 (or 12/14) factor approximately corrects for the annual return from a 14 month strategy that only earns 12 months of interest. For example, if you are in the 30% Fed and 10% state tax brackets, this strategy pays the equivalent of 14 month CD paying 5.84%. Depending on your state tax situation, the annual pretax returns from this range from about 5% (no state tax) to over 6% for those with high local, state and federal rates.

Buy Now or Later?
If you buy before the end of this month, you'll have a guarenteed excellent return as described above. If you wait until November, you might benefit from an increase in the fixed rate component of the I bond, currently at 1.2%. While there is no formula for how this rate is set, it has generally moved together with the Fed's interest rates. From the history over the past few years, I would expect the fixed rate to either stay the same or maybe rise a little (0.1 or 0.2%).

The tradeoff to waiting is that you are no longer able to enjoy the older 4.8% rates, and instead are betting on the inflation in next 6 month period (Sept'05-Mar'06). If you are considering holding your I bonds long term, this might be a more important consideration. For the short term, I would recommend buying now. If the inflation is high during the next 6 month period, you can keep holding your I bonds and enjoy the high rates until the I bond return no longer looks attractive relative to other short term fixed rate products.

docsoc said:Great thread. The best 12 month CDs are up to 4.25% ( just checked on bestcashcow). The I Bond is looking less and less intersting.

Don't forget that I bonds are exempt from state and local taxes. They also grow tax deferred.

Xerty, I came up with the exact same strategy you did. Another bonus with the 14+ month strategy is that the earliest you will cash in is Jan. '07, thus no federal tax will be due until 2007!

when it changes to the new inflation rate, is the new inflation rate good for the next 6 months as well, or does it adjust to be only good until the end of that 6 month period.

If bond purchased in october 2006, the inflation rate in may is used for 6 months(10/05-3/06). When that 6 month timeframe is done in March would the Novmeber inflation rate be good from April 2006 through sepetember 2006???

Xerty

Pardon my ignorance but how did you confirm what the next semi-annual rate is going to be. I thought that the semi-annual
I-bond rates were not announced until November 1.

I get it now. Thanks for the explanation whodini. I somehow missed that other thread.

I have one question about the I bonds.

"11. Is there a limit on how much I can invest each year in I Bonds?

Yes. You can buy up to $30,000 worth of paper I Bonds each calendar year. In addition, you may also purchase up to $30,000 in electronic I Bonds through TreasuryDirect. The purchase limitation for Series I Bonds isn't affected by purchases of Series EE Bonds.
"

Does this mean a person can do a total of $60K worth of I bonds or only $30K of one or the other? I've been shopping around for CD rates in the past few days, with 5+%, I think I know where I am putting my money.