Redeemed October 2005 I Bonds

I redeemed my October 2005 I Bond last week but I didn’t get to write about it until now. This I Bond was purchased at the end of October 2005 in a special situation when the inflation adjustments for the following 12 months were known and were relatively high. I bought it only because the interest rate was known and it was higher than the comparable CD rate at that time. Because the fixed rate on it is low at 1.2%, while 5-year TIPS are yielding at 2.4% now, it doesn’t make sense to continue holding that I Bond.

Before I went to the bank I was afraid that if I pull out an I Bond I would get a “what’s that?” reaction from the teller. I printed out the current value from Treasury Direct and I was prepared to wait a long time for a manager who’s more familiar with selling and redeeming I Bonds. It turned out quite the opposite. I gave my bonds to the teller. She had me sign on the back and then punched in the issue date to her computer. She got the correct redemption value that matches what I got from Treasury Direct. After that, the money is deposited into my account, just as if I deposited some checks.

So how did I do on this investment? Because there was a 1-month bonus for purchasing at the end of the money and a 3-month penalty for holding it less than 5-years, I held the bond for 14 months plus a few days and got paid 12 months worth of interest. The interest rate was 4.80% per year for the first 6 months and 6.93% per year for the second 6 months. Spreading out over a 14-month period, my annualized yield from this I Bond was 5.09%. The interest is exempt from state income tax.

Could I have done better if I put the money somewhere else? Yes. If I invested in a stock mutual fund, I would have earned 15% or more.

Could I have known that when I bought the I Bond in October 2005? No way.

Could the stock mutual fund have returned less or even negative? Yes.

So was it worth it in the end? Yes, because I wanted it safe and at the time of purchase there was no other investment that offered a higher return with the same level of risk.

Should I buy another I Bond now? No, because there are better alternatives. I Bonds haven’t been competitive since 2003 except for that one time opportunity in October 2005.

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