Investors lock in rates for 'I bonds'
By Frank Cho
Advertiser Staff Writer
Investors tired of the stock market's rollercoaster ride have been snapping up inflation-indexed savings bonds at a unprecedented pace, hoping to buy some peace of mind and a very competitive 5.92 percent interest rate before tomorrow's deadline.
Investors have bought $3.4 billion worth of "I bonds" for the year ended Sept. 30, more than double the $1.5 billion purchased during the previous fiscal year, the U.S. Treasury Department reports. And through July, Hawai'i sales were $15 million — $7 million through local banks and $8 million through employer plans.
Experts say sales heated up even more this month because investors want to buy the bonds before the government recalculates a new, and likely lower, six-month interest rate as of Nov. 1.
"People are very concerned about a volatile stock market. Safety is certainly something that people have always looked at but they are particularly paying attention to it now," said Dan Carkonen, Hawai'i director for the U.S. Treasury Department's savings bond marketing office.
On Monday alone, more than $12 million savings bonds were sold through the Internet nationwide, Carkonen said. October sales through Monday were $144 million, up from $10.7 million the same time a year ago.
Local banks say demand has been mixed.
Wayne Kirihara, a spokesman for Central Pacific Bank, said demand for I bonds has increased in recent days but not necessarily because of the impending recalculation of the bonds' interest rate.
"At this time of the year, we see a normal increase because a lot of people do start buying savings bonds for Christmas but other than that we have not had any unusual activity," Kirihara said.
First Hawaiian Bank said there has been a slight increase in demand from people who are hoping to lock in the higher interest rates.
"Certainly it has not been overwhelming. The numbers (of savings bond sales) have never been huge and they are not now," said Gerry Keir, a First Hawaiian Bank spokesman.
But Todd Nohara, metro regional sales manager at Bank of Hawaii, said there has been a significant increase in the number of sales and in the dollar value of the transactions over the past couple of weeks.
Nohara declined to give specifics, but said several bank customers bought so many I bonds that they hit the government's annual limit of $30,000.
"The I bonds are issued in eight denominations starting at $50, but demand has been heaviest in the $1,000, $5,000 and the $10,000 denominations," Nohara said.
Like other savings bonds, I bonds can be purchased at banks, some credit unions, and savings and loans. They are also available through employer savings plans as well as on the Internet at www.savingsbonds.gov. The I bonds are sold in denominations ranging from $50 to $10,000.
Since being introduced in 1998, I bonds have become more popular than the familiar EE bonds, which sold $3.1 billion in the fiscal year ended Sept. 30, according to the Treasury.
The interest rate that Series I bonds pay is made up of two pieces. One is a variable rate that can change depending on inflation and is set every six months — on May 1 and Nov. 1. The other is a fixed rate, which guarantees a specific return over and above the rate of inflation for the life of the bond.
Currently, the variable rate is 2.88 percent on an annualized basis. The fixed rate is 3 percent. When you combine the two, and take compounding into account, the I bond's current rate is 5.92 percent when stated on an annualized basis and rounded up.
But because inflation has been so low lately, many people believe the new variable rate the government will announce tomorrow probably will drop. So investors who buy now will lock in that variable rate for the next six months.
"People are anticipating, and anticipating correctly in my opinion, that the rate is going to drop on Nov. 1 and that is what all the excitement is about," Carkonen.
Correction: Investors may each annually purchase up to $30,000 worth of inflation-indexed bonds, or "I bonds." A previous version of this story reported an incorrect time period to purchase the limit.
