Savings Bond Alert #017

Wednesday, February 22nd, 2006
Categorized as: Savings Bond Alerts

I bond investments at all time high, but next rate could be low

More than $1.3 billion was invested in Series I Savings Bonds in January, which set a new record for Series I bond investments in a single month. For the month, about 87% of all Savings Bond investment dollars went into I bonds.

The annual rate of Savings Bonds investment in January was about $18 billion. Since 1999, fiscal year investments have ranged from a low of $4.7 billion in 1999 to a high of $11.3 billion in 2003.

The reason for the surge, of course, is the current 6.73% interest rate on new I bonds. The new investments are coming primarily from large investors. Calculating from the number of paper bonds issued in each series, the average Series EE bond issued in January represented an investment of about $86, while for I bonds the comparable investment was $1,426.

It seems doubtful that all these large investors actually understand that the the 6.73% rate that’s attracting them is only good for six months. Moreover, based on the level of the Consumer Price Index for January, which was released today by the Bureau of Labor Statistics, it’s possible that the rate for the following six months could be quite low.

I bonds have a base rate that is fixed for the life at the bond at issue – currently 1% – and they earn the inflation rate above that. The inflation rate is calculated as the difference between the level of the CPI in March and September. September’s level was 198.8. The January level announced today was 198.3, down .5 points from September’s level.

If the March index, which will be announced on April 19, is still under 198.8, the next I bond inflation component will be negative. Since I bonds were introduced in 1998, this has never happened.

If the inflation component goes negative, it can wipe out an I bond’s fixed rate. However, an I bond’s composite rate (fixed rate plus inflation rate) can’t go below zero, no matter how deeply the CPI dips. This gives I bonds an advantage over the Treasury’s big-boy inflation security, TIPS, which actually decline in value when the CPI goes negative.

The silver lining to this situation is that a negative or low inflation rate might force the Treasury to raise the I bond fixed-rate to a more attractive level than the current 1%.

Savings Bond Alert moves to

We’ve been through a major update to our web sites this winter, consolidating the information on the site and the blog, which used to be at, on a new site

The new site has features neither of the old sites had, including a quick and easy Savings Bond price and interest rate calculator. The site is updated every day, features RSS syndication for those of you who use news readers, and allows our readers to comment or ask questions on almost every page of the site.

One feature you might want to take a look at if you’re an I bond investor is the Inflation Update page, which includes a graph showing the monthly level of the CPI since I bonds were introduced in 1998.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On February 22nd, 2006 Baird Edmonds said:

I’m a little confused about the calculations. Inflation hasn’t gone negative (deflation) and the relative decrease is small so why should there be a dramatic reduction in total return?

On February 22nd, 2006 Tom Adams said:

Baird – When they announce the CPI each month, the percentage changes you hear on the news are either month to month or year to year. Today’s announcement, for example, said inflation was up 4.0% from a year ago.

But all that counts for I bonds is what the index is in September and March.

In March 2005 the index was 193.3 and in September it was 198.8. This huge jump accounts for the large 5.70% inflation component in current I bond rates.

For the next six months, the inflation component will depend on the level of the index in March. It’s impossible to predict what that level will be. However, January’s level was below September’s, which hints that the next inflation component could be relatively low.

On March 14th, 2006 Robert Willig said:

Tom, thank you for this valuable information.

1. I was planning to make a large I-bond purchase in March. Now, I am inclined to wait until April 19, and then ask you to let me know the likely inflation interest component. If negative, or even very low, I will instead take out a 6 month 4.7 to 5.0%, and consider making my next savings bond investment 6 months later if the inflation factor comes back. Please comment on this strategy?

2. I may want to sell some I-bonds with low 1% fixed rates that are under 5 years old. Since the penalty is giving up 3 months interest, if the new combined rate starting May 06 is as low as you are now estimating, might this be a good time to sell from the point of view of minimizing the penalty?

On March 14th, 2006 Tom Adams said:

Robert – I think it’s worth waiting until April 19 to decide. Now might also be the time to consider opening a TreasuryDirect account and using it to invest in a six-month Treasury Bill, which should be competitive with a bank CD.

If the inflation rate for the next six months is low, three months after a bond’s next rate period starts would be an ideal time to redeem. Make sure you understand how Savings Bond rate periods work.

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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