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 Savings-Bond-Advisor.com
We’ve been through a major update to our web sites this winter, consolidating the information on the www.savings-bonds-alert.com site and the blog, which used to be at savings-bonds-alert.blogspot.com, on a new site http://www.savings-bond-advisor.com/.
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.