Savings Bond Alert #029

Tuesday, April 17th, 2007
Categorized as: Savings Bond Alerts

Next I bond inflation component will be 2.42%

The next I bond inflation component will be 2.42%, down from the current 3.10%. The component is based on the difference between the Consumer Price Index in September (202.9) and March (205.352). The March CPI was released this morning.

To determine what your own I bonds will earn during their next six-month rate period, you have to add their fixed base-rate to 2.42%. The fixed-base rate for your I bonds can be anywhere between 1.0% and 3.6%, depending on when the I bond was issued.

Moreover, keep in mind that the new interest rate for your I bonds will not necessarily begin on May 1. Instead, new rate periods begin every six months starting with the month in which your I bond was issued. So, for example, an I bond issued in July begins new rate periods in July and January.

Because the Treasury doesn’t have public criteria for setting the fixed base-rate for new I bonds, it’s impossible to predict what the next I bond fixed-base rate will be. If the Treasury keeps the current fixed base-rate of 1.4%, new I bonds would have a composite rate of 3.84%.

However, we can guess that the Treasury will look at the current rate for Treasury Inflation Protected Securities (TIPS). Right now, those rates are about 15 basis points lower than when the 1.4% base rate was set on November 1, indicating we might see a base rate of 1.2% or 1.3%. However, TIPS rates have been headed up the last three weeks and could make up the 15 basis points by May 1.

We can also guess that the Treasury looks at competitive investments, such as bank CDs. CD rates have been declining since last summer, but are still generally in the 4.75% to 5+% range, making a 3.84% I bond uncompetitive. You can follow average CD rates on our web site.

Of course I bonds have advantages that CDs lack, including inflation protection, tax deferral, exemption from state and local income taxes, and a fixed base-rate that’s locked in for 30 years, so you should expect Savings Bonds to have a somewhat lower rate than CDs, but a whole percentage point is a lot.

A final factor is that new investments in Savings Bonds haven’t recovered from the 20-year lows reached last summer. Although Savings Bonds cover a very small proportion of the national debt, they are a visible component of that debt. The Treasury has to have some concern that if it sets the fixed base-rate too low, the extrememly low levels of investment in Savings Bonds will continue.

Other stories on the Savings Bond Advisor web site in the last month include:

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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 April 17th, 2007 Mike Occhialini said:

Tom – thanks for the timely update and commentary. Your Savings Bond Alert has taken a lot of the suprise out of May and November for me. Please keep up the good work… and see what you can do about that I-bond base-rate.

On April 17th, 2007 Jon Gutek said:

Tom: Your explanation regarding the possible base rate at May 1 is well reasoned, well explained, and greatly appreciated. I am sure that I am not the only one who has to decide when to use up my annual limitation amount; i.e., do I buy before May 1 or after? Thank you for all your hard work.

On April 17th, 2007 Ken said:

How about plotting the average CD rates with the I-bond rates over the last 7 years? That would be interesting and may help with predictions of future base rates.

On April 18th, 2007 Tom Adams said:

Ken – there may be some way to draw the graph you want to see, but I haven’t yet figured out what it is.

Because I bond rates change while you hold the investment and CD rates don’t, this is a difficult comparison to do.

In addition, I don’t know of any statistical series on CD rates that goes back more than five years, though if anyone else does I’d be happy to look at it.

Tom Adams

On April 18th, 2007 Mario said:

The Federal Reserve’s FRED database has a lot of interest rate information here, many series having decades worth of data:

It includes CDs, although only up to 6-month. I-bonds are probably more comparable to longer rates, such as 5-10 year T-bonds. I believe bankrate also has CD rate charts but for a much shorter time, about 5 years as Tom mentioned.

One way to do this comparison would be similar to the “stock market comparison charts” you show, i.e. compounding the value of $1 invested in CDs and I bonds over time. (I’d be interested in this too – my impression is that I bonds were very comparable to CD rates about 4-5 years ago, but have not been so competitive since.)

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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