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: