Savings Bond Alert #031
Wednesday, October 17th, 2007
Categorized as: Savings Bond Alerts
Next I bond inflation component will be 3.06%
The next I bond inflation component will be 3.06%, up from the current 2.42%. The component is based on the difference between the Consumer Price Index in March (205.352) and September (208.490). The September 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 the 3.06% inflation rate. 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 November 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 1.3%, new I bonds would have a composite rate of 4.38%.
The Treasury appears to set the fixed base-rate for new I bonds about 1 percentage point lower than the rate on 10-year Treasury Inflation Protected Securities (TIPS). Yesterday, that rate was 2.31%, indicating that if the rate was set today we’d see a unchanged base rate of 1.3%.
However, TIPS rates, like Treasury rates in general, have been volatile since mid-summer because of the evolving financial crisis related to investments in mortgages. You can follow the daily 10-year TIPS rate on the Treasury’s web site.
The average rate on a new 6-month bank CD this week was 4.53%, according to Bankrate.com, indicating that new 6-month CDs continue to outperform new Savings Bonds. And don’t think investors haven’t noticed. Treasury reports indicate that new investments in Savings Bonds for the 2007 Fiscal Year (Oct-Sep) will be about $3.5 billion – down more than 55% from FY-2006.