Savings Bond Alert #032
Wednesday, April 16th, 2008
Categorized as: Savings Bond Alerts
Next I bond inflation component will be 4.83%
The next I bond inflation component will be 4.83%, up from the current 3.06%. The component is based on the difference between the Consumer Price Index in September (208.490) and March (213.528). 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 the 4.83% 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 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. However, 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 1.28%, indicating that the new rate is likely to be 0.5% or less.
Given that the current fixed base rate is 1.20%, it would much better to invest in I bonds this month rather than waiting until May 1 or later. I bonds you purchase today will earn a composite rate of 4.28% for six months, followed by six month of 6.06%. These are much higher rates than are available in bank CDs or even other US Treasury securities.
However, TIPS rates, like Treasury rates in general, have been volatile because of the evolving financial crisis. You can follow the daily 10-year TIPS rate on the Treasury’s web site. If TIPS rates spike up or down between now and the end of April, it would impact the next I bond fixed base rate.
Also keep in mind that the Treasury changed the annual purchase limit on Savings Bonds in January to $5,000 per social security number per type of bond. This means you can invest $5,000 in paper I bonds at a bank and another $5,000 in electronic I bonds through Treasury Direct for a total of $10,000 per social security number.
Treasury reports indicate that new investments in Savings Bonds for the 2008 Fiscal Year (Oct-Sep) will be up from FY-2007. However, FY-2007 was a terrible year for Savings Bond investments – down 59% from the previous year. I bond rates after May 1, at 5%+, will appear attractive to novice investors. FY-2008 will be a better year for Savings Bond investments, but because of the annual limit investments will never again reach the amounts in FY-2002 and -2003, which were more than 2.5 times today’s levels.