Savings Bond Alert #033

Thursday, October 16th, 2008
Categorized as: Savings Bond Alerts

Next I bond inflation component will be 4.92%

The next I bond inflation component will be 4.92%, up from the current 4.83%. The component is based on the difference between the Consumer Price Index in March (213.528) and September (218.783). 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 4.92% inflation rate. The fixed-base rate for your I bonds can be anywhere between 0.0% 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. For some time the Treasury appeared 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), however, last May the rate was set at 0.0%, 1.5 percentage points below 10-year TIPS.

Yesterday, the 10-year TIPS rate was 3.02%, indicating that the new rate could be as high as 2.0%, but given that the inflation component alone will give I bonds the highest rate currently offered by the Treasury on any short- or long-term security, it’s more likely the new fixed rate will be much closer to, if not exactly, 0.0%.

Given that the current fixed base rate is 0.0%, it’s very difficult to decide whether to invest in I bonds now or to wait until November 1. I bonds you purchase today will earn a composite rate of 4.84% for six months, followed by six months of 4.92%. These are much higher rates than are available in bank CDs or even other US Treasury securities. But the downside is that you lock in that 0.0% fixed rate.

If you wait until November 1 to invest, you’ll get 4.92% plus an unknown fixed rate. The inflation rate for the following six months is likely to be lower as the economy is slowing down and commodity prices are dropping like a rock.

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 the month, it could impact the next I bond fixed base rate, but the risk is that the Treasury will leave this rate at 0.0% no matter what happens with TIPS.

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.

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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 October 16th, 2008 Marty said:

Do you think given the size of the deficit and need for funds, Treasury will relax those foolishly low purchase limits? Why did they impose them anyway?

On October 16th, 2008 Dan said:

Did you happen to catch short-term TIPS rates on the secondary market today?

As I write this, the bid/ask on a 10-year TIPS maturing 1/15/09 is 9.499/9.433!

Apparently, the market believes we’re in for some severe deflation!

On October 16th, 2008 Tom Adams said:

Marty – You could double the amount of Savings Bond investments and it wouldn’t amount to half a drop in the bucket of Treasury borrowings. The new administration might change the limits, but it won’t be because Savings Bond investments are deemed to be necessary to cover the national debt.

Dan – The big jump happened last week. To convert Dan’s prices to rates for others – the 10-year TIPS rate right now according to is 3.03%.

Tom Adams

On October 16th, 2008 Dan said:


No, the numbers close to 3% on Bloomberg are for bonds maturing 2013 and beyond. That jives with similar maturities at the Vanguard Bond Desk.

The 9.4% I quoted is the real (annualized) rate the secondary market is currently demanding on TIPS maturing January 2009.

If the market is right, I think we’re in for a heck of a winter.

On October 17th, 2008 Tom Adams said:

Dan – thanks for sticking with me on this. I see what you’re talking about now – those really are rates, not prices!


  • TIPS adjust to inflation monthly
  • the inflation component is added (when prices go up) or subtracted (when prices go down) from the TIPS principal, and
  • prices are going down

a TIPS that matures in January is likely to have a lower redemption value than it has right now. Thus, to make up for it, the fixed rate has to be higher. You’re right – these rates show expectations of seriously lower prices between now and January.

Tom Adams

On October 17th, 2008 Bill Briner said:

I have been buying I-Bonds since 1998, but I have never bought TIPS. As I understand it, you have to place an order for TIPS without knowing what the fixed portion of the interest rate will be; their actual return could theoretically be negative if there is deflation; the minimum purchase amount is higher for TIPS than for I-Bonds; the maximum allowable purchase limit is much, much higher for TIPS than for Savings Bonds; and the price can go up or down if you sell TIPS through a broker prior to maturity. Are those the main differences between TIPS and I-Bonds?


Bill Briner

On October 17th, 2008 Tom Adams said:

Hi Bill – You’ve got most of it. They’ve changed the minimum purchase for TIPS down to $100 (from $1,000 previously), so that’s not a big deal anymore.

Although you can buy and sell TIPS using a broker any business day, you get a better deal if you buy through TreasuryDirect and hold until maturity.

However, in that case, although you can place an order on any business day, new TIPS are only available about 10 days a year. They hold your order until the next time the type of TIPS you order is available. Behind the scenes there’s an auction you don’t participate in on that day, and you get the best price from the auction.

Another way to invest in TIPS is to use a mutual fund or exchange traded fund that invests only in TIPS. See the stock symbol TIP for an example.

Tom Adams

On October 18th, 2008 Mike said:

There are a few other differences between I-bonds and TIPS. With TIPS, the interest is paid out every 6 months, and you have to pay taxes on that interest plus the increase in the principal (due to inflation adjustment) every year – a lot of people don’t like the latter (paying taxes on money they haven’t received). With I-bonds, you don’t get the interest or have to pay taxes until they are cashed.

Also, if you sell TIPS in Treasury Direct before maturity, there is a $45 charge, regardless of the amount. So buying a small amount of TIPS is a bad idea if you might want to sell before maturity.

On October 18th, 2008 Labj said:

Thanks for all the excellent Info Tom. I just found this site but have been investing in I bonds for years.

I am really disappointed that the treasury has reduced the amount we can purchase AND the fixed rate to 0, I hope this changes on Nov. 1st but I am not holding my breath.

I am leaning towards purchasing TIPS if the fixed rate stays at zero for another 6 months 🙁

On October 23rd, 2008 Peter P. said:

Why does the U.S.A. keep making it so difficult for the small investor. When I-Bonds were first introduced it was great for small investors. The Washington lobby for the Banks and Brokers must have put pressure on the Treasury to kill this program which they are doing. Why else would they limit your yesrly investment from $20k to 5K. Stopped purchases of paper bonds on the internet. Stopped purchases on the internet with credit cards. There isn’t any limits to how much China can invest in the U.S.A. Treasury. Why isn’t our Government encouraging U.S.A. citizens to invest in their Country? Why didn’t the fact that for the first time in the history of I-Bonds the rate in Mat 2008 dropped down to ZERO and the Treasury will not tell us how they arrived at a ZERO rate. Why wasn’t this inportant news in all the papers and TV ?

On October 25th, 2008 william said:

Peter: In 3 months there will be a totally different look to Federal Government. I look for a lot of changes.

On October 26th, 2008 George H. said:

Both the Social Security COLA and the Federal Retiree COLA are set at 5.8%.

That’s supposed to be the inflation rate.

Why are the I-Bonds currently paying only 4.83% and projected to pay only 4.92%? The “inflation” component of the I-Bond is below the CPI-U and the CPI-W, the metrics that the Federal Government uses to calculate inflation. The Treasury states that they use a “variable semiannual inflation rate based on changes in the Consumer Price Index for all Urban Consumers (CPI-U)” to determine the inflation portion of the I-Bond rate.

Yet, they are NOT paying the CPI-U rate, as Social Security and Federal Retirements are. The Treasury is ripping off investors in I-Bonds to the tune of about 1% right now, and they have been all year long. Couple that with the abandonment of the advertised and specifically stated purpose of the I-Bond to be ” low-risk savings product that earn interest while protecting you from inflation.”

I wrote a letter to my congressman, for all the good that will do.

How are they getting away with this?

On October 27th, 2008 Tom Adams said:

George – the COLA is based on an index called the CPI-W. From the Bureau of Labor Statistics web site

Indexes are available for two population groups: a CPI for All Urban Consumers (CPI-U) which covers approximately 87 percent of the total population and a CPI for Urban Wage Earners and Clerical Workers (CPI-W) which covers 32 percent of the population. The CPI-U includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force. The CPI-W includes only expenditures by those in hourly wage earning or clerical jobs.

The I bond rate is based on the CPI-U, not the CPI-W. You can argue that the CPI-U isn’t an accurate measure of inflation, but to say the Treasury doesn’t use it to calculate the I bond rate is just stupid. It is exactly what the Treasury uses.

Tom Adams

On October 27th, 2008 Mike said:

What is wrong with you? Since when have you started insulting people visiting your website? George may have been mistaken, but calling his opinion stupid is wrong. I have noticed in several of your previous replies to different topics, that you are very disrespectful to some opinions and questions of others.

I used to check your website regularly to read info on savings bonds, but I think I will go somewhere else.

On October 27th, 2008 Steve said:

The current fixed coupon on TIPS, as set by the secondary market is around 3% depending on specific maturity.

Very recently the Treasury has reopend auctions on old TIPS, which have coupons below 1%, since at the time they were first issued fixed coupons were much lower.

The discrepancy, of course, is taken care during the auction process and these reopened TIPS are sold at a discount to compensate for the lower coupon.

It just occurred to me that these TIPS might offer a substantial advantage over new issues in that a new issue (higher coupon), presumably sold around par, can have its higher coupon eroded by deflation. Whereas those older issues are still guaranteed to be paid off at par when they mature, thus securing a higher fixed rate, even in the case of prolonged deflation.

I’m giving an example to make sure I’m clear about what I mean:

Hypotetical 1-year TIPS (and for simplicity I also ignore compounded interest, which on a few percent for 1 year is small anyway)

Old Issue: coupon 0.5%, sold at 97 => Approximate fixed rate: 3.5%

New Issue: coupon 3.5%, sold at par.

Apparently they are equivalent, both paying 3.5% + inflation and they are indeed.

But what happens if during the year we have a 4% deflation instead.

New issue: 3.5%-4%=-0.5%. Par value is guaranteed anyway so one gets back his money. Return: 0%

Old issue: 0.5%-4%=-3.5%. Yet par value is again guaranteed, so one gets back face value which was acquired at a discount. Return: 3%

I’d like to know what you think about this, if there is something that I’m leaving out or indeed old issues, while equivalent in case of positive inflation are more protected from deflation.

On October 27th, 2008 Tom Adams said:

Mike – you’re right; it’s like I’m a troll on my own web site.

Steve – I understand what you’re saying.

Remember that with TIPS the inflation component is added/subtracted to/from the principle of the bond, not to the interest rate as with I bonds.

You’re right that there’s a rule that with deflation you could lose all you prior inflation gains, but the value of the bond can’t go below the original par value.

So think again about what happens with the new issue. Since there’s deflation, the value of the bond should go down, but it can’t because it can’t go lower than par value, which is where it started. You’d get the 3.5% coupon on the par value and be protected from deflation – at least until there was some inflation. (At that point a return of deflation could erase your inflation gains.)

With the old issue, deflation would first cause you to lose any prior inflation gains. You’d get the 0.5% coupon plus the 3% equivalent at redemption when you collected the difference between what you paid and the redemption value.

The two transactions seem about the same to me with the exception of possible loss of inflation gains made during the old issue’s first few months.

Tom Adams

On November 13th, 2008 Tage Blytmann said:

Dear Tom,

I am wondering if you could enlighten me. I have been purchasing I-bonds for the last 6-7 years in anticipation of the likelihood of severe inflationary pressures in the coming years.

Right now my wife and I purchase a total of only $20,000 yearly in our own names (in paper and from TreasuryDirect). It is my understanding that we can purchase only $10,000 each, yearly, on any one Social Security number.

Now I am now told that – in addition to the above – we can ALSO purchase an additional total of $20,000 I-bonds (4 x $5,000) by using the co-ownership method by registering additional I-bond purchases in my name AND in my wife’s name as co-owners; and also by registering still another purchase in my wife’s name AND in my name, also as co-owners. This – if correct – would enable each married couple to purchase a total of $40,000 yearly.

Am I correctly informed? I don’t find a direct straight answer to this question on the TreasuryDirect website, and would greatly appreciate you input.

Thanks so much, also for you past help.

Tage Blytmann

On November 14th, 2008 Tom Adams said:

Tage – the limit is per SSN, so your source is confused.

This technique works to increase FDIC insurance by holding your money in multiple accounts with different registrations.

But FDIC insurance isn’t limited by SSN. The annual limit in Savings Bond purchases is limited by SSN.

That said, the Treasury appears to be policing the Savings Bond annual purchase limits just like the Bush Administration polices everything else related to the financial system – not at all. So your source may have actually done this, although it’s not officially allowed.

In theory, if you’re caught doing this, the penalty is only that the Treasury could give you your money back without interest.

Tom Adams

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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