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.