Time to dust off the Savings Bond interest rate crystal ball
Friday, March 31st, 2006
Categorized as: Yesterday's News (old post archive)
You have been right about I bond rates in the past. What’s your best guess for the new Series I and EE rates May 1.
Tom’s response
Thank you for misremembering my accuracy. Last November I predicted that the Treasury would increase the Series I bond fixed rate – instead the Treasury lowered it.
Nonetheless, I’ve fearlessly dusted off my crystal ball for you. Let’s see if it works any better this time.
For Series I bonds, I think the inflation component is going to be near the current record low from spring 2002, which was 0.56%. Because the inflation component is low, I think the Treasury will raise the fixed rate component.
Based on current five-year TIPS rates and how they’ve done this historically (except for last time), they might go a bit higher than 2%. They fooled me badly last time, but I’ll stick my neck out and give them a chance at a repeat performance.
Put that together and you get a composite rate on new I bonds of about 2.5%. But stay tuned – we’ll be able to hone this prediction as we get closer to May 1.
The Series EE rate has only been set twice under the new fixed-rate rules instituted on May 1 last year. However, both times the rate was set at about 80% of the average 10-year Treasury rates for the previous six months.
If that holds true this time, we could see EE rates a bit higher than 3.5%, but this prediction is highly dependent on what 10-year rates do between now and May 1.
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Tom Adams
Cool, let the predictions begin! This semiannual guessing game is always fun. I’m glad you didn’t completely give up on the Treasury’s sanity to give a meaningful fixed rate, Tom.
As we get closer to May 1 you’ll see news websites cite, “Tom Adams predicts 2.5% I bond rate.”
I think I’ve posted some values from my statistical forecast modeling previous. It looks like March was a pretty inflationary month (I base this on gas and grocery prices) so I’m predicting a 1% inflation component. I’ll let myself be surprised by the fixed rate – hopefully positively – but around 2% sure would be nice. Do you think there’s a chance that if the inflation rate is bad enough, they might set the fixed rate above 5 year TIPS yields?
I’m looking to start investing in I Bonds.
I’m planning on holding them for 10+ years.
I heard that if I buy right now, I’ll get 6.73% for the next 6 months, but then the fix rate will be only 1%…
On the other hand, if I wait till May, I could get a better fix rate (probably 2+%), but a lousy total rate….
What would you recommend for the long term holder?
Thanks!!
Mario – I can’t find any data on TIPS yields before Jan 2003. Since then the only time the Treasury has set the I bond fixed rate above the 5-year TIPS yield was when the TIPS yield was under 1.0%. The Treasury’s goal is to borrow money as inexpensively as it can, but how that plays out in terms of I bond fixed rates is just a guess.
Gonzalo – The breakeven point for 10 years is a fixed rate of 1.3%. In other words, if the new I bond fixed rate is under 1.3%, you’ll do better after 10 years with the I bond you can buy now. If it’s over 1.3% you’ll do better with a May I bond.
The Treasury can set the I bond fixed rate whereever it wants. For issues from the I bond introduction in Sep 1998 through April 2003 the fixed rate was well above 1.3%; for the last three years it’s been lower than that.