What if the next Series I Savings Bond rate is 0%?
Monday, February 27th, 2006
Categorized as: Series I US Savings Bonds
So if I have I bonds that are over a year old and the next I bond inflation rate does come in at 0%, would it make more sense to wait three months, then cash them in? Or should I hang on for another six months to see if the CPI increases?
Tom’s response
I like I bonds because I’m worried about the amount of debt the U.S. is in. The only easy way for politicans to get out of this debt hole - and I don’t see today’s politicans ever agreeing on anything that isn’t easy - is inflation.
That’s the risk I’m trying to protect myself from and I’m willing to take less than the highest yield to get that protection. Series I Savings Bonds and Treasury Inflation Protected Securities (TIPS) are the only investments guaranteed to protect you from inflation.
Six months at 6.73% and six months at 0% gives an annual yield of 3.37%. Even that is better than the 3.20% we would have gotten from EE bonds.
You make a good point that three months of 0% erases the penalty for redeeming before five years. Moreover, as Dan points out in this comment, if the Treasury raised the fixed base-rate significantly to compensate for a low inflation component, those of us who own I bonds with a low base rate would get an excellent opportunity to switch to bonds with a higher base rate.
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Tom Adams
Dont understand why anyone thinks the I rate is going to 0. The cpi-u is higher than it was a year ago when the rate was set at 4.8%.
It’s the change in CPI-U over the previous six months that matters though. And as far as changes over a six-month span go, as of May 1st it’s nearly certain to be relatively small (unless there’s some seriously crazy inflation before then).
Dan: So you saying we go to 0% for the May 06-Nov 06 period if the rate is even .1 under the previous 6 mo. rate. If so that sucks. TIA
Is it correct that if you buy an I bond in April of 06 it will earn the 6.73% until September of 06?
Dean - yes that’s correct. The Treasury will announce a new inflation rate on May 1, but for an April 06 I bond, that rate won’t kick in until October 06.
The Savvy Saver blog says:
I came across this little blurb about the potential for I-bonds to have an inflation interest component of 0% for the next go-’round….