Savings Bond Alert #024
Friday, September 15th, 2006
Categorized as: Savings Bond Alerts
Next I bond inflation rate likely to be in 4%-5% range
This morning's CPI release for August showed inflation up 3.8% from a year ago. We now have CPI data for five of the six months between March and September that will be used to calculate the next I bond inflation component, which will likely end up somewhere between 4% and 5%.
Add that to the fixed base-rate of your own I bonds to determine what rate you'll get for the next six-month rate period. New I bonds will likely have a fixed base rate in the 1.0% to 1.4% range, for a composite rate that's most likely somewhere in the 5% to 6% range.
Soon after my report about TreasuryDirect security last month, a software bug was found that was preventing certain kinds of email notifications from going out. The bug was fixed and now TreasuryDirect's email notifications are working like they should. This is great news. Combined with other recent enhancements, it gives TreasuryDirect industry best-practice security.
Other stories on the Savings Bond Advisor web site in the last month include:
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How did you determine that the next fixed base rate is likely to be between 1 and 1.4%?
June - while the Treasury has never announced what its criteria are for setting the fixed base-rate, it's possible to guess a probable range for the upcoming rate.
In terms of the low end, they've never set it below 1% in the past and there's no reason for them to do it now.
In terms of the high end, two factors come into play. One is the current rate for TIPS, which I discuss in Series I Savings Bond fixed base-rates.
The other is that when the inflation component is relatively high, the Treasury can set the base-rate lower than it otherwise would and still sell lots of I bonds because so few investors understand how the security's interest rates actually work.
TIPS are now trading about where they were six months ago, which would indicate the Treasury might offer the same 1.4% base rate as it did six months ago.
However, the inflation component will be the second-highest ever, which may cause the Treasury to set the base rate lower than that.
I hope the Treasury won't drop the base-rate even if the inflation rate is very high. The 1.4% is still way below where it use to be back around 2000. I remember when the base-rate dropped from 3.00% to 2.00%. I actually held back on more I-bond purchases thinking it would eventually go up.
But based on the recent history at the Treasury, I think your 1-1.4% guess is solid. I'm just hoping for a pleasant surprise. Maybe with the very low demand on savings bonds, there'll be some pressure on the up side.