Savings Bond Alert #025

Wednesday, October 18th, 2006
Categorized as: Savings Bond Alerts

Next I bond inflation rate will be 3.10%

The Consumer Price Index fell during September to 202.9 from August’s 203.9. The Series I Savings Bond inflation component is based on the level of the CPI in March and September. In March the index was at 199.8. This means the next I bond inflation component will be 3.10%.

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 3.10%. The fixed-base rate for your I bonds can be anywhere between 1.0% 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 January and July.

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.

Nonetheless, we can guess that the Treasury will look at the current rate for Treasury Inflation Protected Securities (TIPS), which right now is almost exactly where it was when the 1.4% base rate was set on May 1.

We can also guess that the Treasury looks at competitive investments, such as bank CDs. CD rates peaked in July and have been declining since, but are still generally above the 4.5% rate I bonds would have if the Treasury stuck with the current 1.4% rate. You can follow average CD rates on our web site.

Of course I bonds have advantages that CDs lack, including inflation protection, tax deferral, exemption from state and local income taxes, and a fixed base-rate that’s locked in for 30 years, so you should expect Savings Bonds to have a somewhat lower rate than CDs.

Another factor to consider is that since the last I bond rate was set we have a new Treasury Secretary. Although it’s not clear whether new rates are cleared at that level, if they are, it could have an unknown impact on the new rate.

A final factor is that new investments in Savings Bonds hit 20-year lows over the summer. Although Savings Bonds cover a very small proportion of the national debt, they are a visible component of the debt. The Treasury has to have some concern that if it sets the fixed base-rate too low, the low levels of investment in Savings Bonds will continue.

Other stories on the Savings Bond Advisor web site in the last month include:

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10 Comments

On October 18th, 2006 dsimicata said:

I am planning to liquidate 30K in electronic and 30K in paper i-bonds which I purchased on 11/28/2005.

What is the 1st date I can cash them out?

thanks.

On October 18th, 2006 SlimJ said:

Tom,

Just to make sure I understand (please correct if wrong):

1: The inflation component is now known for the next period (3.10%)
2: The fixed component is not known for the next period.
3: The next fixed component will be announced on November 1.
4: Once the new fixed component is announced, there is no “grace period” to buy under the old fixed component.

So, here is the conundrum, I have some cash to buy I-bonds now. I plan to hold them for the long term. I don’t know if I should buy them in what is left of October, or wait until November.

What is your best hunch on the next fixed component. You seem to be hinting it could go up or down, but I’m not sure what you think is most likely?

On October 18th, 2006 Tom Adams said:

You can redeem them on November 1st.

On October 18th, 2006 DICK LEVITT said:

Tom, Your new alert rates 6 stars (******), as does your new book which I am still reading. I will be sending you some more comments on the book, which I hope will be helpfull. Keep up the good work. regards, Dick

On October 18th, 2006 Ethan Finneran said:

Your “guess” about what the new fixed rate for I-Bonds will be is the most “educated” and articulate one I have seen. Thanks.

On October 18th, 2006 Mike Occhialini said:

RE: fixed rate “guess” comment - yes! I was thinking the same thing - Tom needs to be in politics - he would do us proud! Of course I’m hoping the fixed rate will bump up a bit but we’ll have to wait and see. Thanks Tom Adams for a fine analysis and web site.

On October 18th, 2006 Mike McCune said:

Tom, you mention new purchases of savings bonds hit 20 year lows this past summer, but what about redemptions? Are people cashing out too? Thanks.

-Mike M

On October 18th, 2006 Samuel J said:

I don’t understand the “guess”. I have some money ready to buy I-Bonds, and I need to know if I act now or wait until November. Maybe Tom’s comments were clear to you, but to me it seems like he is speaking in code.

What’s the consensus? Buy now or buy in a few weeks?

On October 19th, 2006 Mike Occhialini said:

The fixed rate is always a source of speculation in April and October (the months before it changes) so it’s always a “guess.” However, I think Tom Adams has carefully and accurately outlined the factors any reader should consider when making their own guess - BRAVO to Tom for letting us make our own decision!

For what’s it’s worth, I don’t think the fixed rate will go lower and will wait for November to make any purchases. Then again, I might be wrong - it’s happened more than I care to admit!

On October 19th, 2006 Tom Adams said:

Mike McCune - great question. When I asked the Treasury press office for redemption data, they gave me a link to a new web page where anyone can get this data. I haven’t been able to fully analyze the data yet, but Series I redemptions did exceed new investments for the first time in June and the same thing happened in July, August, and September. I’ll do a post on this after I’m able to digest all the data, which is here.

Samuel - You can’t find my “guess” because I’ve gotten burned too many times guessing actual numbers. This time I’m just giving you the data that rational people would use to make the decision about where to set the rate.

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 Savings-Bond-Advisor.com. 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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