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: