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.
(No Ratings Yet)
Loading ...
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.