Predicting the New I-Bond Rates For November

It’s time again to predict the upcoming I-Bond rate announcement for November, as the September CPI-U numbers were just announced. We did this successfully for both last October and April, using the information in my How To Predict I-Bond Savings Bond Rates post.

For more information on savings bonds in general, check out my Savings Bond category. Otherwise, let’s get to it:

The CPI-U in March 2006 was 199.8.
The CPI-U in September 2006 was 202.9.

202.9/199.8 = 1.0155155, or a semi-annual increase of 1.5516%.

Fixed rate = Unknown, currently 1.4%. I predict about 1.2-1.6%.

Total rate = Fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)

If we assume a fixed rate of 1.4%, we get

Total rate = 0.014 + (2 x .0155155) + (.014 x .0155155)
Total rate = 1.4% + 3.12%
Total rate = 4.52%

For those with existing I-Bonds, the variable rate is about 3.1% to add on to your fixed rate. Note that the rate on your bonds changes every six months from the date you bought it, so it might not change immediately in May.

Let’s look at our buying options:

Buying in October
You lock in the current fixed rate of 1.4%, and also the current (pitifully low) variable rate of 1.01%. for a total of 2.41% for the first six months. For the next six months after that, you will get ~3.12% for the variable rate, for a total of 4.52%. Not very impressive.

Treating an I-Bond as a potential 11-month CD
Definitely not a good idea, as even if you maximize your return and do the buy-late trick and hold it for 11 months for 9 months of interest, your return will be far under current market rates for a 1-year bank CD. This is even taking into account the possible state tax exemption advantage of certain states.

Buying in November
If you wait until the fixed rate is actually announced on November 1st and it is really high, which could make I-Bonds a possibly good long-term investment. Probably still not a very good short-term one.

I need to do another analysis of what to do with my current savings bond holdings next.

Comments

  1. I totally agree. I see the savings account and the CDs offered by E-loan are the best short-term risk-free investments.

  2. I’m upgrading some of my 1% and 1.2% fixed rate I-bonds to these current 1.4% I-bonds before Nov. 1st, despite the first six months of pitiful interest.

    Hey, I intended this money to be a future emergency fund (after 1 yr holding period) and hopefully it will just sit there anyway, tax-deferred. So why not upgrade to 1.4% now when I could be holding onto it for 30 more years?

    But yeah, for short term, pre-Nov 1st I-bonds are not a good idea. My shorter-term money’s already in liquid savings or my T-bill ladder, so this doesn’t bother me.

  3. Jonathan, what do you think of substituting TIPS for I-bonds, for a 5 year investment? The yield (equivalent to fixed rate) for the upcoming TIPS auction may be as high as 2.6%, blowing the expected I bond fixed rate away by about a 1% margin. With realistic inflation expectation over 5 years, even the fact that these are taxable shouldn’t make them worse than I bonds (unless perhaps for an extreme case where someone can cash out I bonds in a year with no tax at all).

  4. Mario,

    As long as you’re OK with the differences with TIPS, then there’s nothing wrong at all. But if it’s for long-term, your tax-deferred I-bonds are likely to come out slightly ahead of reinvested TIPS in taxable after about 15-20 years or so.

    Differences:

    TIPS…………………………….I-bonds

    1. pay tax every year……….1. tax-deferred
    on both interest and the
    adjusted principal

    2. with deflation, can……….2. worst case is 0% interest
    actually lose value

    3. no advantage for…………3. tax-free for qualified educational
    educational use expenses

    4. $45 fee to sell within…….4. last 3 months interest penalty
    five years (on TDirect)………..for redeeming within five years,
    plus potential market………….but no secondary market to change
    value decline……………………value

    5. no annual purchase………5. $30k limit per registration account
    limit…………………………(can be $30k Treasury Direct plus
    ……………………………….$30k in paper I-bonds)

    6. cannot partially…………. 6. electronic savings bonds can be
    redeem TIPS…………………partially redeemed for any amount
    …………………………………. over $25

  5. crap, my nifty chart didn’t lay out the way I tried. Well, hopefully it’s still legible…

    :P

  6. Yeah the spaces just disappear as HTML. I tried to clean up your comment a bit :)

  7. Jonathan – wow, thanks! I’ll know not to try that next time!

  8. Wow! You hit it right on the head! Rates were announced yesterday – 4.52%

  9. Do you have a prediction for November 2009?

Trackbacks

  1. [...] As predicted in October, the new inflation portion of I-Bonds is 3.12% and the new fixed rate is 1.4%, for a total of 4.52%. This is still lower than what is available via Treasury Bills and online savings accounts, so those of us with older Savings Bonds should really think about cashing them in. But when is the best time to do it? [...]

  2. [...] about cashing them in. But when is the best time to do it? Here how I try to figure it out, and a quick calculator that does it foryou. [...]

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