Predicting the New I-Bond Rates: Yawn.

Just like last October, using the information in my How To Predict I-Bond Savings Bond Rates post, we can now try to predict the upcoming I-Bond rate announcement on May 1st. For more information on savings bonds, check out my Savings Bond category, starting with my intro to I and EE bonds. Let’s just jump into it:

The CPI-U in September 2005 was 198.8.
The CPI-U in March 2006 was 199.8.

199.8/198.8 = 1.00503018109, or a semi-annual increase of 0.503%.

Fixed rate = Unknown, currently 1.0%, the lowest ever. I predict about 1.1-1.4%.

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

If we assume a fixed rate of 1.2%, we get

Total rate = 0.012 + (2 x .0050302) + (.012 x .00050302)
Total rate = 1.2% + 1.01%
Total rate = 2.21%

For those with existing I-Bonds, the variable rate is about 1.01% 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.

For those considering buying soon:

Buying in April
You lock in the current fixed rate of 1.0%, and also the current variable rate of 5.72% for the first six months. For the next six months after that, you get only 1.01% for the variable rate.

Treating an I-Bond as a potential 11-month CD
Don’t. If you maximize your return and buy on 4/30/06 and sell on 4/1/07, you’ll keep it for 11 months and receive 9 months of interest due to the 3-month interest penalty for selling within 5 years. In the end you’d get about 4.21% APR according to my quick calculations. That’s not very attractive compared to current 1-Year CD rates, which are over 5.0%.

Buying in May
I would probably recommend waiting until May, the government might jack up the fixed rate sky-high, which could make I-Bonds a possibly good long-term investment. Probably still not a very good short-term investment.

Comments

  1. Corey Neubauer says:

    Just let you guys know that “single” member LLCs report their income on the same form as sole prop’s! So forming an llc may not be the best thing to audit proof your company! Having 2 members or more would since you would file a parternship return!

  2. Corey – Yes, that makes perfect sense. Thanks for pointing that out.

    (I think these comments actually apply to the previous post)

  3. Udo Licht says:

    True, but what about tax implications? No state tax on I-bonds. Therefore, the 4.21% APR should rise somewhat, at least for people in high-tax states.

  4. Yes it will help, but not enough to break 5%.

    In addition, a 6-month Treasury Bill is paying ~5% right now, and it is also state/local tax exempt.

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