New inflation numbers for March 2010 were announced today, so it’s time for the usual semi-annual update and rate predictions.
New Inflation Rate
September 2009 CPI-U was 215.969. March 2010 CPI-U was 217.631, for a semi-annual increase of 0.77%. Using the official formula, the variable interest rate for the next 6 months will be approximately 1.54%, depending on the fixed rate. Here’s math:
217.631/215.969 = 1.00769, or a semi-annual increase of 0.77%. Using a fixed rate of the existing 0.3%:
Variable rate = 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
Variable rate = 2 x 0.0077 + (0.0077 X 0.003)
Variable rate = 0.0154, or 1.54%
Buying Now = ~2.33% APR, 11-month investment
If you buy before the end of April, the fixed rate portion of I-Bonds will be 0.3%. You will be guaranteed an variable interest rate of 3.06% for the next 6 months, for a total rate of 3.36%. For the 6 months after that, the total rate will be 0.3 + 1.54 = 1.84%.
You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur a 3-month interest penalty. However, a known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. Let’s say we buy at the end of this April, hold for the minimum of one year, and pay the 3-month interest penalty for redeeming within 5 years. You’ll be able to sell on April 1, 2011 for an actual holding period of 11 months.
Taking into account the 3-month penalty, that leaves you with a 2.33% annualized return, which is also exempt from state income taxes on the interest. This is slightly better than any 1-year bank CD that I can find right now, keeping in mind the liquidity concerns and the purchase limits (see below).
Buying Later? If you wait until May 1st, you will get a new unknown fixed rate plus 1.54% for the first 6 months. My wild guess for the fixed rate would be 0.4% at most, probably less. The next 6 months will be based on an unknown rate based on future inflation. If you really want inflation protection, these I-Bonds may be a viable alternative to TIPS, but I wouldn’t pick them for short-term funds due to the low guaranteed rate.
Low Purchase Limits
The annual purchase limit is now $5,000 in paper I-bonds and $5,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov. As for paper, here is a post on how to buy paper savings bonds from your local bank. Some larger banks may have an electronic process.
For more background, see the rest of my posts on savings bonds.