Well, the CPI-U that I recently questioned went up 0.9% in March alone. I guess you can’t hide everything. So, is it time to buy some Series I bonds? First, refer back to this earlier post for a primer as well as some background information. You can ignore the predictions since we have the actual data now.
Calculating the Rates For Next 12 Months
If you buy by the end of April, the fixed rate portion of I-Bonds will be 1.2%. You will be guaranteed an variable interest rate of 3.08% for the next 6 months, for a total interest rate of 4.28%.
After that, the rate will adjust every 6 months based on the previous 6 month’s worth of inflation data. The next adjustment will be in May, based on September-March 2008 data. We can effectively predict this now using the prediction method explained here:
Sept 2007 CPI-U was 208.490. March 2008 CPI-U was 213.528. 213.528/208.490 = 1.02416, or a semi-annual increase of 2.416%.
Total rate = Unknown fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
If we assume a fixed rate of the current 1.2%, we get
Total rate = 0.012 + (2 x .02416) + (.012 x .02416)
Total rate = 1.2% + 4.86%
Total rate = 6.06%
Possibly Good Short-Term Investment?
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 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, 2009 for an actual holding period of 11 months.
We will get 4.38% for 6 months, and ~6.06% for 3 months taking in account the penalty. Over 11 months, that’s equivalent to an annual rate of ~4.04%. Now, if you live in a state with 9% state income tax, your equivalent yield gets bumped up to ~4.44% depending on if you fully itemize your state income taxes.
This is a pretty competitive yield for an 11-month term on guaranteed cash, as long as you are okay with the lack of liquidity. In addition, you can always decide to hold it longer than 11 months if inflation continues to climb and the Fed is unwilling to raise interest rates due to economic recession. This could make your Series I bonds yield significantly more than similar bank CDs. If you hold for 5 years, then you don’t have to pay the 3-month interest penalty either.
Update: Also, if you hold it for 15 months (14 with buying early), you would get 4.28% for 6 months, 6.06% for 6 months, and then 0% (penalty) for 2 months. This would average out to about ~4.43% APY over that slightly longer period.
Very little downside with a good potential upside… just how I like it! I’m definitely buying some, I just have to figure out how much cash I am willing to lock up for 11 months.
First of all, I just tried and unfortunately the TreasuryDirect website no longer allows purchases over $5,000. The official (and now enforced) purchase limit is $5,000 of paper I-bonds and $5,000 of online I-bonds per Social Security Number, per year. For a couple, that’s $20,000 total per year.
Second, you need to be quick and buy before the end of April to lock in these rates. I have a feeling in May the fixed rate will drop significantly. So if you haven’t already, open your account at TreasuryDirect soon. Their security has increased, I couldn’t even link up a new bank account online without mailing in paperwork. For paper bonds you should be able to buy these at any bank (not sure about credit unions).