How To Predict I-Bond Savings Bond Rates

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I-Bonds pay a rate based on two parts, a fixed component good for the life of the bond and a variable component based on inflation that changes every November and May 1st.

It turns out you can actually predict the variable component of the rate before it is actually announced officially. Inflation in this case is measured by the CPI-U, which is released every month by the government here. For example, the inflation information for August 2005 was just released today. The rate in May is a measure of inflation from the previous October through March; the rate announced in November is a measure of inflation from the previous April through September. Here’s how to use this information to compute the I Bond rate:

Here’s how the current rate of 4.80% that was announced in May 2005 came about.

The CPI-U in September 2004 was 189.9.
The CPI-U in March 2005 was 193.3.

193.3/189.9 = 1.01790, or a semi-annual increase of 1.790%.

So, Semiannual inflation rate = 1.79%
Fixed rate = 1.20% (set separately, not sure how)

Total rate = Fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
Total rate = 0.0120 + 2 x 0.0179 + (0.0179 X 0.0120)
Total rate = 0.048, or 4.80%

So what’s going to happen when the rate changes on November 1st? We’ll know the Semiannual inflation rate for sure in Mid-October, but let’s see what we can guess now. Since we don’t have March-September (3/05-9/05) data, we could

A) Use the previous rolling 6 months, and use February-August (2/05-8/05) instead, or
B) Use March-September (3/05-8/05), and extrapolate another month’s worth of inflation.

Are you stil with me? I’m gonna do both.

Method A above

CPI-U in February = 191.8
CPI-U in August = 196.4

Change = 196.4/191.8 = 1.02398 or a semi-annual increase of 2.398%.

Again, I don’t know what the fixed rate will do. I don’t think the change will be radical, so I’ll use a range of 1.0-1.4%.

Using the above formulas and ranges of rates, Method A estimates the next I-Bond rate to be from 5.8%-6.2%.

Method B above

CPI-U in March = 193.3
CPI-U in August = 196.4

Change = 196.4/193.3 = 1.01604 or a 5-month increase of 1.604%.

I then divide 1.604 by 5 to get a monthly increase of 0.3208%. Extending it for six months gives me a semi-annual inflation rate of 1.9248%, or 0.019248.

Again, I’ll use a range of 1.0-1.4% for the fixed rate.

Using the above formulas and ranges of rates, Method B estimates the next I-Bond rate to be from 4.9%-5.3%.

Hmm.. that gives you a pretty wide range of possibilities, but I think it’s safe to say it’s very likely the rate will rise on November first. I’ll check back and update these predictions in Mid-October before then too.

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  1. I have a feeling that with the inflation portion of the I-bonds likely to rise a little and with long term rates still pretty low, they won’t raise the fixed rate of the I bond. I remember back in 2000 when the fixed rate use to be 3.6%. Wish I had put more into the I-bonds then…

  2. Since I bond can be cashed without penalty after 5 years, its real rate is likely to follow the five year tips (Treasury Inflation Protected Securities) rate averaged over some period of time and perhaps with a spread. This may work in a similar fashion as mortgage rate that tends to follow 10-year treasury rate with a lag and a spread. My guess for the real rate in November is 1.2-1.6.

  3. So we’ve already got one vote for the fixed rate portion either staying put or dropping, and one vote for it going as high as 1.6.

    I should start a betting pool or an over/under. =)

  4. 3 years ago, it was possible to buy savingsbonds using a credit get the drift, I used my discover card to get 1% cash back and bought bonds for over $12000. Then the govt closed that option. I was trying to estimate the rate for the next 6 months myself and it seems from your calculations that it is going to be higher, great! as it is now it is higher than my mortgage even before the tax deduction, so I plan on loading up on these for the next 6-8 months.

  5. But since you can’t withdraw the money without penalty within 5 years, in the case when the inflation slows (let’s say there’s a big drop in oil), I-bond rate can go lower than the highest 5-year CD today, right?

  6. Yes, it is a long term safe investment. If there is one thing I can be sure of it is that the oil companies and OPEC wil find new ways to gouge out the best prices out of every one in the whole world. I would not worry about inflation going down atleast due to oil prices.

  7. sid – I got a $5,000 I-Bond that I bought with a credit card just for that 😉 Too bad that’s gone.

    Alan – that is true, it can easily go lower. But the 5 year CD could also be a poor rate if inflation does rise, and I-Bonds would look great. Ya never know. I-Bonds are better for protection against inflation, EE-Bonds are more for a long-term consistent rate.

  8. It’s been an interesting decade regarding investment, especially in retirement mode. According to Vanguard, if you invested $10,000 in the SP-500 ten years ago, your money is now worth about $8800.
    If you invested it in a intermediate bond fund with Vanguard, it would be worth a little over $19,000. But…these are both subject to lots of ups and downs. Want to sleep at night and have money available when you retire…buy Treasury Bonds. This is a no brainer!

    I invested in I-Bonds in 2001 when the index was 3.0. For the past nine years, I’ve been earning about 6% a year. I have also been in stocks…losing 50% of my retirement portfolio. Finally, this year I called it quits. The stock market is only worthwhile for retirement (imho) if you have a time horizon of 30 years. The thing is…I also lost 50% in the 2000 tech crash as well. It’s all hype for the average person to keep Wall Street fat and happy.

    My suggestion based on 40 years of investing…read the book “Your Money or Your Life” by Joe Dominguez and Vicki Robins. Then, reread it every year for the rest of your life. And…invest in TBonds until you have reached your retirement goal, maybe risking 10-20% on mutual funds for regular bonds and stocks. Otherwsie, work hard, invest in T Bonds, sleep soundly at night, and live a worry free life.

    Don’t listen to Wall Street. Prediction…we are headed for a World Depression in 2012. Wether it happens or not…prepare for it as it will happen. The probabilities are high!!!

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