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:
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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.
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(Please also see the previous discussion of Savings Bonds)

The end of November has snuck up on me, and I’ve been putting off until now deciding whether to buy more I-Type Savings Bonds. I already did the math to see the rates for the worst case scenario (deflation), but that is pretty unlikely. The CPI-U, which is what the inflation component of I-Bonds is based on, only rose 0.2% in October. Instead of trying to predict inflation rates, let’s just see what the overall rate will be for different rates of inflation. I will compare rates for holding the I-Bond for 12 months and then redeeming them with the associated penalties, in order to compare it with a 1-Year Bank CD. I will also assume that you can buy at the end of the month to shorten the actual hold time to 11 months.
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So what’s the worst case scenario with I-Bonds if you cash out in a year? Well, that would mean deflation. Contrary to what some believe, the fixed rate is not the minimum you get. The minimum return is zero (see #5 of FAQ), meaning at least you don’t lose anything.

So 6 months at 6.73%, and then 6 months at 0.0% (3-month penalty of… well, nothing). Buying late in November, you’d actually be holding it for 11 months, working out to an annual rate of about 3.67%, not including tax benefits. Of course, deflation is very unlikely. But that’s still the worse case scenario (barring Armageddon).

The new fixed rate for I-type Savings Bonds was announced today, and it has decreased from 1.2% to 1.0%, matching the lowest historical fixed rate. This was within my prediction of 1.0 to 1.4%, but one has to wonder if all the mid-October buzz caused them to make the rate lower. Oh well, I bought $5,000 worth in October with the higher fixed rate, so I have until the end of this month to decide whether to buy more. No need to buy now, since they credit you interest for the whole month anways as long as you buy it within November.

If you do buy in November, it will earn 6.73% for 6 months, then 1.0% + a variable rate depending on future inflation adjusted every 6 months. You have to hold at least a year, and you lose the last 3 months interest if you redeem within 5 years.

My $5,000 I-Bond online purchase looks like it went off today without a hitch at Treasury Direct. Well, almost. I didn’t pay attention to my BillPay along with my checking account balance and I ended up going below the $1,000 minimum on my Presidential checking account. Doh! At least it’s only a $5 low-balance fee and not a bounced check.

There was also a good question about partial redemptions of Savings Bonds – If you withdraw any of it early (less than 5 years), will you be paying a penalty on all future withdrawals, even if you wait more than 5 years? I e-mailed them (they don’t seem to have a phone number?), and the answer I got was no. Here’s my e-mail and their response:
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A relatively unpublicized new feature of buying your Savings Bonds online is the ability to cash out only part of your bonds, mentioned briefly here. I just noticed this recently, and explored it further in my account with my paper bonds that were recently converted to electronic format. Now that they are electronic – I can partially cash out those too! Apparently the only two restrictions are:

1) The minimum amount you can redeem is $25
2) The remaining value of the bond cannot be less than $25

Here is a screen shot of me trying to partially redeem my bonds:
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[Continued from Part 1.]

Previously I went over the return that I could expect from buying I-type Savings Bonds at the end of October. While the numbers for buying in October are pretty much set, predicting the rates for buying in November will require a lot of guessing and hand-waving.

Short answer: It’s a toss-up. I’m buying half now and half next month.

Long answer:
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Well, there goes another Saturday devoted to watching college football. Now back to the issue at hand – Should I buy I-Bonds now or later? I’m definitely buying some, since the higher rate, low risk, and 1-year minimum hold time matches my Mid-Term goal needs very well. As I and others have mentioned, as long as you buy sometime during the month, you get interest for the entire month. So if you buy at the very end of the month (I’ll call this ‘buying late’), you can view it as getting 12 months of interest in only 11 months. So, we should buy either at the end of October or the end of November. There is a difference, so let’s compare:
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For those that are unfamiliar with I-Bonds or just need a refresher, please check out my old post U.S. Savings Bonds: I-Bonds and EE-Bonds – Good investment?. Keep in mind that it was written 6 months ago, so “current” and “today” means March. Everything else should be good.

Best source for additional information: Gov’t Treasury sites here and here. I’ll try to answer comments too of course.