As promised last month in my How To Predict I-Bond Savings Bond Rates post, the CPI-U inflation data for September is out, and we can get busy predicting the new I-Bond rates that will be officially announced on November 1st, so we can make educated decisions on to buy now or later. Spoiler: it’s gonna be high, as in over 6% APR high. But, first the math:

The inflation-linked part of the I-Bond rate is based on the inflation change for the last six months as measured by the CPI-U:

March CPI-U = 193.3
September CPI-U = 198.8
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I’ve got some U.S. Savings Bonds from back when you could buy them with no fees with a credit card and earn cash-back rewards. Unfortunately that ended in 2003. But I still have these paper bonds worth over $5,000, just asking to be misplaced or stolen. And the Treasury has been teasing me with this page about their SmartExchange program to convert these bonds to online electronic format. It’s invitation only, and I’ve been waiting for one for almost a year now. Finally I found out how to get an invitation – just ask! (Seems like a recurring theme now)

Benefits of Electronic Bonds include:

» Cash them in online, instead of having to go to a bank
» Track their current value online
» You don’t have to worry about losing them
» You can make transfers online
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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%

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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.

As of May 1st, the Treasury announced that I-Bonds bought from now until 10/05 will earn 4.8%. The fixed component is up from 1.0% to 1.2%, and the inflation-indexed component rises to 3.6%. (For more on how I-bonds work, please see this previous post). For me, my older I-bonds, with a fixed part of 1.1%, pay 4.7% now. Not too shabby, especially since you’re not paying state income tax on the interest.
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It looks like my post on EE Savings Bonds a few weeks ago is already obsolete, as the U.S Treasury Department announced yesterday that Series EE Savings Bonds issued on and after May 1, 2005, will earn fixed rates of interest for the lifetime of the bond. You’ll basically be buying a 30-year CD with no early withdrawal penalties after 5 years.
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(This post is continued from Part 1)

Okay, so we went over I-Bonds for a little bit, now let?s see what EE Bonds have to offer. Again, EE-Bonds share many characteristics with I-Bonds, which were outlined in my previous post. However, EE-Bonds are sold at half of face value ? a ?$50 EE Bond? costs $25. Whenever a contest offers you a ?$50 Savings Bond?, odds are it?s an EE-Bond.
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Right now, my portfolio is very cash heavy (almost 50k), as I saving for up a house in crazy-prices land. Accordingly, I am always on the looking for liquid investments that are safe and pay competitive interest rates. So I’m taking another look at U.S. Savings Bonds.

Let?s start with the two types of Savings Bonds that are available: EE and I Bonds. I’ll start with characteristics that are the same for both types, and then focus on I-bonds, leaving EE bonds for a later post.
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