Just like last last April, using the newly released March CPU-I data and 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.
The CPI-U in September 2006 was 202.9.
The CPI-U in March 2007 was 205.352.
205.352/202.9 = 1.012085, or a semi-annual increase of 1.2085%.
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 1.4%, we get
Total rate = 0.014 + (2 x .012085) + (.014 x .012085)
Total rate = 1.4% + 2.43%
Total rate = 3.83%
For those with existing I-Bonds, the variable rate is about 2.43% on top of your fixed rate. Note that the rate on your bonds changes every six months from the date you bought it, so it might not change immediately in May.
Overall, if you buy in April and lock in your 1.4% fixed rate, you’ll get 4.52% for 6 months and then 3.83% for another 6 months. If you wait until May, even if the fixed rate portion rises to 1.6%, the total rate will barely break 4%. Either way, as a short-term safe investment it’s not a very competitive rate. Unless there is a big jump in the fixed rate to make this an interesting long-term investment, I’ll see you in six months…
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Well it can’t jump too much, because TIPS are at about 2.2% fixed, and I Bonds have many advantages (more liquid, tax-deferred, possible tax benefits for education expenses).
Thanks for doing your twice yearly analysis on this as usual-it is greatly appreciated. Let’s hope the rate jumps a bit–surely they must realize that banks have been offering more for quite awhile and they will lose alot of loyal investors if they dont get with it!
Hmmm…I have about 30% of my emergency fund in ibonds. May want to consider something else. Thanks for the update.
To “Ted”, I’d note that moving money out of I-bonds to something with a more competitive rate incurs a 3-month penalty unless you’ve held for more than 5 years.
To “Skywatcher”, I don’t think the government sets its rates in an attempt to being competive with the banks (!).
Thanks for the analysis. The number comes out tomorrow, and was looking around to see if it was announced after hours the day before. . .Wishful thinking.
I love my old 3.6 fixed but would never buy at todays rates. Also, never forget: Other people have had to clean up George W. Bush’s messes ever since he was a baby. Some things never change.