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
198.8/193.3 = 1.028453, or a semi-annual increase of 2.8453%.
Fixed rate = Unknown, most likely between 1.0-1.4% (Currently 1.2%)
Total rate = Fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
If we assume a fixed rate of 1.2%, we get
Total rate = 0.012 + (2 x .028453) + (.012 x .028453)
Total rate = 1.2% + 5.72%
Total rate = 6.92% (!)
For a range of fixed rates of 1.0% to 1.4%, we get a good prediction of the total rate range to be 6.72-7.13% annualized return.
Blows Emigrant Direct out of the water, eh? Of course, there are many differences to consider, not the least of which you can’t cash out a savings bond for at least a year. Also, rates are re-adjusted every six months. I’m just doing the math tonight, tomorrow I look more into weighing my options, and figuring out the best time to buy – now or wait until November?
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The fixed rate is the key. If you think the fix rate will go up, hold. If you think the fix rate will stay the same or go down, buy now.
how about posting some details for the newbies on how to invest in i-bonds or linking to additional details? great job on the blog btw!
I second the above comment. I think it would make a great post for this blog. While I know the definition of and what i-bonds are, it would be very helpful to know some of the insights from someone more experienced.
Diehards.org has a link to an I-bond tutorial.
Or here
http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&convId=26424
It’s a series of discussions, so you need to read them all, or you may be getting out-of-date information.
Man…7% with peacefully-sleep-at-night-security! No point in paying down my 4.75% (before deducting the taxable interest) mortgage.After the taxinterest deduction the mortgage looks more like a 3.2-3.5% loan and this is twice of that!
I confess I don’t know a ton about these but they do seem like a viable option for high yield returns once I reach closer to retirement age. I’ve been thinking that I’d only be able to get 4% on my money once I retire (because I want to be conservative and not risk my capital at that point), but these, depending on the economy at the time, might be a better choice than CD’s etc. Correct me if I’m wrong.
Hazzard
I wrote about the basics of I-bonds in this old post. Keep in mind it was written in March, but I don’t recall any recent changes in I-Bonds.
I wish I known about I bonds a few years earlier. The fixed rate portion was 3.6 just a few years ago and based on these figures that would be a 9.32 return, which is really unheard of with an investment this secure. I have no idea how they figure the fixed rate, but my guess is that it will stay the same or go down. When the fixed was 3 or higher, inflation was almost nothing and with inflation on the rise I don’t know why they would raise the fixed.
One more to keep in mind for anyone buying… I always purchase towards the end of the month and as long as I purchase with at least one business day left in the month, the bond purchase date is within that month, which means you can earn double interest that month depending on your bank terms.
Yes, always buy I/EE bonds at the end of the month and sell them at the begining of the month, that way you can get 12 months interest a 11 month hold
you all are missing one huge thing here… taxes… as long as the cpi is in the 5-6 % range and you guys are in at least the 20% income bracket, you are losing purchasing power… example… inflation is 6% and fixed rate is 1.2%… on 10,000 you earn 720 bucks for the year… after 20% tax it is 576. you just earned 5.76 % while inflation is 6%. congrats, you can now buy less. if you are in a high tax bracket, don’t even consider these while inflation is high!
some guy – this is true. But if you’re earning anything less, you’re losing even MORE to inflation.
What’s a guy looking for low-risk investments with short time frame, saving for a house downpayment to do?
Can I bob be purchased by Non-Profit organization for their foundation investment portfolio.