I Bonds Rate Pre-Guess for May 2007

March 27, 2007 by TFB

It's close to that time again. The Treasury Department will announce a new fixed rate and the inflation adjustment for I Bonds on May 1, 2007. The inflation adjustment will be known for sure on April 17, when the Bureau of Labor Statistics announces the CPI data for March 2007. At this time, we have 5 months of inflation data, just missing one more data point. Feb. 2007 CPI was 203.499, an increase of 1.083 points from the previous month. The reference CPI number in September 2006 was 202.9. If March 2007 CPI comes out to 204.5, a similar increase as in the previous month, the semi-annual inflation adjustment for the next 6-month cycle will be roughly 0.8%.

On the fixed rate side, real yield on 5-year TIPS dropped from 2.4% in last November to 2.0% now (source). Any adjustment to the fixed rate portion will be down, not up. So we are looking at a maximum 1.4% fixed rate, probably lower to 1.2%, plus a ~1.6% inflation adjustment, for a composite rate of 3% or less. I don't think anybody will be excited about this when Treasury Bills are yielding about 5%.

I Bonds haven't been competitive for quite a few years except for one or two special periods. I will revisit this in April but I don't think the picture will change much then.

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