The Finance Buff » I-Bond

I-Bonds Fixed Rate Pre-Guess for November 2007

TFB — Wed, 26 Sep 2007 13:23:00 +0000

I have written off I-Bonds as an attractive investment or even as a substitute for a 1-year CD. In case someone is still interested in I-Bonds, here is my pre-guess for the fixed rate to be announced on November 1, 2007.

For the inflation adjustment part, we have 5 out of 6 months of inflation data. If the September CPI comes out on October 17 at the same level as in August, the semi-annual adjustment will be about 1.25%.

For the fixed rate part, I use the 5-year TIPS real yield as reference. The current 5-year TIPS real yield is about 2.2%. It was 2.06% on April 30, right before the previous announcement. My guess is that the I-Bonds fixed rate will stay the same at 1.3%, or go up to 1.4% if the Treasury department feels generous.

All together, the composite rate will be 3.8% – 3.9%, still lower than many other alternatives. Another big yawn.

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I-Bonds Fixed Rate for May 1, 2007

TFB — Tue, 01 May 2007 15:05:00 +0000

The Treasury Department announced today the new fixed rate for I-Bonds sold between May 1, 2007 and October 31, 2007. I previously guessed that the fixed rate would remain unchanged at 1.4% and I thought any change would be on the down side. Someone on the old Vanguard Diehards forum guessed it would go up to 1.8%. And alas, we were all too optimistic. The Treasury Department reduced the fixed rate on I-Bonds to 1.3%. The composite rate, including the inflation adjustment, will be 3.74% for I-Bonds sold in the next 6 months. Neither the 1.3% fixed rate nor the 3.74% composite rate is attractive relative to alternatives such as TIPS, T-Bills, money market funds or bank savings accounts. Goodbye, I-Bonds, don’t call me until your fixed rate reaches 2.0%.

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I-Bonds Rate Guess for May 1, 2007

TFB — Tue, 17 Apr 2007 13:13:00 +0000

The Bureau of Labor Statistics released Consumer Price Index data for March 2007 this morning. Now I can turn my pre-guess for I-Bonds Rate for May 1, 2007 into a real guess.

Over the 6-month period which will be used for determining the next inflation adjustment, the CPI rose by 1.21%. If the Treasury department keeps the current fixed rate unchanged at 1.4%, the composite rate for I-Bonds sold between May 1 and October 31, 2007 will be 3.84%. That rate is lower than what you can get from bank savings accounts, money market mutual funds and Treasury bills.

My guess is that the new fixed rate on May 1, 2007 will be unchanged. This will slightly narrow the gap between I-Bonds fixed rate and the real yield on 5-year TIPS. When the yield on 5-year TIPS rose last year, I-Bonds didn’t follow. Now the TIPS yield is down a little bit, I-Bonds probably won’t follow either.

I-Bonds have become a big yawn because the Treasury department purposefully allowed them to fall behind the market yield. I will probably redeem my old 1.6% I-Bonds when they reach their 5-year anniversary.

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I Bonds Rate Pre-Guess for May 2007

TFB — Tue, 27 Mar 2007 13:59:00 +0000

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.

References:

Consumer Price Index data from InflationData.com
I Bonds composite rate calculation formula from Treasury Direct (scroll down to bottom)

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No Change in I Bond Fixed Rate

TFB — Wed, 01 Nov 2006 16:09:00 +0000

The Treasury Department announced this morning that the I Bond fixed rate for the next 6 months is 1.4%, no change from the previous cycle. While they didn’t lower it to 1.2% as I speculated in my previous post, this fixed rate is still not attractive. I Bonds remain uncompetitive for both short term and long term needs. For short term, T-Bills and short-term CDs yield more. For long term, TIPS has much better real yields. I will sell my I Bonds bought in October 2005 in January 2007.

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I Bonds Rate Guess for Nov. 1, 2006

TFB — Thu, 19 Oct 2006 07:31:00 +0000

Around mid to late April and October, there is a twice-annual game of guessing what the next I Bonds rate will be. I Bonds are a type of savings bonds issued by U.S. Treasury to retail investors. The interest rate on I Bonds are linked to inflation and adjusted every 6 months. The Treasury Department also arbitrarily determines and announces the fixed (”real”, above inflation) rate on new I Bonds on May 1 and November 1 of each year. Because the inflation adjustment is known around the 20th of April or October, the game becomes guessing what the next fixed rate will be and speculating whether one should buy now or wait until after the announcement. See this post for an example of this guessing game.

I Bonds used to have good fixed rates until April 2003. Good rates plus built-in tax deferral made them very appealing. Since May 2003, the Treasury Department cut the fixed rate significantly. For a while, they were still competitive to savings account and money market funds. However lately yields on savings accounts and money market funds increased because of Fed rate hikes, while I Bonds’ fixed rates were kept low. I Bonds fixed rates also lagged the rates on its sibling TIPS by a long shot. Except for a short-term opportunity in October 2005 induced by inflation spike caused by Hurricane Katrina, I Bonds issued after May 2003 just haven’t been that competitive lately (older I Bonds are still OK). But the game of rate guessing still goes on.

The inflation adjustment for the next 6-month period is 3.1% annualized. I think the fixed rate will be cut again from the current 1.4% to 1.2%. That’s the opposite direction to what the rates on TIPS have been going, but I don’t have high confidence that the Treasury Department will give the retail investors a fair deal based on TIPS rates. Rates on 5-year TIPS have risen from 2.25% in end of April 2006 to 2.58% as of today. A 1.2% fixed rate will take the I Bonds composite rate to 4.32%, allowing the Treasury to claim that it’s still competitive to other bonds — 5-year Treasury note yields 4.74% now. Tom Adams at Savings Bond Advisor wrote in an update to this post:

As of Oct 18, when we learned the next inflation component will be 3.10%, a fixed rate in the 1.4% area, plus or minus .1%, looks more likely.

However even 1.5% real rate is nothing to write home about when 5-year TIPS is yielding close to 2.6%. I will buy TIPS and continue to ignore I Bonds.

More on the mechanics of buying TIPS in a separate post tomorrow. Come Nov. 1 let’s see if my guess on the I Bonds fixed rate is good or not.

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