I bonds from Bankrate.com

[GTM]

Hefty I bond rate looms
By Laura Bruce • Bankrate.com* *


The interest rate on the federal government's inflation-fighting savings bond could come in above 6 percent when it's adjusted Nov. 1.

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The current I-bond rate of 4.8 percent consists of a fixed rate of 1.2 percent and a semiannual inflation-adjusted rate of 3.58 percent. (The slight discrepancy is due to the way the composite is calculated.) Both components are adjusted every May 1 and Nov. 1.

The fixed rate, in effect when the bond is purchased, stays with an investor for as long as he owns the bond. The inflation-adjusted component is based on inflation data for the previous six months as measured by the U.S. Consumer Price Index.

Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold and Everything In-Between," says CPI numbers for the previous six months give us an annualized inflation rate of 5.7 percent.

"Combine that with the current I bond's 1.2 percent fixed rate and you get a blended rate of 6.9 percent. But with a rate that high there's a strong likelihood that the fixed rate will get trimmed."

Pederson says he could see the fixed rated coming in somewhere between 0.5 percent and 1 percent. But even if it gets scalped all the way down to 0.5 percent, the I bond would still have a composite rate of approximately 6.2 percent.

You must hold the I bond for at least one year before cashing it, and you'll pay a penalty of three months' interest if you sell it before five years. Pederson suggests that anyone considering buying the I bond do so now, before the Nov. 1 adjustment.

That means you'd get the current fixed rate of 1.2 percent and the current adjustable rate of 3.58 percent for a combined 4.8 percent for the first six months.

In late April your bond would be adjusted for the following six months. You'd have the 1.2 percent fixed rate and whatever inflation component is issued this Nov. 1. If that combined rate is 6.9 percent, you'd average 5.85 percent for the full year.

If you wait until after Nov. 1 there's no guarantee that the fixed component won't be considerably lower. Pederson estimates there's a 70 percent chance the government will lower the fixed rate.

If you buy the current I bond and sell after one year -- using the above scenario -- the interest penalty would leave you with approximately 4.39 percent for the year. If that appeals to you, don't wait until the last minute to buy. Buying before Oct. 25 should ensure you get the current rate.

The other savings bond that is adjusted semiannually is the EE series. It currently pays 3.5 percent. It's a fixed-rate bond, so the rate you get when you buy stays with you until you sell. It has the same holding and penalty provisions as the I bond. Pederson expects the EE's new interest rate to remain right around 3.5 percent.

Bankrate.com's corrections policy -- Posted: Oct. 19, 2005

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[wabmester]

Quote:

Originally Posted by GTM Pederson says he could see the fixed rated coming in somewhere between 0.5 percent and 1 percent. But even if it gets scalped all the way down to 0.5 percent, the I bond would still have a composite rate of approximately 6.2 percent.

Anybody want to bet me a dollar this guy is wrong?* * Wait till November if you plan to buy i-bonds.* *We will almost certainly see an increase in the fixed component to something close to 1.5%, meaning that your annual yield will be closer to 7%.

The only weird thing about this is that nominal bonds haven't yet caught up.* *I don't really understand that.* * Both real yields and inflation have increased sharply this year, but you wouldn't know it from looking at CDs or nominal treasuries.

The only explanation I can come up with is that the market thinks future inflation will be waaaaay low, like 2%.* *I think the market is dead wrong, but what do I know.

[JPatrick]

Quote:

Originally Posted by wab Anybody want to bet me a dollar this guy is wrong?* * Wait till November if you plan to buy i-bonds.* *We will almost certainly see an increase in the fixed component to something close to 1.5%, meaning that your annual yield will be closer to 7%. The only weird thing about this is that nominal bonds haven't yet caught up.* *I don't really understand that.* * Both real yields and inflation have increased sharply this year, but you wouldn't know it from looking at CDs or nominal treasuries. The only explanation I can come up with is that the market thinks future inflation will be waaaaay low, like 2%.* *I think the market is dead wrong, but what do I know.

I think you are right about November Wab.* At least I hope so.* DW needs a slug of these to round out her new portfolio.* If we are wrong I'll probably be serving my own Corona for some time* to come*

[GTM]

I also think the fixed component will rise.

In any case the return on I bonds should be good.
Given the safety and acceptable liquidity
I like them.

[Eagle43]

Well, I bought 3 grand yesterday, before hearing of this. And, I will buy some more in November. Win-win. I love those I-bonds.

[bongo2]

What reason do you have for thinking the fixed real rate will rise? Is it just because it was higher in the past? I don't know if this guy is right, but it seems plausible to me that the treasury (or whoever sets these rates) will compare the rate they are paying on I Bonds with what they are paying on TBills and lower the fixed rate to bring them more in line. I don't think treasury has much of an insentive to sell more of these things as long as they are getting plenty of investors in their bond auctions, and the rates for I Bonds are higher.

This article may be relevant.

[wabmester]

Quote:

Originally Posted by bongo2 What reason do you have for thinking the fixed real rate will rise?

Because the treasury is not capricious. I-bonds and EE-bonds are the "consumer" versions of 5-year TIPS and 5-year nominal treasuries. They publish the algorithm for the EE, and it is based on the prior 6-month average of the 5-year nominal treasury bond.

If you look at the real component of the 5-year TIPS for the last 6 months, it has ranged from 1.2 to 1.8. While they don't publish the algorithm for the I-bond, in the past it has followed the 5-year TIPS, so I expect the fixed portion to come in at around 1.4 or 1.5%.

[MooreBonds]

Quote:

Originally Posted by JPatrick I think you are right about November Wab. At least I hope so. DW needs a slug of these to round out her new portfolio. If we are wrong I'll probably be serving my own Corona for some time to come

Hey JPatrick - why not simply buy half now, and half in November?

[Renderdog]

November fixed rate is 1%

[wabmester]

Discussion here.

[Gone4Good]

Quote:

Originally Posted by wab Because the treasury is not capricious.* *

If only it were true.

They hosed us on the I Bonds with a lousy 1% fixed. The all-in yield looks juicy now, but just wait. With energy backing off the next CPI reading could drop that fat yield down as low as 2%.

No I Bonds for me.

[wabmester]

Yeah, I'll tell you -- that move really shook my faith in the treasury. Some genius obviously thought there would be enough demand with the high teaser rate, but lots of folks are going to hold onto those bonds for 30 years. 1% real is not fair compensation for holding treasury debt for 30 years.