Anybody Understand I-Bond Rates?

[km4hr]

Looking at my treasury direct account online I see that I have bonds purchased 10-1-2003 that show an "interest rate" of 6.83%. Is that the current rate? Other bonds I purchased on 12-1-2004 show interest rate of 2.01% (why so low?). Bonds purchased 10-1-2005 show 6.93%. What the heck is going on here? Is the web site wrong? Why are the rates so variable? If I understand it correctly the interest rate on an I-bond is the sum of a fixed part and a variable part. The fixed part on these bonds is about 1 percent. The variable part, I thought, is the same for all I-bonds and changes every 6 months based on inflation. So what's going on with these bond rates? Why are they so wildly different? Are the rates shown on the web site current rates or the rate on each bond at the time of purchase? The web site shows that I-bonds purchased today have a rate of 2.41%. Who would want those? Has inflation dropped that much?

 

[ats5g]

fyi - I Bond Interest Rates.

HOW WE SET COMPOSITE RATES

Here's how we set the composite rate for I bonds issued May 2006 - Oct. 2006:

Fixed rate = 1.40%
Semiannual inflation rate = 0.50%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate X Semiannual inflation rate)]
Composite rate = [0.0140 + (2 x 0.0050) + (0.0140 X 0.0050)]
Composite rate = [0.0140 + 0.0100 + 0.0000700]
Composite rate = [0.02407]
Composite rate = 0.0241
Composite rate = 2.41%

- Alec

 

[d]

the variable rate is subject to change every six months from the issue date ... so that 6.83% will be falling to reflect the current variable rate

 

[km4hr]

Thanks Alec,

That shows how the current 2.41% rate is calculated but how about the 6.83% and 6.93% on the older bonds I described? Those bonds actually have a lower base rate than the current 1.4%.

 

[km4hr]

the variable rate is subject to change every six months from the issue date ... so that 6.83% will be falling to reflect the current variable rate

I think you may have provided the technically correct answer but I don't understand it. The bond that's paying 6.83% was issued on 10-1-2003. Six months from that date would be 4-1-2004. So the new interest rate would be calculated on that date. Six months after that would be 10-1-2004. So the interest would again be calculated on that date. From there on the new rate would be calculated every year in April and October. That means the next rate change from now will be calculated on 10-1-2006. Is it gonna drop all the way from 6.83 to 2 point something? I though inflation was on the rise or about level, certainly not falling!

 

[d]

the "new" variable rates are set in May and Nov only! ... your Oct issued bonds reset in April prior to the reduction in the variable rate. but your Dec issued bonds rest in June after the reduction in the variable rate

 

[km4hr]

Thanks to everyone for your help.

I finally found the missing piece of the puzzle on the treasury direct site. According to the govenment inflation fell drastically between 10-1-2005 and 5-1-2006. Who'd of thunk it? I don't recall any recent reduction in my personal rate of inflation. Oh well.

http://www.publicdebt.treas.gov/sav/sbirate2.htm

thanks again.

 

[wabmester]

Currently, YoY inflation is at 4.3%, so you can expect your annual yield to be around 5.7% for the latest i-bond issue.

Of course, the inflation numbers vary each month.   Gas prices drop at the end of summer.   Retailers have big sales in November, etc.   So the inflation adjustment in the last 6 months tends to be smaller than the inflation adjustment in the first 6 months.

 

[brewer12345]

Yeah, what WAB said. Plus I bonds only reset every 6 months, so the inflation component can be pretty volatile from one period to the next. If you look at something like ISM (which resets its inflation component every month), there tend not to be big discontinuities in yield.

 

[Scrooge]

According to the govenment inflation fell drastically between 10-1-2005 and 5-1-2006. Who'd of thunk it? I don't recall any recent reduction in my personal rate of inflation. Oh well.

There was a spike in mid-late 2005 and then a drastic slowdown in early 2006. There is quite a bit on I-Bonds, inflation, etc at http://www.savings-bond-advisor.com

 

[Alan]

KM, If you download the Bond Wizard from the Treasury Direct site and enter your bond details you can "look ahead" to the month before the next rate change (ie October and April). That way you will see what rate bond(s) are going to fall or rise to. Bonds issued in 10,2003 will drop to 2.11% in October.

Bonds issued in 10,2004 will drop to 2.01% because their fixed rate is .1% lower.

Buying I-Bonds today will get 2.41% but their fixed rate will be 1.4% ongoing so will probably jump to about 7% 6 months after purchase.

At least that is how I think it works.