Series I Savings Bonds Watch: August CPI-U numbers released
Although this number can impact interest rates as well as the stock and bond markets, let's see what this means for Series I savings bonds (I Bonds). As I mentioned earlier (Should You Sell Those Savings Bonds?), the variable interest rate portion of I Bonds is determined by the semiannual CPI-U rate. Now that the August 2006 CPI-U data is out, we only need the September 2006 CPI-U data (to be released on October 18th) to determine the initial variable interest rate for I Bonds issued on November 1, 2006.
I watch the CPI-U data on a monthly basis, which I use to help me decide if I want to buy I Bonds. In my opinion, the ideal time to buy I Bonds is in late April and late October, after the previous month's CPI-U numbers have been released. This allows you to know the rate of return for your I Bonds for both the first and second six month periods, which is important since you must hold I Bonds for 12 months before they can be redeemed.
As an example, let's assume that the September 2006 CPI-U number remained unchanged from the August 2006 number released today. Using the CPI-U data from March 2006 (199.8) and August 2006 (203.9) (courtesy of www.inflationdata.com), we can calculate the initial variable rate for the November 2006 issue I Bonds:
For this example, let's also assume that the fixed rate for the November 2006 issue I Bond remains at the current value of 1.40%. That would mean these bonds would earn a rate of 5.50% (1.40% fixed + 4.10% variable) until the variable rate is reset in 6 months.
I will be doing this calculation for real when the September 2006 CPI-U numbers are released next month. Of course, I will not be buying any I Bonds before November 2006 since they would only earn 2.41% (1.40% fixed + 1.01 variable) for the first 6 months. I can get a much better return during those 6 months with a high yield money market account, T-Bills, or CDs.
Similarly, I will make my next I Bond buy decision in late April 2007. Once the March 2007 CPI-U numbers are released, I can perform the same calculation as above using the September 2006 and March 2007 CPI-U numbers: