Picking up Nickels

Wednesday, October 18, 2006

September CPI-U numbers released: Pass on October 2006 I Bonds

The U.S. Bureau of Labor Statistics released the September 2006 Consumer Price Index (CPI-U) inflation data this morning, which decreased by 0.5% last month.

As I have mentioned before, now is one of the best times to consider purchasing I Bonds. The reason for this is that we now know what the rate of return for October 2006 I Bonds will be for both the first and second six month periods, which is important since I Bonds must be held for 12 months before they can be redeemed.

Using the CPI-U data from March 2006 (199.8) and September 2006 (202.9) (courtesy of inflationdata.com), we can calculate the variable rate for the second 6 month period for October 2006 issue I Bonds:



That would mean these bonds would earn a rate of 2.41% (1.40% fixed + 1.01 variable) for the first 6 months and 4.50% (1.40% fixed + 3.10% variable) for the second 6 months. This is obviously not an attractive rate considering that several online savings accounts are currently earning 5%.

Based on that, I don't think it makes sense to purchase October 2006 I Bonds. It is worth re-evaluating I Bonds in late November 2006 though, since it is possible that the Treasury will set an attractive fixed rate for November 2006 issue I Bonds. However, if the Treasury lowers the I Bond fixed interest rate portion (like I think they will), it may make sense to wait until late April 2007 before buying more I Bonds.

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