Picking up Nickels

Friday, March 14, 2008

February 2008 Series I Savings Bond update

The U.S. Bureau of Labor Statistics released the February 2008 Consumer Price Index (CPI-U) inflation data this morning, which increased by 0.29% since last month.

This number is relevant for I Bonds since the variable interest rate portion of I Bonds is determined by the semiannual CPI-U rate. Now that the February 2008 CPI-U data is out, we only need the March 2008 CPI-U data (to be released on April 16th) to determine the initial variable interest rate for I Bonds issued on May 1, 2008. And as I've mentioned before, the date of release of the March and September CPI-U numbers are the best times to consider purchasing I Bonds since we know what the rate of return for April and October issue I Bonds, respectively, will be for both the first and second six month periods that they must be held.

As an example, let's assume that the March 2008 CPI-U number remained unchanged from the February 2008 number released today. Using the CPI-U data from February 2008 (211.693) and September 2007 (208.49) (courtesy of inflationdata.com), we can calculate the variable rate for the second 6 month period for April 2008 issue I Bonds:


That would mean these bonds would earn a rate of 4.28% (using 1.20% fixed & 3.06 variable) for the first 6 months and 4.30% (using 1.20% fixed & 3.07% variable) for the second 6 months. For the first time since October 2005, I Bonds are once again looking like an attractive investment at this rate, since the yield on equivalent 1 year CDs should continue to be in a free fall once the FOMC cuts rates again on March 18th.

One major downside to purchasing I Bonds is that the Treasury cut the annual purchase limit to $5000 per social security number, effective January 1st, 2008. Under the new rules, you still can purchase $10,000 worth of I Bonds by purchasing $5000 in paper bonds at your local bank in addition to the $5000 in electronic bonds that can be purchased online at treasurydirect.gov. There have been reports that it is still possible to purchase up to the old limit of $30,000 at the TreasuryDirect web site, but if you plan on doing that you should act soon since that loophole may be closed at any time.


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