Picking up Nickels

Thursday, October 16, 2008

September CPI-U numbers released: October 2008 I Bonds worth considering

The U.S. Bureau of Labor Statistics released the September 2008 Consumer Price Index (CPI-U) inflation data this morning, which decreased by 0.14% 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 2008 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 2008 (213.528) and September 2008 (218.783) (courtesy of inflationdata.com), we can calculate the variable rate for the second 6 month period for October 2008 issue I Bonds:



That would mean these bonds would earn a rate of 4.84% (combined 0% fixed portion & 4.84% variable) for the first 6 months and 4.92% (combined 0% fixed & 4.92% variable) for the second 6 months. Even with an anemic 0% fixed rate portion, this is a competitive investment when compared to the 1 year CD @ 4.65% APY currently being offered by Corus Bank.

Based on that, October 2008 I Bonds are a reasonable buy at this time. Since I Bonds provide investors with a way to profit from past inflation (a known quantity), I believe that these bonds could provide an ultra safe investment with an attractive return for the next 18 months or so as the economy slows down. However, I don't believe that the current 0% fixed rate portion make this an attractive place to hold cash for the long term, so I would keep an eye on future rate changes as more attractive places to put this money will surely surface over time.

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