Picking up Nickels

Wednesday, April 15, 2009

March CPI-U numbers released: April 2009 issue I Bonds worth considering

The U.S. Bureau of Labor Statistics released the March 2009 Consumer Price Index (CPI-U) inflation data this morning, which increased by 0.24% since last month.

As I have mentioned before, now (along with the release of the September CPI-U) 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 April 2009 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 September 2008 (218.783) and March 2009 (212.709) (courtesy of inflationdata.com), we can calculate the variable rate for the second 6 month period for April 2009 issue I Bonds:

Wow, I believe that this is the first time that I Bonds have had a negative variable portion since they were introduced in 1998. That means these bonds would earn a rate of 5.64% (using 0.70% fixed & 4.94 variable) for the first 6 months and 0% (using 0.70% fixed & -5.56% variable) for the second 6 months. Based on this, I believe I Bonds are once again a competitive investment when compared to something like the 11 month CD @ 3.00% APY currently being offered by Connexus Credit Union.

I believe that April 2009 I Bonds are a reasonable buy at this time even with a 0% composite rate for the second six month period. Please note that even with a negative composite rate, I Bonds do not lose money even during periods of severe deflation. The earnings rate can't go below zero and the redemption value of your I Bonds can't decline (see treasurydirect.gov for more info). I will be buying $5000 worth of April 2009 I Bonds myself and will reevaluate what to do with them in April 2010. If speculation by some that current monetary policy will start to create a high inflationary environment by then, I will probably hang on to them. If they're not an attractive deal at that time, I will redeem them and essentially pay no penalty by forfeiting three months worth of 0% interest.


  • From a long term prospective, I think you're better off waiting for the new fixed rate in May. .7% is the second lowest ever, and much lower than any other except the anomalous 0% rate that preceded it.

    My guess is the new fixed rate will be greater than 1%, possibly 2% or greater, maybe-just-maybe 3% or greater. At a target inflation rate of 2%, the composite rates for these would be 5%, 6%, and 7% respectively.

    ibonds.info/rates.html has a good rate history and links to other information. As stated on their news page, "The bonds with the 3.60% fixed rate were earning 9.4% in November 2005!"

    I realize it's harder to quantify the benefit of waiting and starting the first 6 months at 0%, but the potential payoff is much greater than the marginal benefit the .7% fixed rate bonds might have over current CD rates.

    By Anonymous Anonymous, at 4/15/09, 11:57 AM  

  • Thanks for your thoughts.

    The fixed rate portion for I Bonds has historically trailed the real rate for TIPS, so I believe that the chances of seeing a 2%+ fixed portion in May is highly unlikely.

    Since I believe that the Treasury is trying to kill the savings bond program, my strategy is to focus on the short-term benefits that the backward looking way I Bonds look at inflation provide. Looking long-term, TIPS have offered a much more compelling real return and inflation protection than I Bonds for quite some time now.

    By Blogger Frugal Frugalson, at 4/15/09, 1:46 PM  

  • Good points.

    My judgment may be a bit clouded due to the fact the I Bonds I bought this time last year were one of the few (OK, only) really good financial moves I made in '08.

    It'll be interesting to see if the Treasury changes course on savings bonds under the new administration.

    By Anonymous Anonymous, at 4/15/09, 4:21 PM  

  • These days, I'm not even sure if the Treasury knows what the Treasury is going to do. :)

    Hopefully a decent deal will pop up that individual investors can take advantage of.

    By Blogger Frugal Frugalson, at 4/16/09, 7:37 AM  

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