Picking up Nickels

Friday, April 17, 2015

March CPI-U numbers released: Pass on I Bonds until November 2015

The U.S. Bureau of Labor Statistics released the March 2015 Consumer Price Index (CPI-U) inflation data this morning, which increased by 0.60% last month.

As always, 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 2015 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 2014 (238.031) and March 2015 (236.119) (courtesy of inflationdata.com), we can calculate the variable rate for the second 6 month period for April 2015 issue I Bonds:



That means these bonds would earn a rate of 1.48% (using 0% fixed & 1.48 variable) for the first 6 months and 0% (using 0% fixed & -1.60% variable) for the second 6 months since the composite rate can never fall below zero. Based on this, April 2015 issue I Bonds are not a very competitive investment when compared to something like the 12 month CD @ 1.30% APY currently being offered by Connexus Credit Union. Similarly, May 2015 issue I Bonds are even less attractive since they will have a 0% composite rate for the first 6 months of ownership.

Simply put, I believe the smart money is on deferring any I Bond purchases until the next rate reset in November 2015 to avoid six months of 0% interest. Since the poor inflation number was primarily driven by oil prices falling to about half of the $100 level they were at a year ago, I expect that the next inflation adjustment will be a more typical (and attractive) number for I Bond buyers.

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