Wednesday, October 19, 2011

I-Bond Prediction for November 1, 2011

I'm predicting a fixed rate of 0.0% and a composite rate of 3.06%.

In March 2011 the CPI-U was 223.467.
In September 2011 the CPI-U was 226.889.

That's a 1.53% increase over the six month period. Inflation has been a bit high, but not too bad.

Fixed rate = 0.00%
Semiannual inflation rate = 1.53%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0000 + (2 x 0.0153) + (0.0000 x 0.0153)]
Composite rate = [0.0000 + 0.0306 + 0.0000000]
Composite rate = 0.0306
Composite rate = 3.06%

In my opinion, there is no way that they are going to offer a rate greater than 3.06% on these I-Bonds. I therefore predict that the fixed rate will continue to be 0.0%.

If you are thinking about buying I-Bonds this year then you might wish to consider buying them before November 1st. You'll get a 4.60% rate and lock in a bit more of the inflation that we've seen over the past year.

As for me, my next purchase will be in January. 3.06% seems like a fine alternative to my online savings account.

See Also:
I-Bond Rate Prediction for May 1st

Source Data:
St. Louis Fed: CPI-U
I Savings Bonds Rates & Terms


Mr Slippery said...

Thanks for the calculation. 3.06% is better than almost anywhere, but it is still losing purchasing power unless inflation drops next year. It is losing even more after taxes. :(

In this economy, the government almost guarantees that everyone loses (except government). I've done better than the S&P this year, and better than John Paulson, so I guess I can't complain.

Stagflationary Mark said...

Mr Slippery,

Yeah, 3.06% is horrible in this environment. It beats 0.02% three month treasury bills though.

Safe is a 4-letter word these days, but so is risk.


getyourselfconnected said...

3.06% is big return these days.

Audrey said...

Nice posts this week.
I'm fresh out of sarcastic, gotta go get some, hope it hasn't gone up in price.

Stagflationary Mark said...


Heck, even 0.06% is a big return these days! It's triple the three month treasury bill rate, lol. Sigh.

Stagflationary Mark said...


If you buy one sarcastic comment at its low price of just $19.99, then I'll double your order for free!*

* Just pay separate processing and handling

Anonymous said...

"...before November 1st. You'll get a 4.60% rate..."

This is a silly question you arrive at the 4.6 by adding 3.06 and 1.53?

And can't I just walk into a local bank branch office and buy these?

How long, 10 yrs., 30 yrs.?

Stagflationary Mark said...


This is a silly question you arrive at the 4.6 by adding 3.06 and 1.53?

No, it's a coincidence. It isn't a silly question. The answer is actually a bit complicated.

Here goes.

I-Bond rates are reset each May 1st and November 1st.

The fixed rate says how much interest you will earn above the rate of inflation. That is the rate you lock in for up to 30 years (your choice on how long you hold, minimum of one year, 3-month interest penalty if you sell before 5 years). Lately, the fixed rate has been set at 0.0% for new purchases. (I am still getting a 3.4% fixed rate on purchases made in 2000 though.)

The composite rate is based on the fixed rate and also the inflation rate. That is the true interest you will earn. It is determined every 6 months based on the previous inflation data and the fixed rate of your particular bonds.

In May, the rate was set at 4.6%. See here. As long as you buy before November 1st, you will get the composite rate determined in May. You'll earn that for 6 months and then the rate will be based on November's rate (just the inflation part, not the fixed rate part you locked in).

Although I-Bond rates are tied to inflation, is clearly a lag. That's what makes the composite rate a bit confusing and why I try to provide the math in my posts.

You can walk into most banks and simply ask for the I-Bond form. You can buy up to $5000 (the limit was recently lowered from $30000).

You can also buy I-Bonds through TreasuryDirect. That's an additional $5000 you can buy.

Starting next year, you won't be able to walk into a bank to buy I-Bonds. They are going paperless.

Here's more information that explains it in greater detail. Here's some FAQs on I-Bonds that are worth a read.

One nice thing about I-Bonds is that they earn interest tax deferred. You are not paid anything until you cash them out and you also don't owe any taxes until that point either. This could be a big deal if inflation picks up.

Another nice thing about I-Bonds is that they although they are tied to inflation they cannot deflate, even month to month. Once interest has been earned there's no way to unearn it (since the composite rate of I-Bonds can never fall below 0%).

Stagflationary Mark said...

Sorry about the grammar errors. I was distracted by an ongoing fruit fly invasion.

We got some bananas at Sam's Club last week and I can't even begin to guess how many fruit flies we've killed since then? 500? 1000? Seriously. It's amazing.

Vinegar with soap in bowls, a lighter to kill them on our countertops, and so on...

I have met the enemy, and the enemy is... fruit flies!

Troy said...

In this economy, the government almost guarantees that everyone loses (except government).

In this economy, without ZIRP & government spending money hand over fist 2008-now, there wouldn't *be* any non-negative yields in the first place.

The economy of 2001-2007 was driven by fraud & fiction. We've got about $8T of losses still to take:

Stagflationary Mark said...


I've been predicting falling real yields for years and as you imply, it had little to do with the government issuing more TIPS and and then buying them.

It was simply because I felt that the era of making money off of money was coming to an end. I'm all about "loss avoidance" and have been since 2004.

Check out our conversation in the comments of the following post.

August 23, 2011
Thoughts on Johnson & Johnson


I hear you. Many of JNJ's products can be quite expensive. There are cheaper alternatives.

Now check this out.

October 18, 2011
J&J CFO Says Private Labels Took Over-Counter Market Share

“It is going to be tough to bring them back because people see those other products work just fine and they’re cheaper.”

This is not the sort of environment that makes me want to swing for the fences.

Anonymous said...


Your thought on the E Bonds rate adjustment? Given the cap on I Bond purchases, does it make sense to add to E Bonds in this environment?

Anonymous said...

Thanks for the i-bond primer. Am considering...

(BTW, did you know that if you eat a primer you'll have a prime-rate? ;))

Stagflationary Mark said...


Your thought on the E Bonds rate adjustment? Given the cap on I Bond purchases, does it make sense to add to E Bonds in this environment?

I actually did buy some EE savings bonds in 2010. It might make sense to buy some this year too.

EE Savings Bonds are guaranteed to double if held 20 years. That puts the current long-term rate at 3.53% (2^(1/20)=1.0353).

As seen here, the 20 year treasury yields just 2.92%. EE savings bonds are certainly a bargain relative to those.

Stagflationary Mark said...

I'll put up an EE savings bond rate prediction for November 1, 2011 today.