Another I-Bond Rate Prediction for May 1st

I Savings Bonds Rates and Terms

In March of 2009 the CPI-U (not seasonally adjusted) was 212.709. In October of 2009 the CPI-U was 215.969. That's a 1.53% semi-annual increase. It's the same increase that's shown in the link above so there's a decent chance that I'm using the right data to determine it.

In a previous post I estimated that the most likely new fixed rate would be 0.1%. It's just a guess though. In any event, that is my prediction.

We also should have enough information to determine the semi-annual increase in inflation to be announced on May 1st.

In March of 2010 the CPI-U was 217.631. That's a 0.77% increase over the CPI-U in October of 2009. Inflation has been very tame.

You may be wondering why we are using inflation data from March. We do not yet know April's CPI-U. The government doesn't either and won't know until the middle of May. We are therefore simply using the most recent inflation data that we do know.

Here's the math from the first link above. I'm using the new rate information estimates.

Fixed rate = 0.10%
Semiannual inflation rate = 0.77%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0010 + (2 x 0.0077) + ( 0.0010 x 0.0077)]
Composite rate = [0.0010 + 0.0154 + 0.0000077]
Composite rate = 0.0164077
Composite rate = 0.0164
Composite rate = 1.64%

That's my best guess for the I-Bond Rate that will be announced on May 1st.

In summary, I am predicting a 0.1% fixed rate and a 1.64% composite rate. That's down from the current 0.3% fixed rate and 3.36% composite rate.

To put this in perspective, the 1.64% rate will still be a higher rate than bank savings accounts pay and it will still be comparable to the best rates on one-year bank CDs.

If you are thinking of buying I-Bonds this year, then you could probably do worse than buying before the rates reset on May 1st. It's possible that inflation and/or interest rates will rise by the time I-Bond rates are announced in November, but a bird in the hand is often better than two in the bush.

Source Data:
St. Louis Fed: CPI-U