Finance Business Bank

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The March level of 199.8 (1982-84=100) was 3.4 percent higher than in March 2005.

What this means for I Bond investors

 

For those who purchased I Bonds since November 1 of last year, your bonds will be paying their fixed rate of 1% plus an inflation component of 1% for their second six months.  The inflation component is calculated with the following formula:

March 2006 CPI-U: 199.8
September 2005 CPI-U: 198.8

Difference: (199.8 - 198.8) / 198.8 = .5% (six month inflation rate) x 2 = 1% inflation component

This means a bond purchased between October 2005 and April 2006 and held for the minimum of 12 months would earn 3.88% after the three month interest penalty.  (~4.4% less 3 months worth of interest at 2%).  Not great, but not terrible either.  Note that I’m using a full 12 months worth of time for simplicity, you can actually get 12 months of interest while only holding 11 months by timing your purchases at the end of the month.
The new fixed rate for I Bonds purchase in May will not be announced until May 1.  With a 1% inflation component I don’t see these selling too well if the fixed rate doesn’t rise above the 1% it is currently at.  I anticipate we’ll see an increase but am not too confident it will be enough to justify purchasing I Bonds in the next six months.

I am going to pass on my regularly scheduled April purchase since I can do much better than 4.4% even in a regular savings account.  Depending on where the fixed component gets adjusted to, I may sell the previous bonds I purchased and re-buy new ones.  I’ll let you all know on May 1.  This disrupts my ladder but I’ll manage…

Tags: Bonds, Financial News, Investing