Friday, May 1, 2009

Update re: Savings Bond Rates

[Warning: Boring geek talk about I-Bond rates ahead.]

I previously wrote about how my I-Series Savings Bonds' interest rates will change effective May 1. Since I'm new to purchasing I-Bonds, I wasn't quite sure how the rates re-set and I had couple of doubts.

The interest rate on I-Bonds are a bit confusing to calculate since it is a composite rate of a fixed rate + a variable rate. The variable rate based upon the CPI data for the past 6 months.

In an inflationary economy, the variable rate will be positive, so it would increase the composite rate. Conversely, in a deflationary economy, the variable rate will be negative, thereby reducing the composite rate below the fixed rate.

For those of you who are mathematically inclined, official formula is:

Composite Rate = Fixed Rate + (2 x Semiannual Rate) + (Fixed Rate x Semiannual Rate)

May Semiannual Rate= (CPI-U (current March) div. CPI-U (last Sept.)) - 1

November Semiannual Rate = (CPI-U (current Sept.) div. CPI-U (last March)) - 1

Update: Effective 5/1/09, the fixed rate is 0.1% and the semiannual rate is -2.78%.

My doubts included:
  1. Do the I-Bonds' rates re-set every 6 months on a rolling basis from the date of purchase? (It was my understanding that it did.)

  2. In a deflationary economy where the variable rate is significantly less than the fixed rate, will the I-Bond continue to accrue the fixed rate or will the composite interest rate be 0%? (Under such a scenario, it was my understanding that the rates would be 0%.)

I checked my TreasuryDirect account this morning and my questions were answered.

It appears that the I-Bonds' rates do re-set every 6 months on a rolling basis from the date of purchase. If you look at the chart below, the I-Bonds I purchased between November '08 and April '09 have the same fixed rate of 0.7% and are subject to the same variable rate.

If the I-Bonds re-set all at once, they should carry the same interest rate. However, the only rate that changed was the I-Bond that I purchased in November '08 (i.e., the I-Bond I purchased 6 months ago). So it appears that the I-Bond that I purchased in December '08 will re-set next month, so on and so forth.

Additionally, it appears that in a deflationary economy where the variable rate is significantly less than the fixed rate, the I-Bond will accrue 0%, not the fixed rate. (Bummer.)

I created a spreadsheet that helps me keep track of the past interest rates as well as to "predict" what the future interest rates will be.

I'm glad I purchased in April the I-Bonds I intended to purchase the next 6 months. Based upon my spreadsheet, the I-Bonds I purchased in April will accrue 5.64% for the next 6 months and 0% the following 6 months.

Had I purchased $25 every month starting in May per my original plan, I would've likely earned 0% for the next 12 months. For once, it appears I hedged correctly. Hurray!

Sorry for the boring discussion on a Friday. Hope you all have a great weekend!


Miss M said...

Yep you were right on the rolling 6 month basis! I found that out last night while doing more bond research. They had to go and make it complicated, like treasury direct itself. So the fixed rate didn't quite drop to zero but with the -5% inflation rate it didn't matter! I didn't look yet, are there any I bonds earning interest in the next 6 months? I think that huge deflation rate wipes out any of the fixed rates they've ever offered.

MoneyMateKate said...

Not boring - this is an area I know absolutely nothing about, so it's useful to see how they fit into someone's plans and portfolio.

And looking at that makes zero look like a gift!

Anonymous said...

yes... strange style..