Predicting I-Bond Interest Rates

by Michael on Apr 15, 2013

Predicting I-Bond Interest Rates

It’s no secret that I’m a big fan of Series I Savings Bonds. Each year, my wife and I each max out our annual I-Bond limits.

Not only that, but we jump through hoops to get even more with our tax refund.

It should thus come as no surprise that I keep a close eye on the inflation numbers every April and October. Why those months in particular? Simple. That’s when the March and September inflation data are released, which is what the (May and November) I-Bond rate updates are based on.

Today I want to give a quick overview of how I-Bond rates are constructed and how to predict upcoming rates based on CPI data from the Bureau of Labor Statistics.

For background, the I-Bond rate has two components, a fixed rate and a variable rate. The fixed rate is set by the Treasury and has been 0% since November 2010, so I’m not holding out hope that it will go higher anytime soon.

The variable rate is based on recent changes in the Consumer Price Index for all Urban Consumers (CPI-U). As noted above, these data are available from the BLS.

Running the numbers

For the May update, we’ll need the number for March (released in April) as well as last September (released in October). Since the March numbers aren’t yet available, we’ll have to run the numbers from last November instead.

Note: The March CPI numbers have been released and I’ve used the data to predict the May 2013 I-Bond rates.

Back in September, the CPI-U stood at 231.407 vs. 229.392 during the preceding March. That’s a semi-annual increase of 0.878% (231.407 / 229.392 x 100 = 1.00878). I say “semi-annual” because it reflects a six month change.

The overall (composite) rate is calculated as follows:

Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]

Since the fixed rate was 0%, the calculation went like this:

0% + (2 x 0.878%) + (0% x 0.878%) = 1.76%

As you can see, that 0% fixed rate means that the first and last terms effectively drop off. Thus, you can just double the variable component and call it a day.

While there’s no way to accurately predict the fixed component going forward, it’s a safe bet that it will remain at zero for the foreseeable future. I hope I’m wrong, but I doubt it.

Applying the results

As for how the resulting rate is applied…

Whenever you buy an I-Bond, you get the prevailing rate for the next six months. From there, you retain the original fixed rate and the variable portion is updated to reflect the then-current variable rate. And so on.

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