I-Bond Rates To Soar on High Inflation Data

Bob Brinker should have fun explaining how this high inflation data is good news for iBonds this weekend. The US Bureau of Labor Statistics released its March 2008 Consumer Price Index data today. PRESS RELEASE.

Currently newly purchased I Bonds pay 4.28% for 6 months after purchase with a base rate of 1.20%. This rate is good through May 2008 when they will calculate a new inflation adjustment for the next six month period which we estimate will be over 6% after the latest inflation adjustment!

March CPI up 0.9%; Yearly Inflation Rate Over 4%

If you own iBonds (Inflation protected bonds) that both Bob Brinker and I have recommended in the past, then the number you care about is the "Consumer Price Index for All Urban Consumers (CPI-U) without seasonal adjustments (SA)":

• CPI-U increased 0.9 percent in March, before seasonal adjustments. The March level of 213.528 (1982-84=100) was 4.0 percent higher than in March 2007.

Runner26 posted the current estimate for Ibonds in our I Bonds or iBonds forum on facebook's "Investing for the long term" this morning.

The March jump in CPI was large. [Kirk's Comment: I-bonds use the Not Seasonally Adjusted (NSA) data, so while the headline CPI number with "seasoinal adjustments" was only 0.3%, the NSA was a whopping 0.9% increase for the month. This number matches what many feel in their pocketbooks too.]
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My estimate for the new rates for existing bonds will be the following when their 6-month reset period arrives.
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Base----Rate
1.0%----5.86%
1.1%----5.97%
1.2%----6.07%
1.3%----6.17%
1.4%----6.27%
1.6%----6.48%
2.0%----6.89%
3.0%----7.91%
3.3%----8.22%
3.4%----8.32%
3.6%----8.53%
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Current I-Bonds are at a 1.2% base rate, which means if you buy them before the end of this month, you will get 4.28% for 6 months, followed by 6.07% at their next reset in 6 months. You may find this attractive.
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If they leave the base rate at 1.2%, new May issue bonds would carry a 6.07% rate. My guess would, given the low current base rates being paid for TIPS, the base rate for new May issue I-bonds will be LOWER, and it likely better to purchase before the end of this month. Be aware however, that I have been surprised before by the actions of the Treasury.

For CA residents in the 9.3% state tax bracket, the equivalent taxable rates for the two periods are 4.719%/6.692%.

So, high inflation before seasonal adjustments is not bad news for holders of I bonds and TIPS but inflation is bad news for consumers not making six figure plus incomes who spend most of what they make.

Vanguard's TIPS index fund (VIPSX) was up 11.59% in 2007 and is up 4.74% YTD in anticipation of these high inflation readings. With inflation expected to moderate, I don't expect to see this level of performance continue.

Disclaimer: I have a fairly large position in TIPS in both my personal account and some of the newsletter porfolios in "The Retirement Advisor" investment letter. I also recommend TIPS as part of a 3-item alternative to the easy to track "Total Bond Fund" in "Kirk Lindstrom's Investment Newsletter" where I may again recommend iBonds with these attractive rates.
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