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