In response to last Monday’s post about the Treasury confirming the May 2011 rate for Series I Savings Bonds, a reader named Ginger asked about how I was able to figure out the rates in the first place. While I’d love to say that I have some sort of mystical knowledge, the truth is nowhere near as impressive.
As I’ve noted on more than one occasion, the I Bond rate is made up of two pieces: the fixed rate and the variable rate. The variable rate is pegged to inflation, and that’s the piece that you can easily calculate with just a bit of inflation data. Rates are updated every May and November, and the relevant inflation data is released the preceding month.
The number that you’re looking for is called the Consumer Price Index for all Urban Consumers (CPI-U) and it’s available from the Bureau of Labor Statistics. For the May 2011 rate update, you needed the March 2011 CPI-U numbers (released in mid-April) as well as the September 2010 CPI-U numbers.
Now it’s just a matter of converting the CPI-U growth into a percentage. Back in September 2010, the CPI-U stood at 218.439, and it grew to 223.467 in March 2011. If you divide the old value into the new value, you’ll see that this represents a 2.3% semi-annual growth rate (223.467 / 218.439 = 1.023). I used the therm “semi-annual” because it represents a six month change.
From there, it’s just a matter of doubling the semi-annual rate to get the (variable) annual earnings rate. This value is then added to the fixed rate to arrive at the overall earnings rate. So this time around, it’s (2.3% x 2) + 0% = 4.60%. If you buy now, you’ll have the 0% fixed rate for the life of the bond, but the variable portion will change every six months.
Unfortunately, there are no easy methods for accurately predicting the fixed rate (currently 0%), so its hard to say whether you should buy now or wait until November in hopes that the fixed rate will increase. That being said, most pundits expect it to remain low for the foreseeable future.
For a bit of historical context, fixed rates were over 3% from the late 1990s through early 2001, and have been below 1% since May 2008. In other words, if you had purchased I Bonds back in mid-2000, you’d be enjoying a 3.6% fixed rate on top of whatever the inflation component had to offer – for the current six months, that would total up to 8.2%. Nice, huh?
Oh, and just in case you’re wondering… If we experience deflation, your earnings rate won’t go negative. Rather, you’ll get the fixed rate plus the (negative) variable rate, but no less than 0%. This actually happened back in May 2009, when the CPI-U contracted by 2.78%, resulting in a 0% overall rate during that six month period for any I Bonds purchased since the Fall of 2001.