As we near the end of April, we also near the announcement period of Series I Savings Bond  interest rates. For the uninitiated, here’s a quick recap – Series I Savings bonds are Treasury bonds whose interest rate is pegged to the rate of inflation. The rate is determined by an equation (I just use my Series I bond rate calculator ) involving the bond’s fixed rate and the inflation rate, announced in May and November.
I think Series I bonds are great if you need something 100% safe and a respectable interest rate. My favorite part is that the interest is free of state income taxes plus federal if used for qualified educational expenses. If you have a short term need, like education in a few years, that you want to still accrue interest but not put in the market, a savings bond isn’t a bad idea.
New Semi-Annual Inflation Rate
We know that the new inflation rate, to be announced May 1st, will be 0.77%. It’s easy to guess what the inflation portion of the rate will be, it’s based on the CPI-U as calculated between September and March. The CPI-U in September 2009 was 215.969, the March 2010 CPI-U was 217.631, which is a 0.77% increase.
The mystery is in the fixed rate, since that cannot be as reliably calculated, but it’s still helpful for planning purposes because if you buy a bond in April, you will get this period’s (Nov 2009 – Apr 2010) rate for the next six months.
Buying Series I Bond Today
If you buy a bond today, you will get a fixed rate of 0.30% for the life of the bond plus 1.53% inflation rate for the next six months. That’s a 3.365% APY for six months.
Then, when the May 2010 semi-annual inflation rate kicks in, you will earn 1.842% APY for the next six.
If you close a bond within 5 years, you have to pay a 3 month penalty, which is mitigated by the fact that you can sneak in an extra month just by purchasing near the end of the month (One tiny hack about savings bonds is that you get interest for the month regardless of when you buy it. If you buy the bond on April 30th, you get credit for the entirety of April). Also, the interest is not taxed by the state, which juices the rate a small bit. It’s a little better than 1-year CD rates  but it requires a bit of work and you’re limited to $5,000 in electronic and $5,000 in paper I bonds per social security number.
Fixed Rate Guess
It’s always fun to guess what the fixed rate will be and I say they’ll stand pat at 0.30%. The Fed isn’t tooling with interest rates, we aren’t really out of the recession, and the government is still borrowing money. In the end, our environment hasn’t really changed much since November and I don’t see why the Treasury would bump it up especially if the spectre of inflation is on the horizon.
We only have to wait a week to find out if my wild guess is right! What’s your guess? (and reasoning of course!)
(photo by allyrose18 )