With the release of the March 2013 CPI-U figures, we now know the variable interest rate on Series I Savings Bonds for the next six months starting in May and it continues to be low (but it’s an increase from the last six months – so that’s good right?).

The March 2013 CPI-U figure was 232.773 and the September 2012 CPI-U figure was 231.407 so we can calculate a semi-annual increase of 0.590% and we’d expect the variable component of the bond to be 1.18%. The only question is whether there will be any change in the fixed rate, which currently sits at 0.0%. With interest rates so low, no one expects that to change anytime soon.

That said, using the equation:
Bond rate = Fixed rate + 2 x Semiannual inflation rate + (Semiannual inflation rate X Fixed rate)
Bond rate = 0 + 2 x 0.0059 + (0.0059 X 0)
Bond rate = 0.0118

So we’d expect the interest rate on Series I Savings bonds to be 1.18% in May.

It doesn’t take a financial genius to notice that it’s tough being a responsible saver these days. Interest rates are low, and have been for a while, that it seems as though there isn’t much difference, outside of FDIC insurance, between opening a CD and stuffing the money in your mattress. The term high yield savings account is comedic… since when was 1.11 of anything considered high?

There are, however, a few options out there for savers with more flexibility in their finances. While the national debt has seemed to take hold in our political discussions, it hasn’t been as prominent in our financial discussions. Treasury debt, such as bonds and bills, has never been a sexy pick for main street savers. It’s about time we gave them a serious look as an option and my favorite of the group is the Series I savings bond.

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It looks like the Series I Savings Bond may be competitive again. After a few pathetically low rate adjustment cycles, we can blame low inflation and the economic recession for that, it seems as though the variable rate for Series I Savings Bonds will once again make them competitive with savings account rates again.

To recap, Series I Savings Bond rates are a combination of a fixed rate, which is for the life of the bond, and a variable rate, which is adjusted for inflation as measured by the CPI-U. The equation itself is a little more complicated but you can use this Series I bond rate calculator to help you do the math (the equation isn’t very hard, it’s just hard to explain).

How are we able to predict the rate in May? Easy, the CPI-U we will use is for March and is announced in April (this time it was April 15th). We simply calculate the change from September 2010 (announced in October 2010) and March 2011 and know what the variable interest rate is.

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With another September come and gone, it’s time to take a look at our good friend, the Series I savings bond. Savings bonds are a nice safe way to diversify your savings since they are backed by the full faith and credit of the United States. They won’t make you rich but they have a lot of nice benefits (deferral of gains, no state and local income taxes on the interest, and there is an exemption from federal taxes for educational use) that make them attractive. I wouldn’t put all of my money into bonds but a little bit is good as a safety net.

11/2/10 Update: The Treasury Department announced that the fixed rate component on Series I bonds will be 0.00% for bonds issued November 2010 through April 2011.

That being said, I like Series I bonds the most because they offer a protection against inflation. With the release of inflation figures in September, we can now easily calculate what the interest rate portion of the Series I Savings Bond will be this upcoming month. The September 2010 CPI-U was 218.439 and the March 2010 CPI-U was 217.631. This yields a semi-annual increase of 0.37%.

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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.

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One of the unintended, though predictable, consequences of the unprecedented rescue of the United States financial system is that there will be higher than average inflation figures for years to come. While it’s been popular to dispute the reported Consumer Price Index (CPI), the reality is that the marketplace doesn’t really listen to the reported stats. It reacts to reality. Your boss doesn’t walk into your office and say “Oh, CPI says I need to give you an x% raise this year to maintain your purchasing power.” and the grocery store doesn’t increase the price of a head of cabbage a few cents every month because the BLS came out with another report.

So we need to be proactive and be aware that inflation is a real concern, before it becomes front page fodder for newspapers.
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Update: The Treasury Department announced the fixed rate component on new Series I bonds would be 0.30% for the bonds issued in the next six months. Coupled with the inflation component we all know ahead of time (see below), the new Series I bond rate will be 3.36% for the next six months.

For the last six months, my Series I Savings Bonds have been earning exactly 0.00% APY interest. If you remember from the Savings Bond Foundation post, Series I savings bonds earn interest based on an equation that has both an inflation rate component and a fixed rate component.

The inflation rate component is set twice a year, November and May, and calculated based on six months of inflation data. The November rate is set based on inflation between March and September, the May rate is set based on inflation between September and March (see how that works out?).

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Between the various bailouts, rescues, and spending packages, the United States Treasury has been working overtime issuing debt. If you’re like me, you’re probably wondering how this is even possible and how the government goes about doing it. During the First World War and World War Two, we went through a similar period where the government needed to borrow a lot of money to help fund the war effort. That gave rise to the patriotic posters that called for ordinary Americans to buy war bonds to support our soldiers fighting the enemy on foreign soil. That same mechanism, public debt, is what we use today to help fund many of our programs. This makes it a prime topic for the third installment of the Foundation Series.

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