 A
primer on I bonds vs. TIPS
|
 Dear
Dr. Don,
I have been sort of "laddering" my I bond investments over time.
I felt bright investing in them when I was earning 6.73 percent
but didn't feel quite so bright when I was earning 2.41 percent.
Where do you project the combined return next year? Long-term? Is
it time to avoid I bonds?
My current plan is to sell off the Series I savings
bonds I have owned for over a year that have a 1 percent fixed rate
component, to exchange them in January 2007 for Series I bonds that
have a 1.40 percent fixed rate component. I'll sacrifice the three-month's-interest
penalty for redeeming the bonds before they're five years old to
get the additional yield over that time period. Is this the right
move? I can't do it in 2006 because I've purchased all the Series
I bonds that the Treasury will let me in a year.
Many thanks,
-- Paul Portfolio
 Dear
Paul,
The interest earnings on Series I savings bonds are calculated based
on two interest rates. The first is a fixed-rate component. The
fixed rate is determined by when you originally bought the savings
bond. You earn the same fixed rate until the bond matures or you
redeem the bond. The government changes the applicable fixed rate
for new purchases twice a year, on Nov. 1 and May 1.
That fixed rate applies to all Series I savings bonds
issued in the six months following the rate determination. The
fixed-rate table below is from the TreasuryDirect Web site and shows
the fixed-rate announcements since the Series I savings bonds were
first issued in September of 1998.
The second interest rate is an inflation rate, as
measured by changes in the consumer price index, or CPI, and it
varies with changes in that index over the life of the Series I
savings bond. The variable-rate component changes every six
months and is also announced on Nov. 1 and May 1 of each year. Each
semiannual inflation rate applies to all outstanding I
bonds for six months.
The table on the right below, also from the TreasuryDirect
Web site, shows how that rate has changed over time. The Web
site shows how to combine the two rates to arrive at an annualized
yield. The newly announced inflation rate is 1.55 percent for a
combined annualized yield of 4.52 percent for bonds bought between
Nov. 1, 2006, and April 30, 2007.
 |
| Fixed rates over time |
|
|
| DATE |
FIXED RATE* |
| Nov. 1, 2006 |
1.40% |
| May 1, 2006 |
1.40% |
| Nov. 1, 2005 |
1.00% |
| May 1, 2005 |
1.20% |
| Nov. 1, 2004 |
1.00% |
| May 1, 2004 |
1.00% |
| Nov. 1, 2003 |
1.10% |
| May 1, 2003 |
1.10% |
| Nov. 1, 2002 |
1.60% |
| May 1, 2002 |
2.00% |
| Nov. 1, 2001 |
2.00% |
| May 1, 2001 |
3.00% |
| Nov. 1, 2000 |
3.40% |
| May 1, 2000 |
3.60% |
| Nov. 1, 1999 |
3.40% |
| May 1, 1999 |
3.30% |
| Nov. 1, 1998 |
3.30% |
| Sept. 1, 1998 |
3.40% |
| *Annual rates compounded semiannually |
|
|
|
| Inflation rates over time |
|
|
| DATE |
INFLATION RATE* |
| Nov. 1, 2006 |
1.55% |
| May 1, 2006 |
0.50% |
| Nov. 1, 2005 |
2.85% |
| May 1, 2005 |
1.79% |
| Nov. 1, 2004 |
1.33% |
| May 1, 2004 |
1.19% |
| Nov. 1, 2003 |
0.54% |
| May 1, 2003 |
1.77% |
| Nov. 1, 2002 |
1.23% |
| May 1, 2002 |
0.28% |
| Nov. 1, 2001 |
1.19% |
| May 1, 2001 |
1.44% |
| Nov. 1, 2000 |
1.52% |
| May 1, 2000 |
1.91% |
| Nov. 1, 1999 |
1.76% |
| May 1, 1999 |
0.86% |
| Nov. 1, 1998 |
0.86% |
| Sept. 1, 1998 |
0.62% |
| *Semiannual rates |
|
|
In my mind, the only big advantage to the Series I
savings bonds versus the Treasury Inflation-Protected Securities,
or TIPS, is that you can own the Series I savings bonds and choose
to not annually account for the inflation-indexed earnings and wait
to pay taxes when the bond is redeemed or matures. (You can also
choose to account for these earnings. Talk to your accountant
if you don't know which approach is best for you.)
|
