Based on a drop in the CPI-U, or Consumer Price Index for Urban Consumers, I Bonds issued between May 1, 2009 and October 31, 2009, will earn an effective earnings rate of 0.0%.
The earnings rate combines a 0.10% fixed rate of return with the -5.56% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). When the inflation rate is less than zero, a bond’s earnings rate is less than its fixed rate (but the earnings rate is never less than zero). The fixed rate applies for the 30-year life of I bonds purchased during this six-month period. The CPI-U decreased from 218.783 to 212.709 from September 2008 through March 2009, a six-month change of -2.78%.
This is bad news for investors who have been turning to inflation protected investments, but should be probably looked at as a short term situation. Don’t forget, I bonds issued in the last 6 month period earned an effective annualized rate of 5.64%, so even getting 0% for the next 6 months would give you 2.82% for 12 months, had you purchased them in the beginning of November of 2008.
Due to the weakened economy, some consumer prices have dropped, especially in energy, such as oil, natural gas, and gasoline. While the risk of deflation is still around, with all of the money that has been pumped into the economy recently, I would not expect a drop when the rates are adjusted in 6 months, I would expect it to be an increase. I think most people expect to see some amount of inflation in the coming months, although I guess you never know.
So although you may earn zero percent the next 6 months on an I bond, your average over the next year could still be positive, and could even be 2% + (this is speculation, of course) depending on what the rate changes to 6 months from now.
Similar Posts:
- November 2009 to May 2010 I Bond Rates- 3.36% Total, Fixed Rate 0.30%
- November 2008 I Bond Rate- 5.64% Total, 0.70% Fixed
- May 2008 I Bond Fixed Rates Go to 0.0%, Total Rate 4.84%-What Does This Mean?
- Are I Bonds A Good Investment Option Now?
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{ 1 comment… read it below or add one }
The I-Bond interest rate is a serious disappointment. Some vodoo math for certain going on at the treasury.
The wife and I were set to pounce on 20k worth of I-bonds b/c we thought the fixed interest rate would have been equal to the negative inflation rate making the I-bond a long term gem.
Instead, we’re diverting our money to paying off our investment properties.