Series I Savings Bonds :: inflation update
Series I Savings Bonds :: inflation update
"Invest in inflation. It is the only thing going up." -Will Rogers
Not long ago, we wrote about the attractive opportunity Series I savings bonds offer conservative investors. We still think I bonds are an attractive way to add inflation protection to your investment portfolio.
The current I bond composite rate is 7.12%. Since the I bond fixed rate component is 0%, the consumer price index (CPI) determines the composite rate. The U.S. Treasury announces the latest I bond CPI inflation rate adjustment every May 1st and November 1st. The CPI adjustment is calculated by looking at the six-month rate of change in the CPI between March and September (or September and March). For example, between March 2021 and September 2021, the headline CPI index increased from 264.877 to 274.310, or 3.56%. We double this to 7.12% to get the annualized rate.
Looking ahead, we know Treasury will announce the next I bond inflation adjustment on Monday May 2nd. The inflation adjustment will be derived from the change in headline CPI between September 2021 and March 2022. The headline CPI has already increased 3.43%, or 6.86% annualized through February 2022. We expect another monthly CPI increase in March 2022. Therefore, we anticipate another attractive CPI rate adjustment that is likely to be higher than the current 7.12% I bond rate.
If you purchase I bonds today, you earn a 7.12% rate for the initial six months and you are likely to earn more than 7.12% during the second six months. This gets you through the one-year minimum holding period with a blended rate of more than 7%. Thus, the current I bond rate is much better than the best 1-year CD rates.
Also consider that if you time your purchase of I bonds at treasurydirect.gov for later in the month, Treasury will automatically backdate them to the beginning of the month, which enables you to earn a few weeks of “free” interest. For example, if you purchase I bonds on March 21st, your six-month ownership period will be March through August. During that period you will earn the current 7.12% annualized rate. On September 1st, your I bond rate will update to the latest CPI adjustment rate, which will be announced on May 1st.
In our view, Series I savings bonds remain one of the most appealing conservative investments available today.
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The Vanguard TIPS fund ( Vanguard Inflation-Protected Securities Fund Investor Shares ) has struggled this year as real yields have risen. Most bond funds lose value as interest rates increase, and TIPS are no exception. I do think the real yield on TIPS is reaching attractive levels, so I would hold onto them. And just to be clear, TIPS are not Series I savings bonds.
All my investments are in IRA accounts. I have bought two different batches of VIPSX, about $45,000.00. Together they are down about $9,000.00 at present moment. I do understand that this can happen and I am assuming I should hang in there and hold onto them. Correct? John