Buying I-bonds in this economy a good choice?

**EEinNJ** · 02-12-2009, 07:30 AM

It does look like a good deal. I was planning to buy some anyway, now I think I'll even open a Treasury Direct acc't. I used to think I bonds were a boring, non-competitive investment, though I bought them to round out my portfolio. Now they're one of my best performing investments!

**sweeps** · 02-12-2009, 07:42 AM

The rate will reset in April and will likely be MUCH lower.

**LivingAlmostLarge** · 02-12-2009, 09:28 AM

No, the fixed component is low. I had told my mom to buy when the fixed compenent was above 2%. That was a great buy!

The fixed component is only 0.7%, last year it was 1.3%. That is the most important part of buying i-bonds. What your fixed rate component is.

**kyrie** · 02-26-2009, 07:50 AM

LAL, can you expound on that - about the fixed rates & buying low...
Not sure I'm getting it. Thanks!
(plus, I thought the fixed rate was... FIXED... like it never changes....)

Help me out?

**sweeps** · 02-26-2009, 07:58 AM

There are 2 components to an I-bond. A fixed component and a variable component. Both components change every 6 months. However, when you buy an I-bond, whatever the fixed component was at the time you bought the bond remains that way for the life of the bond. Meanwhile the variable component continues to change and is based on current inflation rates.

At the moment the combined rate is over 5%. Sounds great. But that rate is going to PLUMMET because the variable rate for all I-bonds will go lower. We are in a disinflation (if not deflation) mode right now.

**kyrie** · 02-26-2009, 08:09 AM

Sooo

I'm hoping I understand correctly...
*NOW* would be a good time to buy an I-bond, prior to the (fixed) rates plummeting... right?

Is there anything else I'm missing? Or are you saying don't even bother...

**sweeps** · 02-26-2009, 08:13 AM

The fixed rate is 0.7%... that's pretty low. Although it's probably better than what it will be next time: 0%.

The lowest it's ever been is 0% (May 2008). The highest it's ever been is 3.6%. (May 2000). My personal opinion is that an i-bond is a bad investment right now. But to each his own.

Individual - I Savings Bonds Rates & Terms

**kyrie** · 02-26-2009, 08:16 AM

Can you explain why its a bad investment now?
Sorry for all the questions but I'm interested & don't feel I understand it well enough...

**kyrie** · 02-26-2009, 08:17 AM

Ok, I think I see why the fixed rate being low is bad buying time. But overall, I don't get it...that's what I'm asking about.

**sweeps** · 02-26-2009, 08:23 AM

0.7% is a very low fixed rate in the grand scheme of things. The rate has been as high as 3.6% in the past, and I would say it's likely to go much higher than 0.7% in a few years.

While it is quite possible the fixed rate could go even lower than 0.7% in May, 0.7% is still very low. If you buy a bond now, that 0.7% will stick with you forever -- even as inflation surges in the future.

I would put my "safe money" in a savings account or short-term CD for now and earn maybe 2-3%. And then later look into buying some i-bonds when they make more sense, i.e. when the fixed rate is higher and the variable rate is moving higher.

**kyrie** · 02-26-2009, 10:31 AM

Ok... thanks.

**MomofFour** · 04-08-2009, 09:05 AM

Just thought I would bring up this topic again.... what do you think will happen to the fixed and inflation rates May 1? (Do they announce that ahead of time?)

I'm just not so sure that these I bonds are all so bad right now, compared to the 2% you can get on high yield saving, CDs, and money market accounts right now.

Any thoughts?

**Dixiechick** · 04-12-2009, 05:52 AM

Originally posted by MomofFour View Post

Just thought I would bring up this topic again.... what do you think will happen to the fixed and inflation rates May 1? (Do they announce that ahead of time?)

I'm just not so sure that these I bonds are all so bad right now, compared to the 2% you can get on high yield saving, CDs, and money market accounts right now.

Any thoughts?

All my I-Bonds are over 6% right now. I expect that to go down after May 1. I believe the inflation rate will drop down to about 0 since the CPI has been dropping. I don't know how or what they determine the base rate on. All my bonds have a base rate of 1.2% or better (not much more than what my savings rate is at my regular bank). Since all my bonds are well over 1 year old, I can cash them out (minus a 3-month penalty). The trick is to buy at the end of the month and cash out at the beginning of the month. That way, you still get credit for those 2 months without actually having your money tied up into the bond for those 2 months. You can get credit for the 12 months and only have your money tied up for a bit over 10 months...

To figure out the rate on the bonds, use this calculator:

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

Your fixed rate is the base rate (0.7% currently if you bought since last November). The semi-annual inflation rate is 2.46% currently (will change next month). Using the equation above, you get a composite rate of 5.64%. Since my bonds are 1.2% or better, I'm at least getting 6.14% - not too bad for today. Next month may change that...

The CPI of last September will be well over the CPI of this past March (in my opinion), so the semi-annual inflation rate should be 0 (can't go negative, I believe). I know the composite rate can't go below 0%. So, it'll be interesting to see if there's a mass exodus of the I Bonds next month...

**jeffmem** · 04-12-2009, 11:03 AM

I bought my I bond in 2/2005, my current rate is 5.94%, and my yield is 4.03%. It would appear, Sweeps, correct me if I am wrong, that I bought this bond at the right time?

Buying I-bonds in this economy a good choice?