I-Bond Warning

I received an email asking if I thought moving savings into I-Bonds was a good financial move at this time with the rates at 6.73%. My humble opinion is that it would not be a good move at this time. You need to be careful with this investment. While the 6.73% may look extremely enticing in itself, the key number to look at is the fixed base interest rate which is only 1% and is not a good number to have over the long run.

My main concern was that when the inflation rate was announced, most people agreed that a large part of it was caused by skyrocketing gas prices due to hurricanes Katrina and Rita and the havoc they caused the gulf oil industry while most other prices remained stable. These are likely one time events and gas prices have fallen dramatically in recent weeks.

What my gut feeling tells me will happen over the next six months is that inflation rates will be practically nothing due to oil prices no longer being at all time highs. This will mean that if you buy the I-Bond now, the second 6 months may find you earning much less interest than online banks are currently paying. If the inflation rate is only 2% over the next six months, an I-Bond purchased today will only pay 3% for the second 6 months of the year required holding time while it’s likely online banks will be paying over 4% by that time.

I am happy that I purchased the $1000 I-Bond last month for my niece (this gives me a guaranteed return of 4.8% for 6 months and and 6.73% for six months – then if I don’t like the rate after that, I can sell at 15 months losing 3 months of interest I didn’t like anyway which will still give me an overall return for the year above 5%). If I had that money free today, I would pass on the current I-Bond and hope to see a rise in the fixed rate portion when the new interest rate is announced in 6 months.

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2 Responses to I-Bond Warning

  1. Reality Bites says:

    Unless of course there is peak oil happening….
    There may be a short reprieve, and inflation is already pretty high. I’m betting on more inflation and a recession hot on it’s heels. That’ll cool off the inflation a bit.

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