Gyroscopic Investing

So the new I-Bond rate is 2.76%. That's based on a fixed rate of zero and the semiannual inflation number of 1.38%. Incidentally, that inflation data includes the months April to September so the 1.38% number has been out for a couple of weeks now.

Thoughts? Feelings? Regrets? Complaints?

So the I-Bond fixed rate is back to zero. Sigh. I guess that makes sense.

They're still a pretty good deal compared to, say, an online savings account, even with the occasional zero percent interest periods. I'm not planning to buy any this year though. I set myself a rule that i bonds and > 1 year Treasuries need to be limited to < 1/3 my cash holdings - because I don't want to have to sell them before retirement, or in a rebalance.

Will this push banks to raise CD rates

boglerdude wrote:Will this push banks to raise CD rates

That's a good question. Wish I had the answer! I-Bonds probably suffer some from poor advertising and also the restrictive redemption penalties in the first five years of owning them. I don't follow CD rates very closely but I don't believe there's been a rate jump this week. Remember that one is not locking in that 2.76% rate for an extended period of time. It's only applicable until the next rate (based on inflation numbers from September through March) is announced on 5/1/17. Much would seem to depend on how big the spread is between CDs and I-Bonds... and for how long that spread lasts, I guess. But a saver who is parking cash for the next six months knows that they can make something on a CD. With an I-Bond, they can't even cash out until the 12-month mark.

This is from Treasury Direct:

When can I cash (redeem) an I bond if I need the money?

You can cash your Series I bonds anytime after 12 months. You receive the original purchase price plus interest earnings. I bonds are meant to be longer-term investments; if you redeem an I bond within the first 5 years, you'll lose your last 3 months interest. For example, if you redeem an I bond after 18 months, you'll receive the first 15 months of interest.

Three months is hardly restrictive, its almost a free lunch to get 30-year yields without the downside risk nor be locked into it for that length of time. If fixed rates go up, you can sell for virtually no loss and upgrade. Try that with T-Bonds.

2.76%...so the Fed has exceeded their 2% inflation limit?

boglerdude wrote:2.76%...so the Fed has exceeded their 2% inflation limit?

I think it's more of a target than a limit but my guess is that they would be thrilled to see
inflation higher than 2%. They have something in their toolbox to deal with inflation and
basically nothing left to deal with deflation.

2% target is on the PCE which excludes food and energy as if we all live without eating or electricity, etc..

I'll tell you one thing... when a steak goes up in price, I don't substitute hamburger for it. I want a bloody steak!