The Treasury today announced a new I Bond rate of 1.74% for the period between May 1 2010 and October 31, 2010. The 1.74% is comprised of a fixed rate of .20% and a variable rate of 1.54%. That's well below the 3.36% offered the previous six months.
For those of you new to I Bonds, the I Bond composite rate is composed of a fixed rate and a variable rate. The fixed rate was .30% the previous six months ending April 30 and was lowered to .20% for the next six months. Your fixed rate is always what it was at the time of opening. So, if you opened an I Bond last month when the fixed rate was .30%, then your yield this month would be 1.84% (.30% + the variable component of 1.54%).
The variable rate is based on the previous six month's inflation figures as determined by the government's CPIU index. The higher inflation, the higher the variable rate.
It's interesting that despite all the talk of inflation we've seen the exact opposite happening with bond yields and inflation data. Treasuries and Munis are trading at very low levels and show no sign of future inflation expectations. In addition, the CPI-U data continues to look tame. That does not auger well for good I Bond returns. Hopefully, at some point, the Treasury will decide to boost the fixed component. But as long as Treauries are paying such low yields, the government has little incentive to do so.
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