I Bond Interest Rates – Currently 6.73% (12/22/05)


From my latest newsletter:
I Bonds: The new base rate for I Bonds is 1.00% and the variable rate is 5.73% so new bonds purchased over the next six months will pay 6.73% for six months after purchase!!!
I've been recommending I Bonds for years. From the same newsletter:
On 11/28/05 I added 30 $1,000 I Bonds to my newsletter portfolio. Their base rate is 1.00% and they currently pay 6.73%.

On 12/8/04 I added 30 $1,000 I bonds to the newsletter portfolio. Their base rate is 1.00% and they are currently paying 4.60% tax deferred until you cash out. They will adjust up to 6.73% in December 2005 and pay that for 6 months.

On 8/4/03 I added 30 $1,000 I Bonds to the newsletter portfolio. Their base rate is 1.10% and they are currently paying 4.70% tax deferred. They will adjust to 6.83% in Feb 2006 and pay that for six months.

As my note above says, the variable rate is constant for 6 months after you buy then is reset with the new CPI data. The fixed rate stays the same until you sell the bond.
Tomorrow's WSJ has an article by David Wessel predicting that Bernanke will be cutting rates in 2006. The recent PPI is lower than expected. I suspect that there will be an increase on the fixed portion of Feb's I-bond rate. 1.5%

The new fixed rate will average out the CPI adjustments over six months so it will smooth out the ups and downs. You can ALWAYS sell I Bonds after you hold them for a year. The VERY worst case is you get 6.73% for six months and perhaps 1% for the next six months for an average of roughly 3.8%, about what money funds are paying now then pay a small penalty to sell. If the Fed lowers rates due to a sudden bout of deflation, then you will beat money funds and the penalty to sell will be very small since the rates for I bonds will be lower. I do not see much downside risk and I sure like the inflation protection they afford.

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