Treasury Inflation-Protected Securities

• With the 10-year TIPS yielding just 0.11%, the Treasury couldn’t justify continuing the 0.10% fixed rate.
• But the I Bond will get a six-month variable rate of 2.76%, making it an attractive 1-year investment, no matter what happens in the second six months.
• EE Bonds remain a very attractive super-safe investment for anyone would can hold them for 20 years.

Disappointing? Yes. But all I Bonds – no matter when they were purchased – will earn a variable rate of 2.76% for six months.

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• Buy now? You guarantee a one-year return of 1.56%, which is attractive.
• Wait until November 1? You could lose the 0.1% fixed rate, but earn more money in one year anyway.
• Either way, this isn’t going to be a bad investment.

Yes, a 0.10% fixed rate may not seem like a big deal, but realize this: A 10-year TIPS is currently yielding 0.11%. I Bonds with a fixed rate of 0.1% and an attractive variable rate are going to be a hot investment through May 2017. But what if the fixed rate falls to 0.0%?

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• Buyers had a pay a big premium for the 1.00% coupon rate, about $110.67 for $101.65 of value, when accrued inflation is added in.
• The inflation breakeven rate came in at about 1.83%, 31 basis points higher than at the originating auction in February.
• The trend in breakeven rates indicates rising expectations for inflation.

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• The data support a drop to a 0.0% fixed rate, but wouldn’t the Treasury be sending an awful message?
• You can buy now to lock in the I Bond’s current 0.1% fixed rate, or wait until November 1 and get the higher variable rate immediately.
• A bigger question: Does a fixed rate of 0.1% really matter?

A lot of readers have been asking me why I think the Treasury could drop the I Bond fixed rate to 0.0% on November 1. I’d say if it were purely a data-driven decision, the Treasury will go with a 0.0% fixed rate. But I am hoping it will stick with 0.1% as a nod to small investors who rely on I Bonds for inflation-protected savings.

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• This variable rate will be the highest for an I Bond in 5 years.
• All investors in I Bonds will get the new variable rate for six months, the timing depends on the month the I Bond was purchased.
• One question remains: What rate will the Treasury set for the fixed rate on November 1?

Prediction: I Bonds are going to a hot investment from November 2016 to April 2017. They will have variable rate of 2.76% over six months. Even if you earned zero the next six months, that’s a return of at least 1.37% in one year, beating all super-safe investments.

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Also, I have updated my Tracking Inflation and I Bonds page with this new information.

And here are the new TIPS inflation indexes for November.