Treasury Inflation-Protected Securities

• Buy before May 1 and get a higher variable rate; buy after May 1 and possibly get a higher fixed rate.
• Waiting will cost you short term, and it might take about 4 years to break even.
• But I Bond investors are always eager to get a higher fixed rate. Should you divide your purchases this year?

Investors in US Series I Savings Bonds are in an interesting ‘limbo’ period right now, leading up to the May 1 reset of the I Bond’s variable and fixed rates.

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• At the May 1 reset, the I Bond’s variable rate will fall from 2.76% to 1.96%.
• We don’t know yet what the new fixed rate will be. Will it rise to 0.1%? Still possible.
• Should you buy I Bonds before May 1 to get the higher variable rate? Or hold out for the higher fixed rate? Tough call.

This decline in the variable rate sets up an interesting decision for I Bond investors: Buy before May 1 to get the 2.76% variable rate for six months, or wait until May 1 to see if the I Bond’s fixed rate – currently set at 0.0% – will rise to 0.1% (or higher).

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Also, I have updated my Tracking Inflation and I Bonds page with these new numbers.

And here are the May CPI indexes for TIPS.

• Inflation report on April 14 will set the I Bond’s six-month variable rate, taking effect May 1.
• Right now, it looks like the new six-month variable rate could be lower than the current 2.76%.
• However, it’s possible the May 1 fixed rate – which stays with the I Bond forever – will rise above the current 0.0%.

The idea with I Bonds is to build a large inflation-protected cache, as part of an overall portfolio that includes stocks, bonds, nominal Treasurys, TIPS, bank CDs, mutual funds. The difficulty is that there is a $10,000 per person per year purchase limit on I Bonds, so to build a large stockpile you have to buy them every year. And then the question is: When do you make the purchase?

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• 10-year TIPS yields have been holding under 0.50% even as the Federal Reserve raises short-term rates.
• The inflation breakeven rate dipped to 1.95%, under the 2.00% mark where it had been riding for most of 2017. Inflation expectations are stable right now.
• Buyers at today’s reopening got this TIPS at a slight discount and a slightly higher yield than at the originating auction in January.

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• A week out, CUSIP 912828V49 is trading with a real yield to maturity of 0.48%.
• Its inflation-breakeven rate is 2.04%, right in the mid-range of inflation expectations since 2009.
• Is it a buy? Maybe not at the current yield, but watch for volatility next week.

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• The 12-month increase of 2.7% was the largest since March 2012.
• Gasoline prices fell in February, moderating overall inflation. But they’re still up 30.7% over the last year.
• Non-seasonally adjusted inflation rose 0.31%, which will boost the principal balances of TIPS in April. One month is left in the I Bond rate-setting period.

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Also, I have updated my Inflation and I Bonds page with these new numbers.

And here are the new TIPS inflation indexes for April.