I-Bonds: March 2020 BLS CPI-U report

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dh
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I-Bonds: March 2020 BLS CPI-U report

Post by dh » Fri Apr 10, 2020 1:12 pm

I was fully expecting the CPI-U data reported today to reduce low yielding fixed I-Bonds to zero. However, from the BLS report this morning the new variable rate will be 1.06% (from an Sep 2019 to March 2020 increase of 0.53%).

I first learned about I-Bonds from Mel a long time ago! Not many people were talking about I-Bonds back then. Thank you, Mel! :sharebeer

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emlowe
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by emlowe » Fri Apr 10, 2020 3:34 pm

Yes, this is a nice surprise given the current economy. Make sure to buy them before May 1st, and you will get 2.22% for 6 months and then 1.26% for 6 months which is about 1.74% for 1 year. (this is on par with 1-yr CD rates)

However, the consensus is the fixed-rate, currently 0.2%, will drop to 0.0 on May 1 - and the variable inflation rate in November could also easily reset to 0 - actually if the variable inflation rate gets set to negative, the bonds could end up paying 0 after they all get their new rates reset.

I suspect I'll continue to buy them in the future at my maximum amount though - I really like pretty much everything about them, with the exception of having to use TreasuryDirect (and the purchase limits of course)
Last edited by emlowe on Fri Apr 10, 2020 6:01 pm, edited 1 time in total.
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by #Cruncher » Fri Apr 10, 2020 5:15 pm

dh wrote:
Fri Apr 10, 2020 1:12 pm
... from the BLS report this morning the new variable rate will be 1.06% (from an Sep 2019 to March 2020 increase of 0.53%).
Yes, the 258.115 March CPI is a 0.53% increase over last September's 256.759. (To see, choose U.S. city average, All items - CUUR0000SA0 from the BLS CPI-U Top Picks page.)

However, I find it confusing to refer to twice this 0.53% as "the new variable rate".
  • Firstly, there is no term "variable rate" for I Bonds. There are only the "fixed rate", the "inflation rate", and their combination, the "composite rate". [1] It's unnecessary to coin a new term, "variable rate"; and, since both the inflation rate and the composite rate "vary", it's also ambiguous.
  • Secondly, the composite rate doesn't always equal the fixed rate plus twice the inflation rate. For example, with a 0.53% semi-annual inflation rate the next composite rate for old I Bonds having a fixed rate of 1% or more will be slightly higher than their fixed rate plus 1.06%. [2]

  1. According to TreasuryDirect's I Bonds Rates & Terms page:
    To get the actual rate of interest (sometimes referred to as the composite or earnings rate) we combine the fixed rate and the inflation rate, using the equation in the example below.
  2. For example for a 1.0% fixed rate I Bond,
    2.07% <== 0.020653 = 0.01 + 2 * 0.0053 + 0.01 * 0.0053
    The cutoff fixed rate where the composite rate no longer equals the fixed rate plus twice the inflation rate can be determined by dividing the semi-annual inflation rate into 0.00005. E.g.,
    0.943% = 0.00005 / 0.0053

Topic Author
dh
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by dh » Fri Apr 10, 2020 5:19 pm

emlowe wrote:
Fri Apr 10, 2020 3:34 pm


However, the consensus is the fixed-rate, currently 0.2%, will drop to 0.0 on May 1 - and the variable rate in November could also easily reset to 0 - actually if the variable rate gets set to negative, the bonds could end up paying 0 after they all get their new rates reset.
Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.

Topic Author
dh
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by dh » Fri Apr 10, 2020 5:25 pm

#Cruncher wrote:
Fri Apr 10, 2020 5:15 pm
dh wrote:
Fri Apr 10, 2020 1:12 pm
... from the BLS report this morning the new variable rate will be 1.06% (from an Sep 2019 to March 2020 increase of 0.53%).
Yes, the 258.115 March CPI is a 0.53% increase over last September's 256.759. (To see, choose U.S. city average, All items - CUUR0000SA0 from the BLS CPI-U Top Picks page.)

However, I find it confusing to refer to twice this 0.53% as "the new variable rate".
  • Firstly, there is no term "variable rate" for I Bonds. There are only the "fixed rate", the "inflation rate", and their combination, the "composite rate". [1] It's unnecessary to coin a new term, "variable rate"; and, since both the inflation rate and the composite rate "vary", it's also ambiguous.
  • Secondly, the composite rate doesn't always equal the fixed rate plus twice the inflation rate. For example, with a 0.53% semi-annual inflation rate the next composite rate for old I Bonds having a fixed rate of 1% or more will be slightly higher than their fixed rate plus 1.06%. [2]

  1. According to TreasuryDirect's I Bonds Rates & Terms page:
    To get the actual rate of interest (sometimes referred to as the composite or earnings rate) we combine the fixed rate and the inflation rate, using the equation in the example below.
  2. For example for a 1.0% fixed rate I Bond,
    2.07% <== 0.020653 = 0.01 + 2 * 0.0053 + 0.01 * 0.0053
    The cutoff fixed rate where the composite rate no longer equals the fixed rate plus twice the inflation rate can be determined by dividing the semi-annual inflation rate into 0.00005. E.g.,
    0.943% = 0.00005 / 0.0053
Yes! Only the inflation rate varies, the fixed rate remains constant for the 30 year "life" of the bond. Thus, an I-Bond purchased today with a 0.2 fixed will earn 1.26% for the next 6 months, whereas an older I-Bond with a 2.0 fixed rate will earn 3.07%. If someone waits until May to purchase I am guessing that they would have a 0.0 fixed rate (although that part remains unknown) will earn 1.06%

You probably saw the formula, but it is very simple to set up a spreadsheet for all of the I-Bonds you own (with unique fixed rates):
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]


[0.0020 + (2 x 0.0101) + (0.0020 x 0.0101)]

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Re: I-Bonds: March 2020 BLS CPI-U report

Post by emlowe » Fri Apr 10, 2020 6:11 pm

dh wrote:
Fri Apr 10, 2020 5:19 pm

Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.
Well for 0.2% fixed bonds, it only takes a -0.2 inflation rate to get a 0 combined rate.

This has happened twice before where the inflation rate has gone negative resulting in the combined rates of numerous bonds to be 0. May 2009 - the inflation rate was -2.78% and in May 2015 the inflation rate was -0.8.
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by am » Fri Apr 10, 2020 6:17 pm

dh wrote:
Fri Apr 10, 2020 5:19 pm
emlowe wrote:
Fri Apr 10, 2020 3:34 pm


However, the consensus is the fixed-rate, currently 0.2%, will drop to 0.0 on May 1 - and the variable rate in November could also easily reset to 0 - actually if the variable rate gets set to negative, the bonds could end up paying 0 after they all get their new rates reset.
Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.
If rate goes to 0, should we sell and get a cd or high yield savings?

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dh
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by dh » Fri Apr 10, 2020 6:19 pm

emlowe wrote:
Fri Apr 10, 2020 6:11 pm
dh wrote:
Fri Apr 10, 2020 5:19 pm

Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.
Well for 0.2% fixed bonds, it only takes a -0.2 inflation rate to get a 0 combined rate.

This has happened twice before where the inflation rate has gone negative resulting in the combined rates of numerous bonds to be 0. May 2009 - the inflation rate was -2.78% and in May 2015 the inflation rate was -0.8.
Absolutely true. I am just saying that since we know the adjustment as of today, that cannot happen until November (if it happens then; truthfully I could see inflation tick up before the next reset of inflation rate).

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Re: I-Bonds: March 2020 BLS CPI-U report

Post by WolfgangPauli » Fri Apr 10, 2020 7:45 pm

emlowe wrote:
Fri Apr 10, 2020 6:11 pm
dh wrote:
Fri Apr 10, 2020 5:19 pm

Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.
Well for 0.2% fixed bonds, it only takes a -0.2 inflation rate to get a 0 combined rate.

This has happened twice before where the inflation rate has gone negative resulting in the combined rates of numerous bonds to be 0. May 2009 - the inflation rate was -2.78% and in May 2015 the inflation rate was -0.8.
The beauty part is they cannot go negative. So even if the inflation (Deflation) was -1%, fixed is .2% it will go to zero and stay there. This used to be a crazy scenario but in the world of negative rates this may be a great deal for your "cash equivalent". Agree?
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by DrCheese » Fri Apr 10, 2020 8:08 pm

emlowe wrote:
Fri Apr 10, 2020 6:11 pm

Well for 0.2% fixed bonds, it only takes a -0.2 inflation rate to get a 0 combined rate.

This has happened twice before where the inflation rate has gone negative resulting in the combined rates of numerous bonds to be 0. May 2009 - the inflation rate was -2.78% and in May 2015 the inflation rate was -0.8.
Congratulation, then you will make more than the inflation rate.

Say the inflation rate was -2.78% for the first six months and +.78% for the second six months. Inflation was -2.00% for the year.

But you made 0% for the first six months and +.98% for the second six months. You earned .49% on a year that inflation was -2.00%.

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Re: I-Bonds: March 2020 BLS CPI-U report

Post by Angst » Fri Apr 10, 2020 8:09 pm

dh wrote:
Fri Apr 10, 2020 5:25 pm
#Cruncher wrote:
Fri Apr 10, 2020 5:15 pm
dh wrote:
Fri Apr 10, 2020 1:12 pm
... from the BLS report this morning the new variable rate will be 1.06% (from an Sep 2019 to March 2020 increase of 0.53%).
Yes, the 258.115 March CPI is a 0.53% increase over last September's 256.759. (To see, choose U.S. city average, All items - CUUR0000SA0 from the BLS CPI-U Top Picks page.)

However, I find it confusing to refer to twice this 0.53% as "the new variable rate".
  • Firstly, there is no term "variable rate" for I Bonds. There are only the "fixed rate", the "inflation rate", and their combination, the "composite rate". [1] It's unnecessary to coin a new term, "variable rate"; and, since both the inflation rate and the composite rate "vary", it's also ambiguous.
  • Secondly, the composite rate doesn't always equal the fixed rate plus twice the inflation rate. For example, with a 0.53% semi-annual inflation rate the next composite rate for old I Bonds having a fixed rate of 1% or more will be slightly higher than their fixed rate plus 1.06%. [2]

  1. According to TreasuryDirect's I Bonds Rates & Terms page:
    To get the actual rate of interest (sometimes referred to as the composite or earnings rate) we combine the fixed rate and the inflation rate, using the equation in the example below.
  2. For example for a 1.0% fixed rate I Bond,
    2.07% <== 0.020653 = 0.01 + 2 * 0.0053 + 0.01 * 0.0053
    The cutoff fixed rate where the composite rate no longer equals the fixed rate plus twice the inflation rate can be determined by dividing the semi-annual inflation rate into 0.00005. E.g.,
    0.943% = 0.00005 / 0.0053
Yes! Only the inflation rate varies, the fixed rate remains constant for the 30 year "life" of the bond. Thus, an I-Bond purchased today with a 0.2 fixed will earn 1.26% for the next 6 months, whereas an older I-Bond with a 2.0 fixed rate will earn 3.07%. If someone waits until May to purchase I am guessing that they would have a 0.0 fixed rate (although that part remains unknown) will earn 1.06%

You probably saw the formula, but it is very simple to set up a spreadsheet for all of the I-Bonds you own (with unique fixed rates):
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

[0.0020 + (2 x 0.0101) + (0.0020 x 0.0101)]
Of course #Cruncher is correct about the "inflation rate" and it's always helpful around here to try to consistently use accepted terminology. And for anyone who doesn't already know about it, #Cruncher maintains a nice website that's quite useful to anyone interested in I Bonds and TIPS and well worth exploring. It even has spreadsheets!

protagonist
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by protagonist » Fri Apr 10, 2020 9:11 pm

emlowe wrote:
Fri Apr 10, 2020 6:11 pm
dh wrote:
Fri Apr 10, 2020 5:19 pm

Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.
Well for 0.2% fixed bonds, it only takes a -0.2 inflation rate to get a 0 combined rate.

This has happened twice before where the inflation rate has gone negative resulting in the combined rates of numerous bonds to be 0. May 2009 - the inflation rate was -2.78% and in May 2015 the inflation rate was -0.8.
In which case you are still beating the "inflation" rate, so your assets are preserved (and then some in real terms). The I-bonds are serving their (only) purpose well. I-bonds are always attractive for wealth preservation. If you want growth and are willing to take the commensurate risks, you should look to a different investment.

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Re: I-Bonds: March 2020 BLS CPI-U report

Post by tibbitts » Fri Apr 10, 2020 9:14 pm

protagonist wrote:
Fri Apr 10, 2020 9:11 pm
emlowe wrote:
Fri Apr 10, 2020 6:11 pm
dh wrote:
Fri Apr 10, 2020 5:19 pm

Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.
Well for 0.2% fixed bonds, it only takes a -0.2 inflation rate to get a 0 combined rate.

This has happened twice before where the inflation rate has gone negative resulting in the combined rates of numerous bonds to be 0. May 2009 - the inflation rate was -2.78% and in May 2015 the inflation rate was -0.8.
In which case you are still beating the "inflation" rate, so your assets are preserved (and then some in real terms). The I-bonds are serving their (only) purpose well. I-bonds are always attractive for wealth preservation. If you want growth and are willing to take the commensurate risks, you should look to a different investment.
Not necessarily serving their purpose after tax.

protagonist
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Re: I-Bonds: March 2020 BLS CPI-U report

Post by protagonist » Fri Apr 10, 2020 9:25 pm

tibbitts wrote:
Fri Apr 10, 2020 9:14 pm
protagonist wrote:
Fri Apr 10, 2020 9:11 pm
emlowe wrote:
Fri Apr 10, 2020 6:11 pm
dh wrote:
Fri Apr 10, 2020 5:19 pm

Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.
Well for 0.2% fixed bonds, it only takes a -0.2 inflation rate to get a 0 combined rate.

This has happened twice before where the inflation rate has gone negative resulting in the combined rates of numerous bonds to be 0. May 2009 - the inflation rate was -2.78% and in May 2015 the inflation rate was -0.8.
In which case you are still beating the "inflation" rate, so your assets are preserved (and then some in real terms). The I-bonds are serving their (only) purpose well. I-bonds are always attractive for wealth preservation. If you want growth and are willing to take the commensurate risks, you should look to a different investment.
Not necessarily serving their purpose after tax.
Better than any of the alternatives, as far as I can tell.

Topic Author
dh
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Joined: Sun Mar 13, 2011 8:01 pm

Re: I-Bonds: March 2020 BLS CPI-U report

Post by dh » Fri Apr 10, 2020 9:57 pm

Angst wrote:
Fri Apr 10, 2020 8:09 pm
dh wrote:
Fri Apr 10, 2020 5:25 pm
#Cruncher wrote:
Fri Apr 10, 2020 5:15 pm
dh wrote:
Fri Apr 10, 2020 1:12 pm
... from the BLS report this morning the new variable rate will be 1.06% (from an Sep 2019 to March 2020 increase of 0.53%).
Yes, the 258.115 March CPI is a 0.53% increase over last September's 256.759. (To see, choose U.S. city average, All items - CUUR0000SA0 from the BLS CPI-U Top Picks page.)

However, I find it confusing to refer to twice this 0.53% as "the new variable rate".
  • Firstly, there is no term "variable rate" for I Bonds. There are only the "fixed rate", the "inflation rate", and their combination, the "composite rate". [1] It's unnecessary to coin a new term, "variable rate"; and, since both the inflation rate and the composite rate "vary", it's also ambiguous.
  • Secondly, the composite rate doesn't always equal the fixed rate plus twice the inflation rate. For example, with a 0.53% semi-annual inflation rate the next composite rate for old I Bonds having a fixed rate of 1% or more will be slightly higher than their fixed rate plus 1.06%. [2]

  1. According to TreasuryDirect's I Bonds Rates & Terms page:
    To get the actual rate of interest (sometimes referred to as the composite or earnings rate) we combine the fixed rate and the inflation rate, using the equation in the example below.
  2. For example for a 1.0% fixed rate I Bond,
    2.07% <== 0.020653 = 0.01 + 2 * 0.0053 + 0.01 * 0.0053
    The cutoff fixed rate where the composite rate no longer equals the fixed rate plus twice the inflation rate can be determined by dividing the semi-annual inflation rate into 0.00005. E.g.,
    0.943% = 0.00005 / 0.0053
Yes! Only the inflation rate varies, the fixed rate remains constant for the 30 year "life" of the bond. Thus, an I-Bond purchased today with a 0.2 fixed will earn 1.26% for the next 6 months, whereas an older I-Bond with a 2.0 fixed rate will earn 3.07%. If someone waits until May to purchase I am guessing that they would have a 0.0 fixed rate (although that part remains unknown) will earn 1.06%

You probably saw the formula, but it is very simple to set up a spreadsheet for all of the I-Bonds you own (with unique fixed rates):
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]

[0.0020 + (2 x 0.0101) + (0.0020 x 0.0101)]
Of course #Cruncher is correct about the "inflation rate" and it's always helpful around here to try to consistently use accepted terminology. And for anyone who doesn't already know about it, #Cruncher maintains a nice website that's quite useful to anyone interested in I Bonds and TIPS and well worth exploring. It even has spreadsheets!
Agreed. Having a personal spreadsheet is key!

Topic Author
dh
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Joined: Sun Mar 13, 2011 8:01 pm

Re: I-Bonds: March 2020 BLS CPI-U report

Post by dh » Fri Apr 10, 2020 10:10 pm

protagonist wrote:
Fri Apr 10, 2020 9:25 pm
tibbitts wrote:
Fri Apr 10, 2020 9:14 pm
protagonist wrote:
Fri Apr 10, 2020 9:11 pm
emlowe wrote:
Fri Apr 10, 2020 6:11 pm
dh wrote:
Fri Apr 10, 2020 5:19 pm

Agreed. I honestly believed it would happen in May. Since, it will not I can imagine the combined rate going to 0 in November. If that does happen and someone wants to hold this for just a year, the 3 month penalty would be moot since it would be the last three months of zero. Hence, while I am a long term holder, someone wanting to earn a competitive one year return might find current I-bonds attractive.
Well for 0.2% fixed bonds, it only takes a -0.2 inflation rate to get a 0 combined rate.

This has happened twice before where the inflation rate has gone negative resulting in the combined rates of numerous bonds to be 0. May 2009 - the inflation rate was -2.78% and in May 2015 the inflation rate was -0.8.
In which case you are still beating the "inflation" rate, so your assets are preserved (and then some in real terms). The I-bonds are serving their (only) purpose well. I-bonds are always attractive for wealth preservation. If you want growth and are willing to take the commensurate risks, you should look to a different investment.
Not necessarily serving their purpose after tax.
Better than any of the alternatives, as far as I can tell.
I would not tell anyone what to do, but for me this is true. When I first started investing in I-Bonds, there were a great many critics. That seems to remain the case today. I can honestly say that I have never regretted investing in I-bonds, and any information I have shared is for everyone to make the best decisions for themselves. I truly wish the best to all!

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Re: I-Bonds: March 2020 BLS CPI-U report

Post by Mel Lindauer » Fri Apr 10, 2020 11:08 pm

dh wrote:
Fri Apr 10, 2020 1:12 pm
I was fully expecting the CPI-U data reported today to reduce low yielding fixed I-Bonds to zero. However, from the BLS report this morning the new variable rate will be 1.06% (from an Sep 2019 to March 2020 increase of 0.53%).

I first learned about I-Bonds from Mel a long time ago! Not many people were talking about I-Bonds back then. Thank you, Mel! :sharebeer
You're welcome. Glad to hear that you listened and got your I Bonds when the fixed rates were higher than anyone can even dream about today (3.0, 3.3, 3.4 and 3.6%). Those are definitely keepers.
Best Regards - Mel | | Semper Fi

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Re: I-Bonds: March 2020 BLS CPI-U report

Post by 17outs » Sat Apr 11, 2020 3:05 pm

So what you are saying is that these will not be 2.22% after 6 months?

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Re: I-Bonds: March 2020 BLS CPI-U report

Post by emlowe » Sat Apr 11, 2020 4:15 pm

The i-bonds bonds you buy before May 1 will return 2.22% for 6 months, the next 6 months after that will be 1.26%.

but this is true only for bonds bought prior to May 1.
Ferri Core 4: 40% Bonds | 6% Reit | 18% Total i18n | 36% Total US

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