Mark Freeland wrote:
- quote -

Point made!

I guess the fixed component would be the one to try to predict.
Although I'm not really sure how they determine what to set the fixed
rate at.

Bucky wrote:
- quote -

I think this is the wrong question to ask (at least assuming that the
fixed portion of the rate won't change, which you profess to believe).

Regardless of whether you buy the savings bond now or in November, you
will be receiving the full six months of the Nov 2005-April 2006 rate.

For the sake of argument, let's assume you are planning to sell Nov 1,
2010 if you buy in October (just over 5 years), or Dec 1 2010 if you buy
in November (just over 5 years, again). (One holds 5 years to redeem
without penalty).

Either way you buy the bond, you'll get a full six months interest at
the rates set for each of the periods Nov 2005-April 2006, ..., Nov
2009-April 2010. (That's 9 six month periods, for 4.5 years.)

If you buy in October, you'll also get six months interest at the
current rate (April 2005-Oct 2005), and two months at the May 2010 rate
(for a total of 5 years and two months). If you buy in November, you'll
instead get six months at the May 2010 rate, and two months at the Nov
2010 rate.

So the comparison is: six months at the October 2005 rate vs. 4 months
at the May 2010 rate and two months at the Nov 2010 rate. (The mix of 4
months/2 months comes about because you are holding for 2 months beyond
a multiple of a half year. If you were to hold for, say 5.5 years, then
you would just be comparing the October 2005 rate with the Nov 2010
rate.)

The point is that you need to compare not the current rate with the next
rate, but the current rate with the END rate.

Even if you were to have a fixed redemption date, you would still need
to compare the October 2005 rate with the end rate. I'll try to keep
this shorter. By buying in October, you defer the new rates for six
months, while adding six months at the current rate. If you sell after,
say 5.5 years, the Nov 2010 rate won't have kicked in yet, because you
deferred that for six months. But if you buy in November, you'll miss
the October 2005 rate, and get the full six months of the Nov 2010 rate.

Bottom line - do you expect inflation to be higher or lower than now in
the last six months you expect to hold your savings bond? Best of luck
with your guess :-).

--
Mark Freeland
nNeEwTs[at]sonic.net

Since I-Bond rates only change every 6 months, and therefore very
market inefficient, I find it interesting to play the I-Bonds game.
This means trying to predict the next rate change to decide whether to
buy before or after the change.

Currently the fixed/semi-annual/composite rate is 1.20/1.79/4.80%.

The CPI-U in March 2005 was 193.3. In August it was 196.4. I'm
predicting the September CPI-U to be around 197, which means a
semiannual inflation rate of 1.91%. I'm assuming that I-Bonds correlate
with 5-year treasury yields. Since those yields haven't increased too
much since March, I think the fixed rate will stay the same at 1.2%. So
my prediction for Nov is 1.2/1.91/5.04%.

That's a 0.2% rate increase. Small, but enough for me to wait until
November. Also, apparently it doesn't matter what day of the month you
buy I-Bonds, so it's best to buy at the end of the month and redeem at
the beginning of the month.