I bond, EE bond rates rise sharply
By Laura Bruce • Bankrate.com

The increase in the March Consumer Price Index meant that the I bond, the government's inflation-fighting savings bond, saw a sizable rise in the interest rate.

The current rate is now 4.8 percent, up significantly from 3.67 percent, and includes a fixed rate of 1.2 percent and a semiannual adjustable rate of 3.58 percent. (The slight discrepancy is due to the way the composite is calculated.) The fixed rate stays with investors for as long as they own the bond while the adjustable is pegged to the CPI and changes every six months. The rates are reset every May 1 and Nov. 1.

"That means that whatever the CPI adjusted rate is, buyers will get that for their first six-month period, but they're locking the 1.2 percent fixed rate," explains Dan Pederson, president of the Savings Bond Informer, a bond consulting service. "They'll get the fixed rate for the next 30 years if they hold it that long."

Perhaps the biggest change with this new rate announcement was the fixed rate assigned to the EE bond. That bond has always had an adjustable rate, but the rising rate environment has spurred the government to make the switch in an effort to save money.

The EE's current rate is now 3.5 percent, up from 3.25 percent, and is now based on the 10-year Treasury average for the preceding month. Previously the Series EE bonds were pegged at 90 percent of the average for five-year Treasury securities for the preceding six months. The new fixed rate should be higher than the previous five-year Treasury rates.

Pederson used to consider the EE the better buy for many investors because over time it beat the I bond. But now he says it's like trying to compare apples and oranges.

"One's indexed and one's flat. It's probably more how you think about long-term interest rates. If you think they'll rise and inflation will rise, then the I bond is probably more appealing. If you think inflation will remain low and interest rates will be relatively flat, then the EE may be better."

You can read more about the government's recent decision to change the EE to a fixed rate bond in "Savings bond buyers may be offered a lousy deal."