I-bond rate spikes
Thanks to oil and other inflation culprits,
the I bond's new compound rate is 4.8 percent; a nice jump from the previous 3.67
percent. The I bond is the government's inflation-fighting savings bond.
The compound rate includes a fixed rate of 1.2 percent
and a semiannual inflation-adjusted 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 rate is pegged to the Consumer Price Index.
The rates are reset every May 1 and Nov. 1.
Dan Pederson, president of the Savings Bond Informer,
a bond consulting service, says he's surprised the government raised the fixed
rate to 1.2 percent from 1.0 percent.
"I'm at a loss to understand
why they're giving away more money than they need to. They still would have had
a very attractive rate; it would have been 4.6 percent without bumping the fixed
rate. It's good for the consumer; they'll take it."
The new rate for the series EE bond is 3.5 percent, up from 3.25
percent. The EE had been an adjustable-rate bond pegged at 90 percent
of the average five-year Treasury securities for the preceding six
months. It's now a fixed-rate bond with its new rate based on the
10-year Treasury average for the preceding month with adjustments
made for features such as tax deferral.
Both the EE and the I bond must be held for one year before they
can be cashed. If you hold them for less than five years, you'll
pay a penalty of three months' interest.
If you're trying to choose between the two bonds, Pederson suggests
buying the I bond if you only plan to hold it for a year or so and
take the three-month penalty. You won't know the actual annual return
until Nov. 1, when the variable portion is adjusted for inflation,
but Pederson says there's a chance the I bond could outperform the
EE bond for the full year.
But he cautions that while the current 4.8-percent rate may be
attractive to some consumers, the fixed rate is only 1.2 percent.
If oil prices level off we're likely to see a lower inflation rate
in the second six-month period.
"The key to long term is if you believe inflation will average
more than 2.3 percent (the difference between the EE's 3.5 percent
and the I bond's fixed rate of 1.2 percent), the I bond will be
more attractive to you," Pederson says. "If you think
inflation will average less than 2.3 percent, go with the EE."
You can learn more about the government's
decision to change the EE to a fixed-rate bond by reading Bankrate's "Savings
bond buyers may be offered a lousy deal."