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I bond should hold steady, but EE may
jump
By Laura
Bruce • Bankrate.com
Spiking costs for gas, food, tuition
and insurance may be gobbling the cash in your wallet, but the government
thinks it's just tiny nibbles. As a result, the popular, inflation-fighting
I bond may spend the next six months at or near its current rate
of 3.39 percent when it's adjusted for inflation Nov. 1.
The 3.39 percent is a composite made up of a fixed
rate of 1 percent, which you get for as long as you own the bond,
and an inflation component of 2.38 percent, adjusted semiannually.
(The slight discrepancy is due to the way the composite is calculated.)
Dan Pederson, author of Savings
Bonds: When to Hold, When to Fold, and Everything In-Between,
says the most recent Consumer Price Index shows little change over
the past six months.
"That will put the I bond rate at about where
we were the last time, 3.39 percent. It will be within 10 basis
points of that, a very narrow range. If they leave the fixed rate
at 1 percent, you get a composite rate that's very similar. The
only reason to buy an I bond now [before Nov. 1] would be if you
think they'll lower the fixed rate."
That, says Pederson, is hardly likely the day before
national elections.
A better deal may be the EE bond, which is also repriced
semiannually and will see a new rate Nov. 1. The bond is pegged
at 90 percent of the average five-year Treasury securities yield
for the preceding six months. The current rate is 2.84 percent.
Pederson expects it to hit 3.2 percent to 3.3 percent.
"That puts it even with the I bond, give or take
10 to 20 basis points. Anytime the fixed rate on the I bond is below
2 percent, the EE is a better long-term buy because, traditionally,
it averages 2 percent over inflation, while the I bond is only guaranteeing
1 percent."
Pederson says the EE bond's history of averaging 2
percent better than inflation has held up for more than a dozen
years, even though it does not promise inflation protection.
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