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Consumers who sat on the fence last week unsure about
whether to buy the 6.73 percent I bond or wait until the new rate
was announced May 1 will be rewarded if they kept their money in
their pocket.
The new I bond has a fixed-rate
component of 1.4 percent and an inflation-adjusted component of
1 percent, for a combined rate of 2.4 percent. That compares with
the previous combined rate of 6.73 percent, which consisted of a
1 percent fixed rate and a 5.73 percent adjustable rate.
Savings bond expert Dan Pederson, author of "Savings
Bonds -- When to Hold, When to Fold, and Everything In-Between,"
says the higher fixed rate makes the new I-bond much more attractive
than those purchased in the past year.
"Even though the overall interest rate is much
lower, people who buy this bond will get 40 basis points more than
people who bought the bond last month. You miss out on the teaser
rate, but this is actually better over the long term."
The I-bond's fixed rate stays with the bond for its
30-year life while the adjustable components are reset each May
1 and Nov. 1 based on the rate of inflation for the previous six
months.
The other savings bond that has a semiannually adjusted
rate is the Series EE. That bond received a 50-basis-point boost
May 1 to 3.7 percent, up from 3.2 percent. The EE is a fixed-rate
bond. If you buy the current bond you'll receive 3.7 percent annually
for as long as you own the bond. The bond's interest rate is based
to some degree on the 10-year Treasury, but there are other determining
factors that allow the Treasury to set it somewhat arbitrarily.
"It (the increase) surprises me," says Pederson,
"because they promise that in 20 years the EE will be worth
face
value, and at 3.7 percent it will exceed face value in 20 years.
Both of these moves are good news for bond owners because it makes
the products more competitive. Sometimes (the Treasury) has sat
and not been tuned in to the competitive aspect."
If you are wondering which bond is a better buy over
the long term, Pederson opts for the I bond. He arrives at that
conclusion by considering inflation which, over the past 15 years,
has averaged about 2.5 percent, and about 3.5 percent over the past
year or two.
"I look at where I think inflation will average
over the next five years. If we use 2.5 percent as a guideline and
add the 1.4 percent fixed I-bond rate then you get 3.9 percent.
If you use the more recent inflation average of about 3.5 percent
and add the 1.4 percent fixed rate you'll get 4.9 percent. Either
scenario, over time, beats what the current EE bond is paying."
These savings bonds are good for people with long-term
savings goals. You cannot cash either bond during the first year
of ownership, and you'll pay an interest penalty if you cash in
in less than five years. You can find additional information and
buy the I bond or the EE at www.treasurydirect.gov.
If your savings goals are shorter term, you
might find that the current high-yield
CD rates offer a better deal.
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