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The interest
rate on the federal government's inflation-fighting savings bond could come in
above 6 percent when it's adjusted Nov. 1.
The current I-bond rate of 4.8 percent consists of
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.) Both components are adjusted every
May 1 and Nov. 1.
The fixed rate, in effect when the bond is purchased,
stays with an investor for as long as he owns the bond. The inflation-adjusted
component is based on inflation data for the previous six months
as measured by the U.S. Consumer Price Index.
Dan Pederson, author of "Savings Bonds: When
to Hold, When to Fold and Everything In-Between," says CPI
numbers for the previous six months give us an annualized inflation
rate of 5.7 percent.
"Combine that with the current I bond's 1.2 percent
fixed rate and you get a blended rate of 6.9 percent. But with a
rate that high there's a strong likelihood that the fixed rate will
get trimmed."
Pederson says he could see the fixed rated coming
in somewhere between 0.5 percent and 1 percent. But even if it gets
scalped all the way down to 0.5 percent, the I bond would still
have a composite rate of approximately 6.2 percent.
You must hold the I bond for at least one year before
cashing it, and you'll pay a penalty of three months' interest if
you sell it before five years. Pederson suggests that anyone considering
buying the I bond do so now, before the Nov. 1 adjustment.
That means you'd get the current fixed rate of 1.2
percent and the current adjustable rate of 3.58 percent for a combined
4.8 percent for the first six months.
In late April your bond would be adjusted for the
following six months. You'd have the 1.2 percent fixed rate and
whatever inflation component is issued this Nov. 1. If that combined
rate is 6.9 percent, you'd average 5.85 percent for the full year.
If you wait until after Nov. 1 there's no guarantee
that the fixed component won't be considerably lower. Pederson estimates
there's a 70 percent chance the government will lower the fixed
rate.
If you buy the current I bond and sell after one year
-- using the above scenario -- the interest penalty would leave
you with approximately 4.39 percent for the year. If that appeals
to you, don't wait until the last minute to buy. Buying before Oct.
25 should ensure you get the current rate.
The
other savings bond that is adjusted semiannually is the EE series. It currently
pays 3.5 percent. It's a fixed-rate bond, so the rate you get when you buy stays
with you until you sell. It has the same holding and penalty provisions as the
I bond. Pederson expects the EE's new interest rate to remain right around 3.5
percent.
If you're ready to learn more, read this feature that includes information about how to buy I bonds.
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