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The government will announce its semi-annual adjustment
of the I-bond rate May 1 and there's a good chance it's headed downward.
That's because the Treasury looks at the last six months of Consumer
Price Index data when determining the new rate for the inflation-fighting
bond and we saw a couple of months of very mild inflation in that
period.
The current bond pays 4.52 percent. That's a combination
of a fixed rate of 1.4 percent and an inflation-adjusted component of 3.1 percent.
Buy the bond before May 1 and that's the rate you'll get for the first six months
that you own the bond. Dan Pederson, author of "Savings
Bonds: When to Hold, When to Fold, and Everything In-Between," is predicting
the new combined rate will drop to 3.8 percent. He expects the fixed rate to stay
the same and the inflation-adjusted component to fall to 2.4 percent. "If
all six months had run like this last month you'd have an inflation number close
to 10 percent," says Pederson. "But that was only one of six CPI rates
and since the previous five were substantially lower than that we'll have a slightly
lower rate." I-bond or CD?
If the new combined rate is lower than the current one, the smart
move would be to buy the current I-bond. But that means you'll be
stuck with the 1.4 percent fixed rate for as long as you own the bond,
since that rate stays the same for the life of the bond. You'd need
an inflation-adjusted rate of at least 2.56 percent just to compete
with an average-yielding five-year CD. To be on a par with a high-yield
five-year CD, the inflation component would have to be 3.9 percent.
Even five-year Treasuries are yielding around 4.57 percent today.
It's been a
while since the I-bond was an attractive investment, but if the adjustable rate
drops, the new bond will be an even worse investment. Of course, I-bonds are meant
to be long-term investments and, for some people, they're appropriate. But be
aware that you must hold the I-bond for at least one year before cashing it and
that there's a three-month interest penalty if you sell before five years. The
Series EE bond, a fixed-rate savings bond, will also be repriced on May 1. Pederson
expects that rate to hold steady at 3.6 percent. For more
information on the I-bond, read "Series
I-bond: Your protection against inflation." | 
