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I-bond's new rate -- tough choice for investors

The government's inflation-fighting I-bond, issued from May 2008 through October 2008, will earn an annual rate of 4.84 percent. That sounds pretty decent in this time of low rates that are outrun by inflation. But the I-bond's rate is comprised of two components -- a fixed rate that sticks with the bond for its 30-year life, and an earnings rate that's adjusted semi-annually based on inflation.

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The 4.84 percent comes entirely from the inflation component. This particular I-bond has a fixed rate of zero percent. This is the first time in the I-bond's 10-year history that the Treasury has slapped the bond with a goose egg for a fixed rate; 1 percent had been the previous low.

"Let's say a year or two from now you start getting I-bonds with a fixed rate, then these will be the dogs of all the I-bonds ever issued," says Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold, and Everything In-Between."

"This hurts people who are just entering the game now who would like to buy an I-bond. The only return they're promised is whatever inflation does. I don't know what they're thinking, but I couldn't argue with the premise that (the government) is thinking we're going to have abnormally high inflation and doesn't want to pay an extra premium on top of it."

The fixed rate given to bonds issued from November 2007 through April 2008 was 1.2 percent. Those bonds carried an adjustable rate of 3.06 percent for the first six months.

People who will benefit from the new rate are those who bought I-bonds between September 1998 and October 2001 when fixed rates ranged between 3 percent and 3.6 percent. Those folks will eventually be earning 7.84 percent to 8.44 percent for at least six months.

Consider municipal bonds
For investors who might want to forgo the I-bond until it has a guaranteed fixed rate of some merit, Kurt Rossi, a Certified Financial Planner at Independent Wealth Management in Wall, N.J., says high-quality municipal bonds, which traditionally have a very low risk of default, could be considered.

"The problem is that people are being forced to take on more risk through duration or through higher-risk investments just for yield. It's definitely a very tricky time because when you look at conservative investments there are only so many options right now."

Series EE bonds issued May 1 through October 2008 have a fixed annual rate of 1.4 percent. The EE has only a fixed rate, so if you buy it now that's all you'll get for as long as you own the bond. The previous rate was 3 percent.

"I think it's pretty obvious that (the government) isn't interested in selling EE bonds," Pederson says. "It's not a shock because they've been sending that signal for a while, but that's a dramatic slash of the EE bond rate. At 1.4 percent, that's about 50 years for your money to double. The promise with the EE is that your money will double in 20 years, but if you only stay in it for 12 or 15 years, you miss out on the promise. I think they want to chop the legs out from underneath savings bonds and push people toward Treasuries."

For additional information on the I-bond visit Bankrate's Investing Basics.

Bankrate.com's corrections policy
-- Posted: May 2, 2008
 
 
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