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I Bond jumps but fixed rate ticks down

Savers who are focused on beating inflation may like the new I bond compounded rate of 3.39 percent. It includes a fixed component of 1 percent, down from 1.1 percent, and a semiannual adjustable rate of 2.38 percent. The fixed rate applies for the life of the bond. The adjustable, inflation-fighting component, tied to the Consumer Price Index, is subject to change every May 1 and Nov. 1. The previous combined I bond rate was 2.19 percent.

The drop in the already paltry fixed rate disappointed some observers because the U.S. Treasury has taken steps to encourage investors to hold the 30-year bonds for a longer period. I bonds must be held for at least one year. Cashing a bond in less than five years will result in a three-month earnings penalty. But a 1 percent interest rate isn't likely to encourage many to hold the bond for more than the required one year.

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"It's disappointing because it shows a continuing micromanagement of that rate," says Dan Pederson, savings bond expert and author of Savings Bonds: When to Hold, When to Fold, and Everything In-Between.

"It's clear though that the public is buying more on the combination rate, and if the Treasury has a combo rate that looks palatable, they'll trim the fixed rate to save money."

Even with the penalty, investors will come out ahead of money market funds if the I bond is priced around 3.4 percent for the entire year.

The new interest rate for the Series EE, also re-priced semiannually, is 2.84 percent, up from 2.61 percent. The rate is pegged at 90 percent of the average 5-year Treasury securities yields for the preceding six months.

For long-term investors, Pederson has long favored the EE over the I bond because it has averaged 2 percent above inflation over the last 12 years even though it does not promise inflation protection.



-- Posted: May 4, 2004
Read more stories by Laura  Bruce
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See Also
Series I bonds: Your inflation protection
5 questions about savings bonds
The future of savings bonds is paperless
Savings glossary
More savings stories

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