I Bond jumps but fixed rate ticks
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.
"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