investing

I-bond rate improves, but be cautious

Highlights
  • The rate applies to all I bonds issued between Nov. 1, 2009, and April 30, 2010.
  • The rate consists of the fixed rate and the annualized inflation rate.
  • Most mutual fund families offer inflation-protected bond funds.

The new earnings rate for the I bond, the government's inflation-fighting savings bond, is 3.36 percent. The rate applies to all I bonds issued between Nov. 1, 2009, and April 30, 2010. It's a considerable improvement over the zero-percent rate that was slapped on I bonds issued between May 1, 2009, and Oct. 31, 2009.

But consumers who are looking for protection from inflation should be wary because the fixed rate is a mere 0.3 percent. The I bond's earning rate consists of two components, the fixed rate and the semiannually adjusted annualized inflation rate, which is 3.06 percent. The fixed rate stays with the bond for its 30-year life. If you own this particular issue, your return will be 30 basis points above inflation. That's quite disappointing; seven of the previous issues had fixed rates above 3 percent.

The I bond's inflation rate is determined by the ups and downs in the Consumer Price Index for All Urban Consumers, or CPI-U, over the previous six months. The CPI-U had a six-month increase of 1.53 percent. The fixed rate is more of an administrative decision by the Treasury Department.

The previous I bond had a fixed rate of 0.1 percent and an inflation rate of -5.56 percent due to a negative inflation rate during the preceding six months. Because the U.S. Treasury guarantees that the bond won't have a negative accrual, the earnings rate was set at zero percent.

If a long-term marriage with an I bond is unappealing, consider other options for inflation protection such as iShares Barclays Capital U.S. Treasury Inflation-Protected Securities (TIPS) Index, symbol TIP.

Additionally, most mutual fund families offer inflation-protected bond funds. A few to look at are Fidelity's FINPX, Vanguard's VIPSX, T. Rowe Price's PRIPX, and Schwab's SWRSX.

The other savings bond that is issued a new rate every six months is Series EE bond, sometimes known as the Patriot bond.

The EE bond only has a fixed rate, which is 1.2 percent, from Nov. 1, 2009, through April 30, 2010. This is up from the previous rate of 0.7 percent. The Treasury guarantees that the EE will, at a minimum, double its value within the first 20 years of its 30-year maturity. If it doesn't, the Treasury will make a one-time adjustment to make up the difference. But that's a long time to stay in a bond that's paying 1.2 percent.

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