After six months with zero for a fixed rate, the U.S. Treasury has once again included a fixed-rate component to the current I bond. The new composite rate of 5.64 percent consists of a fixed rate of 0.70 percent and an inflation-triggered, semi-annually adjustable rate of 4.92* percent. You have to go back to November 2005 to find a higher rate on the I bond.
Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold, and Everything In-Between," says he's a bit surprised they boosted the fixed rate.
"Even at 4.92 percent, they would have a rate that beat other Treasury securities. I suspect that the zero percent fixed rate impacted sales and they thought they needed to do something to keep it attractive long term."
Rate in effect until April 30
The I bond is the government's inflation-fighting savings bond. It's re-priced every May 1 and Nov. 1. The current rate is in effect until April 30, 2009. The fixed-rate component stays with the bond for its 30-year life. The adjustable component changes every six months to offset inflation.
The previous I bond, issued May 1, had an adjustable rate of 4.84 percent and a fixed rate of zero percent, for a composite rate of 4.84 percent.
If you plan on owning I bonds long-term and bought the May 1 bond, you may want to cash it after this next six-month period to get rid of a bond with a zero-percent fixed rate. The current fixed rate won't give savers much to smile about, but over the long haul, it will more than make up for cashing out, paying the penalty and the tax and then reinvesting in another I bond with a real fixed rate.
I bond rules prohibit selling the bond in the first 12 months. Any bonds cashed in the first five years will forfeit the last three months of interest. If you hold the May 1 bond, you received 4.84 percent on an annualized basis for the first six months and you'll receive 4.92 percent annualized for the second six months -- until April 30, 2009. That averages to an annualized rate of 4.88 percent. Subtract the 1.22 percent you'll pay in early withdrawal penalties, and you end up with 3.66 percent for the 12 months; not bad when compared to other short-term investments.
Next I bond rate lower?
Pederson expects the next I bond rate could be considerably lower, thanks to falling energy costs.
"We're seeing this huge drop in energy. Typically there's a two (month) to three month lag before it starts to impact the inflation numbers. We've seen relatively high inflation this past year -- averaging almost 5 percent. If energy costs continue to fall, we could see much more moderate inflation over the next six to 12 months."
The other savings bond that's reissued on the same schedule as the I bond is the Series EE. It consists solely of a fixed rate, which has been lowered to 1.30 percent, down from 1.40 percent.
The EE bond also has a 30-year life, but the government guarantees that its value will, at a minimum, double within the first 20 years of maturity. If it doesn't, the Treasury makes a one-time adjustment to make up the difference.
I bonds and EE bonds are subject to federal income tax, but are exempt from state and local income tax.
*The announced fixed and inflation components don't quite add up to the composite rate because of the way the composite is calculated.