Swallow low Series I savings bond rate

Don Taylorq_v2.gifDear Dr. Don,
What should be done with my Series I bonds now that they have a zero percent interest rate?
-- Troubled Tom

a_v2.gifDear Tom,
Your Series I savings bonds will earn zero percent interest only for six months. While that sounds awful, it's actually something that a long-term investor should suffer through -- if the Series I bond has a good-to-great fixed rate.

An earlier column, "Keeping I bond should pay off over time," explains why in greater depth. Savings bonds are non-negotiable, so you can't change your mind later and buy back in at the old fixed rates.

If you've got a Series I savings bond that doesn't have a very good fixed-rate component -- and it was issued within the past five years -- earning three months' worth of zero percent interest and then redeeming the bond means the early redemption penalty of the last three months' interest will be $0.

You need to be aware of when you bought your bond and when the interest rate paid on the bond changes. If you bought your bond in October, then its combined interest rate (fixed rate plus inflation component) changes each year in October and April.

With a bond bought in October or April, you won't start earning the zero percent interest rate until October. That's because while rate changes are announced at the beginning of May and November, the rates don't take effect on your bond until the start of the next six-month interest payment cycle.

6-month interest payment cycles
Series I savings bond
purchase month
Six months
at zero percent starts:
January or JulyJuly 1, 2009
February or AugustAug. 1, 2009
March or SeptemberSept. 1, 2009
April or OctoberOct. 1, 2009
May or NovemberMay 1, 2009
June or DecemberJune 1, 2009

It's possible that a deflationary period could occur again during the time you own the bonds. But since the bonds never decline in value, they can still be a good way to hedge inflation, provided you have a decent fixed-rate component on the Series I savings bond.

Read more Dr. Don columns for additional personal finance advice.


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