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Do I bonds trump CDs?

By Claes Bell ·
Tuesday, November 13, 2012
Posted: 6 am ET

Like most risk-free investments right now, rates on I bonds are abysmal. For the fifth time in a row, the Treasury has elected to slap a zero percent base rate on the savings bonds, meaning they'll never earn a return above inflation. Still, they do have one big advantage over certificates of deposit: keeping up with inflation.

At the moment, the average rate for a one-year CD is 0.29 percent. Meanwhile, the consumer price index tells us prices are currently rising at a rate of 2 percent a year. That means that even as you're earning that whopping 0.29 percent return, your money will have 2 percent less buying power when you take it out. On the other hand, I bonds, which track the rate of inflation, will earn 0.88 percent (or 1.76 percent annual percentage yield) over the next six months, at which time the rate will adjust again based on inflation.

While there are certainly banks out there offering CD rates better than that 0.29 percent average, I bonds could be a better solution, especially for CD investors who have their interest payments automatically reinvested rather than paid out in monthly checks. I bonds are an accrual-type security, meaning you won't actually get your hands on the interest until you cash out the bond.

If you're OK with that, I think an I bond could make a decent replacement "rung" for a CD ladder. For instance, say you've got a five-year CD maturing tomorrow. Instead of plowing the balance back into another five-year CD earning an average of 0.94 percent a year, you decide to put up to $10,000 per person, or $20,000 for couples, in an I bond.

I bonds are intended to be held for at least five years, but can be cashed in any time after one year at the cost of the most recent three months' worth of interest. So if rates rose, you could always pull your money out of that I bond and go find a CD with a better rate. But in the meantime, you'd be earning more than you would on a lot of CDs, with that same "full faith and credit of the U.S. government" guarantee.

What do you think? Are I bonds a good stopgap until CD rates rise?

Follow me on Twitter: @ClaesBell

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November 16, 2012 at 3:19 am

When it comes to a horizon of saving and/or prinicple protection, I Series are the best high quality debt instrument. Another advantage they hold over CD's is they are exempt of state and local taxes, and under some exceptions, federal ones too. True, you're not going to get any sort of profit putting your money in them these days, but they do help with two other factors when considering saving/investing; taxes and inflation

November 13, 2012 at 8:28 pm

Since TIPS have gone negative on their yields, I've been dumping the maximum amount into iBonds. Since I'm ancient, my goal is to preserve wealth, not grow it. It's as bought as simple a hedge against inflation as you can get.