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Modest savings bond yield looks savvy

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Dear Dr. Don,
I purchased I bonds between 2004 and 2006. I downloaded the Savings Bond Wizard and it is indicating that the bonds purchased August through October 2005 are now earning zero percent. Should I sell those bonds?

It is also telling me that the bonds purchased in June and July 2005 are earning 4.28 percent. I don’t understand why the July rate would be so different than the August rate. Is there something wrong with the Savings Bond Wizard?
— Georganne Goose-Egg

Dear Georganne,
You can trust the Savings Bond Wizard on this one. All of the Series I savings bonds you reference were purchased during the same interest rate period between May 1, 2005, and Oct. 31, 2005. That means they have the same fixed rate of 1.2 percent. They’ll also have the same inflation component. They differ in terms of when they were purchased, and the purchase dates explain the current difference in yields among the bonds.

The interest earnings on a Series I savings bond are based on two interest rates, a fixed rate and a variable rate based on changes in the Consumer Price Index. The fixed rate stays the same for the life of the bond, but the variable rate changes every six months.

The Treasury changes fixed rates and inflation rates every six months, on May 1 and Nov. 1. Outstanding bonds earn a yield based on the fixed rate when they were purchased, and the inflation rate applicable for that interest rate period.

The government announces the changes in interest rates on set dates in May and November. Your bonds earn interest for six months at that announced inflation rate based on when you purchased the bond.

So, the bonds you purchased in June and July 2005 are now earning a yield based on the 1.2 percent fixed-rate component, and the inflation rate announced in November, 1.53 percent.

The bonds you purchased in between August and October 2005 will start earning the November inflation rate in February, March and April, respectively. For now, they’re still earning zero percent. That’s because the inflation component announced in May was at -2.78 percent, which negated the fixed-rate component of 1.2 percent.

They’ll be out of the penalty box soon, and the zero percent yield isn’t a reason to sell the bonds, as I point out in an earlier column, “Swallow low Series I savings bond rate.” Another column, “Zero interest on I bond confuses saver,” also explains the zero interest earnings.

Trust the Savings Bond Wizard and hold on to those bonds. Earning 1.2 percent above inflation is going to look like a pretty savvy investment over the years.

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