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The November I-bond rate craters

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Savers who are looking for inflation protection need to look past the I bond — at least until May, when a new rate is announced.

The new earnings rate for I bonds issued November 2010 through April 2011 is 0.74 percent. That rate includes a variable rate of 0.74 percent and a fixed rate of zero percent.

The fixed rate is set by the Treasury and will stay with the bond for its 30-year, interest-bearing life. That means all I bonds issued over the next six months will have a fixed interest rate of zero percent for 30 years.

The variable rate is based on the annualized rate of inflation as represented by the Consumer Price Index, or CPI, over the previous six months. A new variable rate will be announced on the first business day in May and will be applied to all outstanding I bonds.

“When you see yields this low, this is screaming irrational,” says William Larkin, fixed-income portfolio manager at Cabot Money Management Inc., in Salem, Mass.

“CPI as a measure of inflation is flawed. It can say there’s no inflation when you’re getting hammered with inflation, and that indexed component of the I bond or TIPS is what attracts people,” he says.

TIPS, or Treasury Inflation-Protected Securities, are also connected to the Consumer Price Index.

Investing should at least preserve the purchasing power of money against inflation, but doing so with the new I bond will be difficult. Extremely risk-averse investors willing to take such a low yield can actually be costing themselves money.

Savers would be better served with a “very good corporate bond that will mature in seven years and will yield 4 percent,” says Larkin.

“Or there are agency bonds,” he says. “Agency bonds are backed by the government and have liquidity. You can sell it if you want. And they have step-up bonds. I think people don’t know there are other options.”

Agency bonds are issued by agencies affiliated with the U.S. government — such as Fannie Mae, Freddie Mac and Ginnie Mae. Ginnie Mae is a government-backed agency, meaning its bonds are backed by the full faith and credit of the U.S. government. Fannie Mae and Freddie Mac are government-sponsored entities, or GSEs, and their bonds are not government-insured.

Another savings bond, the Series EE bond, is also assigned a new rate every six months. EE bonds issued from now through April 2011 will have a fixed interest rate of 0.6 percent. That interest rate will stay with the bond for 30 years.

According to, the Treasury guarantees that the EE bond’s value will at least double after 20 years. The Treasury will make a one-time adjustment to make up the difference if earning interest at the fixed rate does not double the value of the bond.