Dear Dr. Don,
When is the best time to buy Series I savings bonds?
— Mila Moment

Dear Mila,
It depends in part on your investment horizon. You have to hold the bonds for at least one year, so there’s no short-term play here. If you redeem the bond within five years, you forfeit the bond’s last three months of interest earnings. The longer your investment horizon, the more important it is to focus on the fixed yield paid by the Series I savings bond.

Series I savings bonds have two yield components: a fixed rate and an inflation rate. The fixed-rate component stays the same over the life of the bond. The inflation rate component changes every six months and is based on the rate of inflation as measured by the Consumer Price Index.

Every November and May, the U.S. Treasury announces the fixed rate and inflation rate for Series I savings bonds. The inflation rate is relevant to all Series I bondholders. The fixed rate is only relevant for people buying Series I savings bonds in the six-month period following the announcement.

The current (November 2008) fixed-rate component is 0.70 percent and the current inflation component is 2.46 percent. Combined, they equate to an annualized yield of 5.46 percent. The math is a little dicey but the formula is available on the Treasury Direct Web site page titled “I Savings Bonds Rates & Terms.”

Historically, the fixed-rate component has ranged between 0 and 3.6 percent. The inflation component has ranged between 0.28 and 2.85 percent. Remember, you can’t just add the two numbers together to get the annualized yield.

Although it’s not an apples-to-apples comparison, I like to look at the yields on Treasury inflation-protected securities when deciding whether or not the Series I savings bond looks attractive. Currently, five-year TIPS are paying the equivalent of a 1.1 percent fixed-rate component.

Interest earnings on Series I bonds can be tax-deferred until maturity. That’s not true of TIPS, which is why you can’t make an apples-to-apples comparison between the two investments (although owning TIPS in a tax-advantaged retirement account can finesse the tax issue). If you’re thinking of buying TIPS instead of Series I savings bonds, first discuss the potential purchase with a tax professional before buying.

For long-term investors, I don’t think Series I bonds are attractive unless they offer a fixed rate above 1 percent. In fact, I’d like to see it closer to 2 percent before recommending that someone load up on these bonds.

But I’ll admit that in the current market, it’s hard to ignore a tax-deferred, guaranteed return over and above the inflation rate.