Inflation gives boost to I Savings Bonds

Published online on Monday, Nov. 09, 2009

The I Bond - which enraged savers when its rate dropped to zero percent - is back in business thanks to renewed inflation.

Series I Savings Bonds bought from November through April 2010 will pay an annualized rate of 3.36 percent for the first 6 months after issue. That's up from zero percent for the same type of bonds issued last May through October.

Others who owned I Bonds that were sold earlier also ran up against time periods when those bonds earned no interest for 6 months, too.

The good news is that if you bought or held onto old I Bonds when they were paying nothing, you're eventually going to see a higher rate of interest.

I Bonds can adjust rates every 6 months.

So anyone who owns an I Bond now is going to see a 3.06 percent inflation rate added onto their I Bonds for a 6-month run. I Bonds issued from now through April 2010 would have a fixed rate of 0.30 percent. That's how you'd get 3.36 percent for the first 6 months.

Some I Bonds pay excellent rates and should not be cashed in carelessly.

The rate each individual I Bond would pay will vary significantly based on when a saver actually bought that I Bond.

For example, someone who bought an I Bond last June would start seeing a higher rate of 3.16 percent in December. I Bonds bought a few months ago had a fixed rate of 0.10 percent that would be added to the inflation rate. That's how some savers would end up with 3.16 percent.

Others who bought I Bonds years ago would do far better.

Daniel Pederson, a Monroe-based savings bond expert, noted that I Bonds bought from September 1998 through October 2001 had fixed rates that ranged from 3 percent to 3.6 percent. So those savers would see new rates for 6 months, after this latest inflation adjustment, that would range from 6.06 percent to 6.66 percent for a six-month period.

Pederson notes that just how well I Bonds do overall depends much on inflation or deflation. Again, these things adjust every 6 months. No one knows where inflation is headed so rates could be higher or lower for a given 6-month time frame.

I Bonds can fluctuate considerably. Savers saw some solid rates before that awful zero-percent rate.

"You have to look over the life of the product and see how it performed," Pederson said. "Don't make a decision on one 6-month period of earnings."

Figuring out just how rates are calculated with I Bonds can be mind-boggling. You can see www.treasurydirect.gov to find some charts and details.

No, most of us aren't seeing prices roar out of control in many parts of our lives. But in general, prices aren't declining to the extremes that they were during the financial crisis several months ago.

While consumer prices have declined year-over-year since last September, the I Bond measures only a 6-month trend based on the Consumer Price Index for Urban Consumers, known as the CPI-U.

And the CPI-U has increased from March through September by 1.53 percent. For I Bonds, the inflation rate is multiplied by 2 for an annualized rate. That's how you get 3.06 percent for the inflation adjustment.

Pederson said right now, he'd pick an I Bond over a Series EE Bond. Series EE Bonds bought from November through April 2010 will pay a rate of 1.2 percent for the next 20 years - and have a new rate for the last 10 years until the bond no longer pays interest.

Again, if you bought a bunch of bonds years ago, you want to pay attention to the fact that some could have stopped earning interest long ago.

While plenty of people grumbled about the zero-percent rate that I Bonds had paid for 6 months, many others just let their old bonds sit around and pay nothing for years.