csua.org/u/fs6 -> www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/05/02/BUGE2IIOV71.DTL
view archive From the too-good-to-last department: On Monday, the government slashed the rate for inflation-indexed US savings bonds, called Series I bonds, for the next six months to 241 percent, from 673 percent the previous six months. This startling plunge of more than 4 percentage points was largely due to a quirk in the way I bond rates are calculated. The rate on an I bond is made up of two parts: a fixed rate that does not change as long as you own the bond plus an inflation-indexed rate that changes every six months. It can change the fixed rate every six months if it so desires, but once you buy a bond, your fixed rate does not change. The fixed rate has ranged from 1 percent to more than 3 percent. The variable rate is equal to the change in the consumer price index during a previous six-month period. But an inflation spike between March and September 2005 -- caused mostly by the jump in energy prices after Hurricane Katrina -- pushed the variable rate to 57 percent. The mouth-watering rate attracted hordes of people who began scarfing up I bonds -- perhaps not realizing the rate was only good for six months. The inflation rate between September and March was only 1 percent (on an annualized basis). Rather than pay just 2 percent on I bonds, the government raised the fixed rate to 14 percent, bringing the total rate for the next six months to 241 percent. Fixed-rate EE bonds While sales of I bonds were soaring, sales of series EE bonds were plummeting, for two reasons. Two, the government announced that starting May 1, 2005, all EE bonds would pay fixed rates. Previously, EE bonds paid variable rates tied to the five-year Treasury note yield. At a time when interest rates were moving up, the change was seen as almost a death knell. On Monday, the government raised the rate on EE bonds to 37 percent. That rate applies to EE bonds sold between May 1 and Oct. People who bought EE bonds during the previous six months will earn only 32 percent as long as they hold the bonds. Floating-rate EE bonds People who bought EE bonds before they changed to fixed-rate last May will do best of all during the next six months. On Monday, the government announced that the rate on EE bonds purchased between May 1997 and April 2005 will earn an annual rate of 41 percent, up from 36 percent the previous six months. The rate on these bonds will remain tied to the five-year Treasury note as long as they are held.
com, still recommends floating-rate I bonds over fixed-rate EE bonds. "Over the long term, I bonds have done better than EE bonds," he says. At the moment, Adams says, certificates of deposit look like a better deal than either type of savings bonds. The average rate on a one-year CD is 464 percent and the average rate on a five-year CD is 467 percent. One advantage savings bonds have over CDs is that you won't pay tax on savings bond interest until you cash them in. Interest on CDs is taxable each year, unless you hold them in a tax-deferred account.
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