Treasury Raises I Bond Rate to 5.64%

Article Submitted by: Sam Cass
Bonds


The US Treasury announced its new I Bond rate of 5.64% after adding the fixed and variable components.

 

Submitted: Nov 4, 2008    Views: 122    Comments: 1    Likes: 2   


The US Treasury announced its new I Bond rate of 5.64% after adding the fixed and variable components.  I Bond rates are comprised of two components, a fixed portion and a variable portion that is set based upon the previous 6 month's inflation rate.  The previous rates as well as the new rates are:

Old I Bond Rates

Fixed: 0%

Variable: 4.84%

Total: 4.84%

New I Bond Rates

Fixed: 0.7%

Variable: 4.92%

Total: 5.64%

At first glance, the new I Bond rate of 5.64% looks attractive.  Here are some things to consider:

  1. The fixed component is only .7%.  The rest can and will vary with inflation.  Inflation was high the last six months because of the rise in oil and commodity prices.  But in the past two months both have crashed and the banking collapse threatens to create deflation, not inflation.  At the next readjustment in May the variable rate will drop significantly if the economy maintains the status quo.  In other words, the rate will most likely drop six months from now.  
  2. The maximum purchases of I Bonds is low.  Each individual can purchase a maximum of $10,000 in I Bonds per calendar year.  That makes it difficult to invest a large sum of money.  But I Bonds can be an effective part of estate planning, especialy if you are annually gifting money to kids or grandchildren. 
  3. kcalif commented on a previous post on I Bonds that the interest on I Bonds is tax deferred and paid out every six months.  Depending on individual circumstances and tax brackets, they can be a better investment than a CD. 

The current top 5 year CD rate is 5.21% APY. 




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Comments Received:

p1ct1sh
(Unregistered)

I prefer them over EE-Bonds. I have been buying I-Bonds for my young kids as they were getting a paltry return in their savings accounts. So even if they sell early and have the 3 month penalty, the return is still better than in other savings vehicles. I don't buy them for myself, though.

Posted: Nov 4, 2008



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