Rates fall on inflation-adjusted U.S. savings bonds

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Waning inflation, at least as measured by the consumer price index, will cut returns earned by Series I U.S. Savings Bonds for the next six months, the Treasury announced on Monday.

Series I bonds bought between May 1 and Nov. 1 will earn an annualized interest rate of 1.74% in their first six months, down from the 3.36% annualized earnings rate on newly issued bonds in the previous six months.

Series I bonds earn the combined total of their fixed annual rate, which is set for the 30-year life of the bonds, and the inflation rate as measured by the consumer price index. The inflation adjustment is recalculated every six months for new and outstanding bonds.

The fixed rate on new Series I bonds is 0.20%, down from the 0.30% fixed rate on bonds sold in the previous six months. The fixed portion of the return can be whatever the Treasury decides -- and Uncle Sam has become far less generous with that rate over the last few years, reducing I-bonds’ overall appeal. The fixed return on new I-bonds was 1.40% as recently as 2007.

The inflation component will provide an annualized return of 1.54% on new I-bonds in their first six months after issuance, as well as on previously issued bonds as they adjust. Add the 0.20% fixed rate to 1.54% to get the total return of 1.74% on newly issued securities.

Owners of previously issued I-bonds can see their new six-month earnings rates in a chart provided on savings-bond-advisor.com.

The Treasury on Monday also announced the interest rate on newly issued Series EE Savings Bonds, which earn a fixed rate of interest for the life of the security. EE bonds issued in the next six months will earn 1.40% a year, up from the rate of 1.20% on EE bonds issued in the previous six months.

But if you can hold EE bonds for 20 years, the government guarantees that the bonds will double in value at that point. That would equate to an annualized return of 3.50%.

That’s less than the 3.68% yield on conventional 10-year Treasury notes as of Monday, but remember that savings bonds allow you to defer federal income taxes on interest earned until the bonds are redeemed.

-- Tom Petruno