Savings Bond Alert #012

Upcoming Series I rate at least 4.60%

The inflation component of the Series I Savings Bond rate will be 3.58% for May through October rate periods, according to Consumer Price Index data released this morning by the Bureau of Labor Statistics. This is up from the 2.67% inflation component for November 2004 through April 2005 rate periods.

The inflation component was higher than this when I bonds were introduced in 1989-1990, however, it has only exceeded this level one other time in the history of I bonds.

If the Treasury leaves the I bond fixed-rate component at 1.00%, the composite rate for new I bonds will be 4.60%, compared to the current 3.67%. The Treasury may make a slight upward adjustment to the I bond fixed-rate component.

The new Series EE fixed-rate Savings Bonds, announced earlier this month, will offer a rate that’s based on the average yield of 10-year Treasury securities over the last six months. That average yield will be about 4.25%. However, the Treasury is expected to set the rate at something less than that.

Consequently Series I bonds will offer an initial rate that’s about half a percentage point higher than the new fixed-rate EE bonds.

Based on the current average yield of 5-year Treasury securities over the last six months, Series EE bonds purchased from May 1997 through this month will earn about 3.45% during their next six-month rate period, up from the current 3.25%.

The one-year APR on an EE bond purchased at the end of April and cashed at the beginning of April 2006 will be about 2.8% after early redemption penalty. The one-year APR on an I bond for this 11-month, 1-day period will be about 3.44% after the penalty.