Series I bonds become an even better deal

So if you buy a Series I bond between now and next May, it'll earn interest at an annualized rate of 6.73 percent for the first six months you hold it. (After that, another rate kicks in.)

And what about those older Series I bonds you may have stashed away? Hold on to them, and pat yourself in the back - they're all earning more than 6.73 percent, or will be shortly.

In fact, certain Series I bonds (those purchased between September 1998 and April 2001) are all eligible to earn more than 9 percent.

So what's going on? One word: Inflation.

Series I bonds, launched in 1998, are meant to help you keep up with inflation. As the cost of goods and services goes up _ energy prices, for instance _ the rate on Series I bonds automatically goes up, too.

So when it came time for the government to publish the rate for new Series I bonds yesterday, there was little doubt about the result: With inflation soaring in recent months, mainly because of higher energy costs, the rate on Series I bonds had to go up, too.

"Inflation is the overriding factor in the rate calculation," said Steve Meyerhardt, spokesman for the Treasury's Bureau of the Public Debt, which runs the nation's savings bond program.

Robert E. Veasey Jr., former head of the Rhode Island chapter of the Financial Planning Association, a trade group for financial planners and others, said that for conservative investors, who have suffered with low-yields on fixed-income investments, "This is the best news they've heard in a long time."

The new rate may even tempt some investors to steer into Series I bonds some of the money they might normally invest in stocks and other equity investments, said Veasey, a certified financial planner and an investment adviser with Sowa Financial Group Inc. of East Providence.

Just keep in mind that the government publishes a new rate for savings bonds every six months, in May and November. The new rate published yesterday applies only for the first six months you hold a new Series I bond, Veasey pointed out. After that, another rate kicks in _ and it could be higher or lower, depending on inflation in the months ahead.

Still, even if inflation falls back to normal levels, and the next rate on Series I bonds is lower when it's posted in May, people who buy Series I bonds now will be in pretty good shape, said Daniel J. Pederson, president of The Savings Bond Informer Inc. of Detroit, which prepares customized reports on bond-holdings for savings bond investors and financial advisers.

Suppose you buy a Series I bond now, the rate in May drops to around 3 percent or so, and you cash in that bond about a year from now. You might still net around 4 percent, even after paying a penalty that applies for early redemption, Pederson said. (If you cash in a Series I bond before you've held it for five years, you must forfeit three months' interest.)

A few other points: Series I bonds actually earn two rates of interest: One is a fixed rate, which applies for the 30-year life of the bond; the other is a variable rate, which changes every six months, with inflation.

The 6.73-percent rate the government posted yesterday includes a fixed rate of 1 percent and a variable rate of 5.70 percent. (When annualized and compounded, the new rate works out to 6.73 percent.)

The last time the government posted new rates on Series I bonds, in May 2005, the overall rate was 4.8 percent _ including a fixed rate of 1.2 percent, and a variable rate of 3.58 percent.

The new rate published yesterday is the highest overall rate for new Series I bonds since May 2000, when it was 7.49 percent.

You can buy Series I bonds through many banks and credit unions and online: www.treasurydirect.gov

If you buy paper Series I bonds, the minimum investment is $50; if you buy them online, the minimum investment is $25.

Series I bonds don't pay out interest. Instead, the interest accumulates over time. When you cash in your bond, you get back the amount you originally invested, plus all the accumulated interest. At that point, the interest is subject to federal income tax, but is free from any state and local tax. Also yesterday, the government set the fixed rate on new Series EE bonds at 3.2 percent. That's down from the fixed rate of 3.5 percent set in May 2005. Mainly because of that, Pederson said, Series I bonds are more appealing than Series EE bonds.

TODAY'S TIP: More information about savings bonds is available at this Treasury Web site:

www.publicdebt.treas.gov

(Click on "Savings Bonds" on the far left side of the screen.)

The government also publishes a savings bond earnings report that contains rate and yield information on Series I bonds. For a free copy, send a postcard to: "Earnings Report," Bureau of the Public Debt, 200 Third St., Parkersburg, WV 26106-5312.

(Neil Downing is the author of "The New IRAs and How to Make Them Work for You." E-mail questions to moneyline@projo.com or leave a message at 401-277-7484. No personal replies, but as many questions as possible will appear here.) (Distributed by Scripps Howard News Service, http://www.shns.com.)

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