There isn’t much to say about inflation, with higher prices stalking consumers at the grocery store and at the gas pump. But there is a positive point: Government I bonds are earning astonishing rates.
New Notes I – low-risk, inflation-linked federal savings bonds – issued through the end of October will earn an annualized rate of 9.62% for six months, the Treasury Department announced this week. The rate also applies to older I bonds that are still earning interest.
This represents the highest inflation rate bonds have earned since they were introduced in 1998, said Ken Tumin, the founder of the financial website DepositAccounts.com. It means that bonds earn a lot more than a typical federally insured savings account or certificate of deposit.
Because of the way rates are set on I bonds, people holding older bonds could be earning double-digit rates. An I bond rate is made up of two parts: a fixed rate, fixed at the time of issue of the bond, which remains the same for its 30-year life; and a floating rate, which is based on the six-monthly change in the Consumer Price Index and can be reset twice a year, in May and November. The Department of the Treasury applies a formula to combine the two into a composite rate.
The fixed rate component is currently zero, but in the past it was 3% or more. Stocks purchased in early 2001 are currently earning more than 13 percent, if the holders have not already redeemed them, according to the government website TreasuryDirect.
The Treasury Department does not disclose its formula for fixing the fixed rate, Tumin said. But like the Federal Reserve increases the reference interest rateit seems “more likely” that the fixed rate on I bonds will rise at the next recovery in November, Tumin said.
Ties are considered to be quite safe. While it’s possible the combined rate could drop to zero (it happened before), it’s guaranteed it won’t drop below that value, so you’ll at least get your initial investment back when you redeem the bond, according to the Treasury Department.
You can acquire up to $ 10,000 in I bonds per person, per year, onwards TreasuryDirect.gov. You can also purchase up to $ 5,000 more using the federal income tax refund. (A couple filing a joint tax return can purchase up to $ 25,000 annually.)
Keep in mind that you must hold the bonds for at least 12 months before redeeming them and, if you redeem before five years, you will be charged the last three months of interest as a penalty.