I-Bonds Trounce Bank Yields

published 3 June 2011

With most savings accounts offering measly yields, it's news that the interest rate on I-bonds as of May 1 is 4.6%. I-bonds, unlike the more traditional EE savings bonds, are designed to provide a hedge against inflation. They combine two rates of interest: a fixed component, currently 0.0%, and an inflation component, currently 4.6%, which resets every six months.

You must hold an I-bond for 12 months before you can redeem it, and you lose the last three months' interest if you cash in your bond before five years. But we don't recommend you buy I-bonds for long-term savings now because that 0.0% fixed rate lasts for the life of the bond. However, says Ken Tumin, of DepositAccounts.com, which tracks bank rates, "I-bonds are a good short-term deal compared with CDs." Say you purchase an I-bond in July and cash it in after 12 months. For the first six months, you are guaranteed to earn interest at a rate of 4.6%. Even in the unlikely event that the inflation-rate component resets in November to 0% and your bond earns no interest for the next six months -- making an early-redemption penalty moot -- you'll still earn 2.3% over the 12 months. You bump up your yield a little by buying a bond at the end of the month because interest for the entire month accrues on the first of the month.

I-bonds are sold at face value and may be purchased at TreasuryDirect.gov. And individual may buy $10,000 worth of bonds each calendar year ($5,000 electronically and $5,000 in paper bonds). The bonds are exempt from state and local taxes, and you may defer paying federal taxes until you cash them in.