Does the new I bond rate have you worried?
Monday, May 15th, 2006
Categorized as: Yesterday's News (old post archive)
I bought a bunch of I bonds with a rate of 6.73% in December. What's the rate now? I don't want to earn under 3%! What should I do?
Tom's response
Just hang on. The rate will change again in six months. Over long terms, inflation runs in the 2.5% to 4% range. Add that to your bond's 1.0% base rate and you get 3.5% to 5%. If inflation runs even higher than that, you'll get even even higher rates.
Your bond will earn 6.73% for six months (Dec - Jun), then 2.01% for six months - this is an annual yield of 3.85%, well above your goal and within the historical range you can expect with this kind of investment.
You are hedged against any risk of default, any risk of inflation, and any risk of capital loss. Your investment also has tax advantages. In today's environment, this is a great place for money you can't afford to lose.
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It's also worth mentioning that, when you're finally able to redeem, it's the LAST three months worth of interest that is sacrificed to early redemption penalty.
So at the 12-month mark, if the new fixed rate at that time is significantly better, you could just cash out those 1% fixed rate I-bonds and replace with the new. Your only sacrifice would be 3 months of interest at the lower rate and an extra year before you can withdraw penalty-free.