Appeal of ‘I Bonds’ Rises With Inflation

A near-7% return on a U.S. government bond? It may sound like a scam, but it’s real -- for a while, at least.

The Treasury’s inflation-adjusted savings bonds, known as Series I bonds (or just “I bonds” for short), currently pay an annualized return of 6.73%. That rate applies to bonds purchased between Nov. 1 and April 30.

I-bond rates have two components: a fixed return and a variable return. The fixed return, now 1%, is set for the 30-year life of the bond. The variable return is the inflation adjustment, which the Treasury changes every six months.

The overall return rate on newly issued I bonds jumped from 4.8% with the Nov. 1 adjustment because of the surge in energy prices in spring and summer.

The idea behind the I bond is to guarantee some return above the inflation rate, as measured by the consumer price index. What the current 1% fixed rate means is that newly purchased bonds are guaranteed to earn 1% more than whatever the inflation rate is over time.

Because inflation has risen this year, the total return on the I-bond looks appealing. But Dan Pederson, author of the book “Savings Bonds: When to Hold, When to Fold, and Everything in Between,” cautioned that if the official inflation rate sinks in 2006 or beyond, so will the total return on the I bond.

Still, if you’re worried about inflation, or just figure it will be higher than it was over the last decade, “I would give the edge to the I bond” over fixed-rate savings bonds, Pederson said.

I-bond earnings are exempt from state income taxes, and you can defer federal income tax until you redeem the bond. For more information, go to: www.publicdebt.treas.gov.