Wednesday, November 4, 2009

Savings Bonds warm up to back above zero. Why should I care?

Series I Savings Bonds, which have been paying some savers zero-percent interest the last six months, are back in the black again. The Treasury Department announced earlier this week that savers who buy the inflation-adjusted bonds will get 3.36 percent interest on any bonds they buy before May 1. Rates will change again after that depending on what consumer prices do.

Calculating what I-bonds pay can be mystifying. Buyers get paid with a combination of interest rates. One is a fixed rate that is calculated on the recent price for government securities when you buy the bonds and stays the same for however long you own them. The fixed rate is 0.30 percent now, but was as high as 3.6 percent a decade or so ago when financial markets were boomier.

The other rate, which changes every May 1 and Nov. 1, is based on the Consumer Price Index. It's 3.06 percent now, thanks in part to some recently spiky energy prices. It's been minus 2.78 percent for the last six months, so anyone with a fixed rate smaller than that has been earning zip.

So why do we care? Basically, now that I-bonds have a pulse again, they are an okay place to stash any emergency money you won't need for a year or more. Starting at $50, they are cheap to buy. And they currently pay better than money market accounts or comparable certificates of deposit.

Their biggest drawback is that you cannot get your money back for 12 months. Busting a CD and paying a penalty is easier. The second biggest drawback is that after those first 12 months are up, you still lose three-months' interest if you cash out before 5 years are up. I think that's a judgment call. If you really need your money that badly, you've still made better than bank rates for nine months or longer and three months interest at current market rates may not be that big a hit.

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