Savings Bond Rates Set to Slump Soon

The calculation itself is more complicated than my high school calculus will allow me to explain! But you can find it on the Treasury Web site under the I-bonds section. Here's how it's explained:

Rate Calculation for I-Bonds Issued November 2005-April 2006

Fixed rate = 1.00%

Semiannual inflation rate = 2.85%

Composite rate = [Fixed rate + 2 x Semiannual inflation rate + (Fixed rate X Semiannual inflation rate)]

Composite rate = [0.0100 + 2 x 0.0285 + (0.0100 X 0.0285)]

Composite rate = [0.0100 + 0.057 + 0.000285]

Composite rate = [0.067285]

Composite rate = 0.0673

Composite rate = 6.73%

It was the huge jump in rate of change in the CPI in September that led to the new rate of 6.73% that was established Nov. 1.

But at the end of March, the unadjusted CPI stood at 199.8, up only 1 point from the previous 198.8. So doing the complicated math described above, it appears that the "semi-annual inflation factor" will be only 1% starting May 1.

Add that 1% to the base rate of 1%, and it looks like Series I bonds will pay only about 2% starting Monday and for the following six months!

Of course, if you have older I-bonds with a higher base rate, you'll get your new six-month rate by adding the 1% inflation factor to your base rate, plus a small "fudge factor" that recognizes you've held those older bonds. The actual rates will be posted at the Treasury Web site.

One more important note: If you buy I-bonds today at the current 6.73% rate, you'll keep earning that rate for the next six months. Then the rate on your bonds will drop to the expected 2% rate for the following six months. In fact, if current rising energy prices contribute to another big CPI jump when rates are reset on Nov. 1, you'll still be stuck earning that low 2% for the full six months.

You can't play the interest rate game with these bonds by selling when rates drop. You must hold I-bonds for at least one year before cashing them in. And if you redeem them before five years, you'll lose three months' interest!

Bottom line: Series I bonds are for long-term holders. Eventually, you'll get the benefit of all those six-month adjustments and you'll keep up with inflation. But starting May 1, the Treasury Department is going to have a lot of explaining to do. And that's The Savage Truth.