It looks like the Series I Savings Bond  may be competitive again. After a few pathetically low rate adjustment cycles, we can blame low inflation and the economic recession for that, it seems as though the variable rate for Series I Savings Bonds will once again make them competitive with savings account rates  again.
To recap, Series I Savings Bond rates are a combination of a fixed rate, which is for the life of the bond, and a variable rate, which is adjusted for inflation as measured by the CPI-U. The equation itself is a little more complicated but you can use this Series I bond rate calculator  to help you do the math (the equation isn’t very hard, it’s just hard to explain).
How are we able to predict the rate in May? Easy, the CPI-U we will use is for March and is announced in April (this time it was April 15th). We simply calculate the change from September 2010 (announced in October 2010) and March 2011 and know what the variable interest rate is.
New Variable Rate
The September 2010 CPI-U was 218.439 and the March 2011 CPI-U was 223.467, according to the BLS . Some math tells us the increase was 2.302% over the six months, which comes out to 4.604% for the year. If you own a Series I Savings bond, you know your fixed rate and you can calculate your effective rate for the coming period (adjusting for when you purchased the bond). It’s harder to predict what the fixed rate on new bonds will be but we do know that the current fixed rate on Series I bonds is 0%.
When To Buy?
There’s one trick to Series I Savings Bonds that you should know – if you buy it at the end of the month, you get credit for the full month. If you were to buy the bond on April 30th, it’s as if you purchased it on April 1st. This means that you can keep the savings in a bank, accruing interest, and then pull the trigger at the end of the month and still get credit for owning the bond for the entire month.
Should you buy the bond in April? If you buy the bond in April, you’ll get a 0% fixed interest rate for the life of the bond and the 0.74% variable interest rate. The real interest rate works out to be 0.74% since the fixed rate is 0%. You’ll have that for six months before you get the next interest rate of 4.60%, that’s based on how Series I bonds work. If you wait until May 1, or even better May 31st, you’ll get an unknown fixed rate plus the 4.60%, which is probably a better bet.
If I was looking to buy a bond and was faced with that decision, I’d buy on May 31st. Also remember that your annual limit, per person, is $5,000 in paper bonds (which you buy at the bank) and $5,000 in electronic bonds (which you can buy at TreasuryDirect.gov ). If you buy paper, I recommend converting your Series I bonds to electronic .
I still have the bonds I purchased back in April of 2008 , when the fixed rate was a whopping 1.30%!
(Photo: karen_d )