Savers who turn to Series I savings bonds could earn nearly three times the national rate average for 1-year CDs. In a savings environment where interest rates are falling, a one-year investment that earns an effective 1.56% APY is attractive — and it could be found with I bonds that are purchased in the next two weeks.
New consumer-inflation data released today allows savers to determine the approximate return of a one-year investment in I bonds. The composite earnings rate for the bonds has a component that change in six-month inflation rates.
According to the Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) was 231.407 in September, up from 229.392 in March. During the last six months, inflation clocked in at 0.878 percent.
Using the formula by the Treasury Department to calculate I-bond composite rates, the November 2012 composite rate will be at least 1.76% — lower than the May 2012 composite rate of 2.21%.
The Treasury uses inflation data from March and September to determine the May and November I-bond rates, respectively.
Individuals who invest in I bonds before Nov. 1 will lock in the May composite rate of 2.21% for six months and get a November composite rate of at least 1.76%. If they are redeemed after 12 months, bondholders earn an effective 1.56% APY (already accounts for 3-month interest penalty on I bonds redeemed within five years of purchase).
According to bank data tracked by MyBankTracker, the national rate average for 1-year CDs is 0.55% APY. The top nationwide 1-year CD rate is 1.10% APY, available from Bank of Internet with a minimum deposit of $1,000.
I bonds purchased between Nov. 1, 2012 to April 30, 2013 will earn at least 0.88% APY if they are redeemed after 12 months (assuming that the composite rate of the subsequent six months is 0%).
Given that the Federal Reserve expects interest rates to remain extremely low until mid-2015, diversifying savings with I bonds is one way that savers can boost their interest earnings during this period of low rates.
Individuals can purchase up to $10,000 in I bonds per calendar year. Savers can only purchase Series I savings bonds through TreasuryDirect.gov (learn more about how the I-bond composite rate is calculated).