The Treasury has raised the fixed rate component that goes into the calculation for the rates on Series I savings bonds. For the past three years, the fixed rate component has remained at 0%. This month, the Treasury increased the fixed rate component to 0.20%, while the six-month inflation rate component fell to 0.59%.Series I bonds issued from Nov. 1, 2013 to April 30, 2013 will earn a composite rate of 1.38%, which applies to bond purchase for six months, before a new composite rate is released and applied in the subsequent six months. Any bonds redeemed prior to the five-year mark will take a penalty of the last three months of interest.

Treasury Department Building

Tim Evanson / Flickr source

Assuming that the inflation rate in the next six months is 0%, Series I bonds purchased by April 30, 2013 will earn an effective 0.74% APY if they’re redeemed after 12 months of purchase.

Compared to the market-leading 1-year CD rates of at least 1.00% APY from some online banks, it would be unwise to redeem the Series I bonds if there was zero inflation in the next six months.

However, assuming that the inflation rate is unchanged in the next six months, bondholders are looking at an effective APY of 1.04% APY, if the bonds were redeemed after 12 months. With rising inflation, I bonds will appear more and more attractive.

Existing bondholders with 0% fixed rates will earn a composite rate of 1.18%.

To savers, the hike in the fixed rate for I bonds may come as a surprise, given that there has been no change in monetary policy by the Federal Reserve. The central bank says that it will continue to buy government securities to suppress interest rates but there is growing speculation that the Fed may reduce its bond-buying program in the near future.

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