Rates rise on inflation-adjusted U.S. savings bonds

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The rebound in oil prices since March has had one beneficial side effect for savers: Interest rates will rise on Series I U.S. Savings Bonds, which earn returns adjusted for the inflation rate.

Series I bonds bought between Nov. 1 and May 1 will earn an annualized interest rate of 3.36% in their first six months, up from the zero earnings rate on newly issued bonds in the previous six months, the Treasury Department said today.

Series I bonds earn the combined total of their fixed annual rate, which is set for the 30-year life of the bonds, and the inflation rate as measured by the consumer price index. The inflation adjustment is recalculated every six months for new and outstanding bonds.

The new fixed rate on Series I bonds is 0.30%, an increase from the 0.10% fixed rate on bonds sold in the previous six months. So the government got a little more generous with the part of the return that it controls.

The inflation component will provide an annualized return of 3.06% on new I-bonds in their first six months after issuance, as well as on previously issued bonds as they adjust. Add the 0.30% fixed rate to 3.06% to get the total return of 3.36% on newly issued securities.

The surge in oil prices since mid-February pulled the consumer price index higher through Sept. 30. By contrast, plummeting oil prices had helped drive the CPI down in the six months through March. With the CPI negative for that period, Series I bond returns when adjusted May 1 paid no inflation adjustment -- the first time that had happened for any six-month period since I bonds were launched in 1998.

Still, I-bond investors are guaranteed that their returns can never fall below zero, even if the CPI were to decline again.

I bonds were far more attractive a decade ago, when the Treasury was offering fixed rates as high as 3.6%. Even so, if you think inflation will revive in the next few years thanks to the government’s massive effort to reflate the economy, I bonds still would offer a way to preserve your purchasing power by rising in line with the CPI.

Owners of previously issued I bonds can see their new earnings rates in a chart provided on savings-bond-advisor.com.

Also today, the Treasury said Series EE bonds issued in the next six months will earn 1.2% a year for the life of the security, up from 0.70% on EE bonds issued in the previous six months.

-- Tom Petruno