The news from the Bureau of the Public Debt regarding the current I-Bond wasn’t pretty. While I-Bonds had been paying 6.73% during the previous period (November 1, 2005 to April 30, 2006), the new rates plunged to a measly 2.41%. I had written that I believed that something like this would happen so it really wasn’t much of a surprise, but I bet a lot of people who saw that 6.73% rate aren’t quite as happy as they were when they purchased the I-Bond. The new I-Bond includes a fixed rate of 1.4% (up from 1.0%) and a variable rate of 1.0%. Since you can easily find online banks that are paying above 4% (with sign up bonuses to boot: Emigrant $20 Bonus and ING $25 Bonus), I-Bonds are not looking like a good place to invest these days.

I purchased an I-Bond for my niece during the May 1, 2005 to October 31, 2005 period when it was paying a bit over 4%. I also got the 6.73% so what I’ll do is when the year is up (a requirement of the I-bond), I’ll wait two months and 1 day (to hit the third month) and redeem it. There is a 3 month penalty for redeeming the I-Bond early so I’ll wait the 2 months and 1 day to have the penalty take the 2.21% (the base rate was 1.2% when I purchased it) interest off instead of 3 months at 6.73% interest. It didn’t work out quite as well as I hoped, but it will still average to a decent rate over the year.

For those who purchased during the last six months, the rate is even worse since the fixed portion was only 1.0% during the November 1, 2005 to April 30, 2006 period. The rate for for the next six months drops to 2.01%.

While the raising of the base rate to 1.4% is better than the previous 1%, it is a lot less than a lot of people had been hoping (including myself) and doesn’t really make purchasing the I-Bonds a “hidden opportunity” that some had hoped for. It looks like the best option is to wait until next November to see what changes occur. If you currently have I-Bonds that meet the 1 year holding period (like my niece) with a low fixed rate, you’ll want to consider redeeming them. (Note: a 3-month interest penalty applies if you sell the I-Bond before 5 years and Federal tax will be applied for the year you redeem any I-Bonds for the year you redeem I Bonds)

I have updated all the information on our satellite site I-Bond Rate if you are seeking more information on I-Bonds.