You may remember that last April I bought some I Series Savings Bonds that promised to pay 6% interest, though not for another six months. It turned out to be a great investment, not just because of the high interest rate, but because it prevented me from investing that money in the stock market, which I would have done otherwise, what with me being tapped out by October when the market was still pretty far off the bottom it hit in November and well before falling to new lows just last month.
By November I was earning 6.07% interest and starting next month I will be at 6.15%. This is because I bought the bond in April and so I am lagging the actual inflation rate by six months while also earning a fixed rate of 1.2% (the fixed rate dropped to 0% a few days after I bought my bond, but I am locked in at 1.2% for the life of the bond plus inflation; it is now 0.7% and due to change again May 1).
The latest Consumer Price Index was released yesterday and it showed a negative inflation rate during the past year for the first time since 1955. It was pretty small, just -0.38%. But during the last six months, which is what the Treasury Department uses to calculate interest rates on I Series Savings Bonds, it is down 5.55% (the website Savings Bond Advisor keeps up with all of this). This means that when the -5.55% inflation component is combined with my 1.2% fixed return, I would actually lose money except that savings bonds are guaranteed not to go negative. Since I am lagging the market, I won’t start “earning” 0% interest until November. The nice thing about that is it gives me a great excuse to sell the bonds in January, forfeiting 3 months of interest as a penalty for cashing the bonds before 5 years (thus a penalty of $0).