I Savings Bonds set to soar in May

Closeup of savings bond

There will be some good news for savers coming soon from the Treasury Department.

Rates on Series I Savings Bonds are about to move considerably higher, pushing back above 4%.

That's because inflation has kicked up over the past six months, primarily because of higher oil and food prices.

The government's inflation-adjusted savings bonds will reflect that when they reset on May 1.

The yield on new Series I issues will almost certainly eclipse the return on even the top-paying CDs, money market and savings accounts – at least for the next six months.

What is called the composite rate on the Series I is based on a fixed-rate set by the Treasury Department and the semi-annual inflation rate for the preceding six months.

When the return reset on Nov. 1, the government lowered the fixed rate from 0.20% to 0%.

Inflation for the previous six months, as determined by the Consumer Price Index, was just 0.37%.

Using the formula established for determining the return, that meant the annual yield for new bonds purchased since then has been 0.74%.

(Savers who hold older bonds with higher fixed rates earned a higher return.)

But according to the U.S. Bureau of Labor Statistics, the CPI rose from 218.44 in September 2010 to 223.47 in March 2011.

That's a semi-annual increase of 2.3%.

Plug that into the formula used to calculate the composite rate and the new annualized rate should be something like 4.6% over the next six months even if the Treasury leaves the fixed-rate at zero.

The owners of older bonds with higher fixed rates will earn even more.

You can cash Series I investments in after 12 months by paying a modest penalty of three months' interest. (After five years, there's no redemption penalty.)

With the best nationally available 12-month CDs paying 1.4%, you could probably buy a Series I bond in May, cash it out next spring, and still come out ahead.

You don't need a lot of money to take advantage.

They can be purchased online for as little as $25 from TreasuryDirect.

The drawback for many savers is that you can't move more than $5,000 per year per Social Security number.

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