Return on I Bonds will fall to 1.74% for next six months

Portion of savings bond

The return on inflation-adjusted savings bonds is going to be nearly a half-point lower over the next six months.

Based on the latest Consumer Price Index released today, the U.S. Treasury will likely set the total return on Series I Savings Bonds for the next six months at 1.74%.

That’s still more than you can earn with the huge majority of certificates of deposit or any money market or savings accounts.

But it continues a steady decline in the return on these popular government bonds over the past couple of years.

That new rate is down from the 2.2% that the Treasury has been paying since March 2012. The six months before that it was 3.06%, and from March 2011 to November 2011, you could have earned 4.6%.

The total return is calculated by adding the inflation rate, which changes every six months, to the fixed rate. The fixed rate is based on when your bond was purchased and does not change for as long as you own the bond.

The Treasury will also likely keep the fixed rate at 0%. The fixed rate has been zero since November 2010.

So the inflation rate will be the total earnings rate for Series I Bonds sold from Nov. 1 through April 30.

That rate is calculated by the changes in the Consumer Price Index and shows the annualized inflation rate over the past six months.

Here's how Treasury figures the inflation component.

The CPI-U for September 2012 was 231.407, and the CPI-U for March 2012 was 229.392. That represents a six-month increase of 0.88%. To get the annualized rate, you multiply by two.

The yield on these savings bonds may be falling, but only the top deals on long-term CDs can beat them.

The highest returns on nationally available 12-month CDs, for example, are just over 1%.

To match the new yield on I-Bonds, you’d have to get one of the absolutely best 5-year CD rates in the country. They’re running from 1.70% APY to 1.86% APY this month.

Savings bonds also have several tax advantages over CDs:

You can buy savings bonds at TreasuryDirect and have them issued electronically to your account.

The Treasury Department also stopped issuing paper bonds at the start of 2012. The only exception is that you can buy up to $5,000 in paper bonds using your tax refund by filing IRS Form 8888.

At the website, you can buy as much as $10,000 in Series I Bonds and another $10,000 in Series EE bonds.

All Series I Bonds and Series EE Bonds purchased electronically are issued at face value. So if you pay $1,000 for a bond, it is immediately worth that much.

Paper Series EE bonds are issued at half their face value. You will pay $500 for a $1,000 bond, but it will not be worth its face value until it matures.

Do be aware that you'll have to hold onto these bonds for a while. To avoid any early-withdrawal penalty, you'll have to hold onto the bonds for five years. Redeem them before that, and you'll forfeit the three most recent months' worth of interest.