The Series I bond inflation component is based on the difference between the March and September levels of the CPI-U. The September level of 215.969 will be the base for next inflation component. If inflation over the next five months matches October's inflation, the next rate announcement would be 1.16%..

For TIPS, the outstanding principle is adjusted up or down, using a daily index, to compensate for inflation. Today's inflation announcement will be applied to TIPS next month. Expressed as an annual rate, next month's TIPS inflation adjustment will be 1.16%.

The red line on the following graph shows the level of the CPI-U for each month since Series I bonds were introduced.

The blue lines in the graph are each six-months long and begin on their left end in March or September and end on their right end the following September or March.

The up-and-down space between the blue lines represents the change in the CPI-U during the six-month period.

The percentages on the graph indicate the change, expressed as an annual rate, for each six-month period. These are the same percentages the Treasury uses to calculate composite Series I bond interest rates for these periods.

When the inflation component goes negative, as it did in the September 2008 - March 2009 period, it can wipe out an I bond's fixed rate. However, an I bond's composite rate can't go below zero, no matter how deeply the CPI-U dips. This gives I bonds an advantage over the Treasury's big-boy inflation security, TIPS, which do decline in value when the CPI-U change is negative.

It's clear from the questions I receive that many I bond investors don't understand that the rates earned by their I bonds change every six months based on the inflation rate.

For the curious, here's complete information on how I bond interest rates are determined.

The CPI-U uses the price levels of 1982-1984 as its base of 100.

Let's take a look and see if they're right. The following figure shows the results of investing an equal amount each month in both Series I Savings Bonds and the Vanguard 500 Index fund.

The graph begins when Series I Savings Bonds were introduced in September 1998 and has been updated through November 2, 2009.

The thin, black line shows how much money has been invested. It goes up very steadily because an equal amount of money is added each month. This month, it's at 135. In other words, the total amount invested is whatever equal monthly investment you choose times 135.

The upper blue line is the total value of the Series I Savings Bond investment. Note that this line never goes down. This month it's 183.85 times the monthly investment. This is 36.2% more than the total amount invested.

The red line that goes both up and down is the total value of the stock market investment, including reinvested dividends. This month it's at 133.39 times the monthly investment, up from last month's 130.37. This is 1.2% less than the total amount invested.

Because of the ongoing financial crisis and recession, if you need to cash your stock investment now you'll not only get back less than the I bond investment, you'll get back less than you put in. The same thing happened between 2001 and 2003.

At any rate, no matter what this graph says, don't buy Savings Bonds expecting to outperform stocks.

Buy Savings Bonds because you can't get back less than you put in. They make a great foundational choice for the low-risk portion of your investment portfolio.

That said, it's clear that people who tell you that a stock investment always outperforms an investment in Savings Bonds don't know what they're talking about.

• Nov 2, 2009 - Los Angeles Times - Rates rise on inflation-adjusted U.S. Savings Bonds - Tom Petruno
• May 4, 2009 - USA Today - Inflation-adjusted Savings Bonds hit 0% rate for first time - Sandra Block
• May 2, 2009 - Wall Street Journal - 'I Bond' Payments Get Wiped Out - Jane J. Kim
• May 1, 2009 - The Oregonian - I-Bond rate at 0% but don't panic or redeem just yet - Brent Hunsberger
• December 17, 2008 - Forbes - Are savings bonds a safe bet as gifts? - Erin Conroy
• December 10, 2008 - Dow Jones Newswire - Getting Personal: How Deflation Would Affect TIPS, I-Bonds - Ian Salisbury
• October 28, 2008 - Wall Street Journal - Here's One Safe Haven With Attractive Yields - Jane J. Kim
• May 2, 2008 - Baltimore Sun - Time to buy an I bond has passed - Eileen Ambrose
• April 29, 2008 - Baltimore Sun - Price rise good for I bond investors - Eileen Ambrose
• April 22, 2008 - USA Today - Now would be good time to invest in I Bonds - Sandra Block
• April 20, 2008- Wall Street Journal - Buy Series I Savings Bonds Before May Day - Emily Green
• April 17, 2008- Wall Street Journal - Inflation-Linked Bonds May Offer Inviting Rate - Jane J. Kim
• April 17, 2008- St. Louis Post-Dispatch - An opportunity in I bonds - David Nicklaus
• March 3, 2008 - Christian Science Monitor - Options few when U.S. Savings Bonds Mature - Steve Dinnen
• December 4, 2007 - San Francisco Chronicle - Treasury takes new whack at savings bonds - Kathleen Pender
• November 4, 2007 - Providence Journal - Savings bonds offer a safe harbor - Neil Downing
• May 5, 2007 - Wall Street Journal - Cashing In Matured Savings Bonds May Be Best - Kelly Greene
• April 30, 2007 - Christian Science Monitor - Asset allocation for seniors, and what are the taxes on $1.9 million in savings bonds? - Steve Dinnen
• November 2, 2006 - Wall Street Journal - I-Bond Rates Are Raised to 4.52% - Jane J. Kim
• October 23, 2006 - USA Today - Inflation-adjusted Savings Bonds could look more lackluster soon - Sandra Block
• October 11, 2006 - Christian Science Monitor - Advice on opening a Roth IRA, digging out of debt, and US Saving Bonds rules - Steve Dinnen
• October 2, 2006 - Christian Science Monitor - How is the base rate figured on the Series I US Savings Bond? - Steve Dinnen
• October 1, 2006 - Chicago Tribune - Keeping stock of savings bonds yields benefits - Andrew Leckey
• July 8-9, 2006 - The Wall Street Journal - Buying Treasuries Online: How Safe Is It? - Eleanor Laise
• June 5, 2006 - Christian Science Monitor - No simple strategy to avoid taxes on US Saving Bonds - Steve Dinnen
• May 22, 2006 - Christian Science Monitor - A.W. in Escondido asks… - Steve Dinnen
• May 21, 2006 - Kansas City Star - Taking stock of bonds - Gene Meyer
• May 2, 2006 - San Francisco Chronicle - I bond rates get slashed - Kathleen Pender
• May 1, 2006 - Providence Journal - Before you buy savings bonds, look at the rates - Neil Downing
• April 28, 2006 - USA Today - I Bonds' interest rate will get that sinking feeling May 1st - Sandra Block
• April 24, 2006 - Christian Science Monitor - Does Series EE have better returns than Series I? - Steve Dinnen
• April 17, 2006 - Christian Science Monitor - Time horizon will help you determine when to make a move on I bonds - Steve Dinnen

Note that doing the rollover will earn only an extra $3 per $1,000 invested per year. For I bonds issued between June and October you'll also gain a bit by limiting the number of months your bond investment earns 0% to less than six.

Combine that with the annual I bond investment limit of $5,000 paper and $5,000 electronic - yes, rollovers count against the investment limit - and the maximum benefit a single individual can get from a rollover is $30 year. But that is $900 over the 30-year life of an I bond.

If you're going to do this, you should do it while your three-month interest penalty for redeeming before your bond's 5th anniversary is zero. You'll get that low penalty because your I bonds have been or are now earning a 0% rate.

If you want to do a rollover, I bonds issued in:

• May, June, July, and August 2008 can be rolled over without penalty in November 2009
• September 2008 can be rolled over without penalty in December 2009
• October 2008 can be rolled over without penalty in January 2010 - or, if you want the purchase of the new I bonds to go against your calendar year 2009 limit, you can rollover in December 2009 at the expense of a one-month interest penalty of $4.40 per $1,000.

Keep in mind you'll also get a 1099-INT for the interest your I bonds earned between the time you bought them in 2008 and the time you cashed them in to purchase new ones. The tax on this interest will be less than the interest itself, so you'll have a bit left over.

The spread between the I bond fixed base rate and the 10-year TIPS dropped to 111 percentage points, the lowest in two years and less than half the spread of a year ago. The 10-year TIPS rate on Friday was 1.41%.

The increased rate may be a sign that Obama Treasury appointees will be a bit friendlier to Savings Bond investors than the Treasury appointees at the end of the Bush administration were.

The rate on new EE bonds will be fixed at 1.20% for 20 years. It only makes sense to invest in these if you can hold them for 20 years, at which point their double-value guarantee will give you a rate of 3.50%.

To determine what your own I bonds will earn during their next six-month rate period, see the following table.

Keep in mind that the new interest rate for your I bonds will not necessarily begin in November. Instead, new rate periods begin every six months starting with the month in which your I bond was issued. So, for example, an I bond issued in July begins new rate periods in July and January.

These Savings Bonds are also guaranteed to double in value in 20 years, which is an implied interest rate of 3.50% if you can hold on that long. When the fixed-base rate is above 3.50%, the bonds will double in value faster than the guarantee.

When the fixed rate is significantly below 3.50%, the redemption value of an EE bond will explode on its 20th anniversary. For example, a $1,000 EE bond investment at a 0.70% fixed rate will have a redemption value of about $1,149 after 19 years and 11 months and a redemption value of $2,000 the following month.

Investing in these low fixed-rate Savings Bonds only makes sense if you plan to hold them for 20 years.