Why are I bonds rates higher than CD rates

[ray.james]

Why I bonds yield almost 1.5 percent higher than CD rates, with the risk being the same.
The CD rates are backed by FDIC, which is full faith of US government. Any reasons for this disparity.

Also feel free to add any inputs to my assumption here - "risk is almost the same"

[BYUvol]

How does I bonds yield so much almost 1.5 percent higher than CD rates while the risk is almost the same.
The CD rates are backed by FDIC which is full faith of US government which is pretty much same as the I-bonds. Any reasons for this disparity.

Also feel free to add any inputs to my assumption here - "risk is almost the same"

CDs track nominal interest rates, I-Bonds track CPI.

If we were to enter a deflationary period, CDs would seem much better than I-bonds which would yield 0%.

[Mel Lindauer]

How does I bonds yield so much almost 1.5 percent higher than CD rates while the risk is almost the same.
The CD rates are backed by FDIC which is full faith of US government which is pretty much same as the I-bonds. Any reasons for this disparity.

Also feel free to add any inputs to my assumption here - "risk is almost the same"

Probably because most CD investors don't understand the meaning of "real return". Rather, they look at nominal return and think they're doing just fine, despite the fact that after inflation, they're actually losing spending power, and that's what really matters.

And, despite the fact that both CDs and I Bonds are basically risk-free, remember that I Bonds are both tax-deferred and free from state and local taxes. And they can be used, tax-free, for qualifying educational expenses. CDs don't offer these benefits.

[HueyLD]

And, despite the fact that both CDs and I Bonds are basically risk-free, remember that I Bonds are both tax-deferred and free from state and local taxes. And they can be used, tax-free, for qualifying educational expenses. CDs don't offer these benefits.

All true except that the annual purchase limit is way too low for many BHs.

[Mel Lindauer]

And, despite the fact that both CDs and I Bonds are basically risk-free, remember that I Bonds are both tax-deferred and free from state and local taxes. And they can be used, tax-free, for qualifying educational expenses. CDs don't offer these benefits.

All true except that the annual purchase limit is way too low for many BHs.

So true! Ah, for the "good old days" when you could buy $30k per SS# AND get 3.0, 3.3, 3.4 and 3.6% fixed rates to go along with the inflation adjustment.

[Grt2bOutdoors]

And, despite the fact that both CDs and I Bonds are basically risk-free, remember that I Bonds are both tax-deferred and free from state and local taxes. And they can be used, tax-free, for qualifying educational expenses. CDs don't offer these benefits.

All true except that the annual purchase limit is way too low for many BHs.

So true! Ah, for the "good old days" when you could buy $30k per SS# AND get 3.0, 3.3, 3.4 and 3.6% fixed rates to go along with the inflation adjustment.

I remember those days....alas, I didn't have 30K to spend back then. Still, when I view them, I can't believe how fast they've grown.

[#Cruncher]

How does I bonds yield so much almost 1.5 percent higher than CD rates

Ray, your question seems to imply that there is just one I Bond rate and one CD rate. But neither is so. In the case of an I Bond the initial rate depends on when it's purchased; and then it changes every six months in line with the Consumer Price Index. This is explained on TreasuryDirect's web page, I Savings Bonds Rates & Terms.

For example, if you bought an I Bond last April you'd be earning an annual rate of 3.06% for the first six months. Then it would drop to 2.20% for the six months beginning in October. And it would earn yet a different, yet to be announced, rate for the six months beginning April 2013. (See: $100 I Bond with 0.00% Fixed Rate Purchased April 2012.)

[Kevin M]

Not sure where you're getting your numbers. Back when I made my last I Bond purchases (earning 2.2%), I was able to get 2.5% on 5-year to 7-year CDs. Rates have dropped since then, but you can still get 2% on a 7-year CD. Next, I don't know what I'll be earning on the I Bond in the future, since it depends on inflation and changes every six months; it may be more than the CDs I bought, it may be less. Also as already mentioned, the annual purchase limits severely limit the use of I Bonds for some of us. Also, I Bonds cannot be held in a tax-advantaged account, while CDs can be held in an IRA.

Don't get me wrong: I Bonds are great, and I have maxed out my purchase of them the last two years. It's just not an either-or comparison between I Bonds and CDs. They each serve a purpose.

Kevin

[ray.james]

Thanks for the thoughts. I am surprised by how many less people know about I-bonds in real world. This is the only place where I read them, apart from magazines/books. This almost gives an illusion that no one thinks they are good instruments for savings. I just love them and use them off as emergency funds.