Finally, a Rate That Rates More Than a Yawn
The Treasury's I Bonds are paying 6.73%--for the next six months, anyway.
By Jia Lynn Yang

(FORTUNE Magazine) – The past five years have been lean times for savers. With interest rates hovering at historical lows, the yields on supersafe vehicles like money market funds and certificates of deposit have been negligible. But with the Federal Reserve now raising interest rates to a four-year high, savers are getting more intriguing deals. One particularly eye-catching opportunity is the U.S. Treasury--issued I Bond, which just saw its yield jump from 4.8% to 6.73%.

That's an impressive figure, especially compared with other low-risk options. For instance, the average five-year certificate of deposit and five-year Treasury bond will earn you roughly 4.5%. What accounts for the gap? Thank--or blame--rising oil prices. The I Bond, introduced by the government seven years ago, is inflation-protected, meaning the Treasury adjusts the bond's rate every six months to reflect changes in the consumer price index. And mainly because of the huge jump in energy costs, inflation has been climbing rapidly--the CPI rose 2.85% from March through September--propelling the I Bond's yield to its current lofty level.

But before you grab that rate, though, there are several factors to consider. For one thing, you can buy only $30,000 worth of I Bonds a year. You can't cash one in during the initial year, and if you redeem it in the first five years, you lose three months of interest. And the current payout may not last. The rate is based on two numbers: the semiannual inflation rate and a fixed rate of return that lasts the life of the bond. That fixed rate is only 1% right now, so if you think inflation will peter out, "a five-year CD is a better place to be," says Greg McBride, a senior financial analyst at "The highest-yielding CD will get you 5%," he adds. "If inflation is anything less than 4% over the next five years, it beats the I bond."

Of course, if inflation takes off, the I Bond will keep pace--a guarantee that few other investments offer. And the I Bond has other advantages over run-of-the-mill CDs. All the interest is exempt from state and local income taxes. Federal taxes can be deferred until you redeem the bond (you can hold one for up to 30 years). And if you use the proceeds for college tuition, all or part of the interest may be exempt from taxes (see for more details).