01:00 AM EDT on Tuesday, May 2, 2006

There's good news and bad news for people who buy U.S. Savings Bonds: Rates on new Series EE bonds are up, but rates on new Series I bonds are down.

The U.S. Treasury said yesterday that Series EE bonds purchased now through October will earn interest at an annualized rate of 3.7 percent.

That's up from the 3.2-percent annualized rate that applied to Series EE bonds purchased between November 2005 and April 2006.

But the Treasury also had some bad news about Series I bonds: Those purchased now through October will earn interest at an annualized rate of 2.41 percent for the first six months you hold them.

That's down sharply from the 6.73-percent annualized rate that applied to Series I bonds purchased over the last six months.

So if you plan to buy some savings bonds any time soon, the Series EE bond may seem more attractive, because of its higher rate.

But the Series EE bond is not a slam-dunk, said Tom Weishaar, author of Savings Bond Alert (written under his pen name, Tom Adams).

Why? If you go with a new Series EE bond, you'll essentially get the fixed rate for as long as you hold it.

If you buy Series I bonds, however, the yield will vary over time, with inflation.

So it boils down to this: If you like your bonds straight up, with a rate that's easy to track, go with the Series EE bond; the EE bond you buy now will essentially give you the same fixed rate for at least 20 years (a new rate could kick in for the final 10 years). If you want some protection against inflation, go with the Series I bond.

Weishaar said he likes the Series I bond for new purchases. That's because new Series I bonds really give you two rates in one: a fixed rate for the bond's life, and a variable rate that changes with inflation.

Yesterday, the Treasury set the fixed rate on I bonds at 1.4 percent. That's up from the 1-percent fixed rate that applied to Series I bonds bought during the last six months.

Also yesterday, the Treasury set the variable rate for Series I bonds at an annualized 1 percent. That's lower than the old variable rate of 5.7 percent.

What happened? Remember that the variable rate is tied to inflation. The government calculates the Series I bond's variable rate based on the inflation rate for the previous six months.

When the Treasury set the last I bond variable rate, in November, it was an annualized rate of 5.7 percent, reflecting a spike in inflation.

The new variable rate for I bonds reflects a recent drop in inflation, based on the government's Consumer Price Index from September 2005 to March 2006, said Mckayla Braden, spokeswoman for the Treasury's Bureau of the Public Debt in Washington, which runs the nation's savings bond program.

Sorting all this out can get pretty confusing, so here's the key point to remember: If you buy a Series I bond now, you'll be guaranteed a return of 1.4 percent a year above inflation for as long as you hold it, up to 30 years.

That fixed rate of 1.4 percent "still isn't very high" compared with some of the fixed rates that older Series I bonds carry, said Weishaar, who also runs a Web site on savings bonds:

www.savings-bond-advisor.com

Still, he said, the fixed rate is "better than it's been."

Don't forget that you need not choose one or the other; you can buy both Series I and Series EE bonds if you like.

Savings bonds are attractive for a variety of reasons. One is that you don't have to be wealthy to buy one. (Series I bonds, for example, cost as little as $25 if bought online, or as little as $50 for paper bonds bought through banks and credit unions.)

Another reason is that the interest you earn doesn't get taxed until you cash in the bond. At that point, the interest is subject to federal income tax, but escapes state and local income tax.

Also, savings bonds are a handy, safe place to stash cash, especially for the conservative portion of your investment portfolio; they are backed directly by the U.S. government.

For more information about savings bonds, call toll-free at 1-800-487-2663 or 1-866-388-1776, or use these Web sites:

www.publicdebt.treas.gov

(Click on "Savings Bonds" on the left of the screen.)

www.treasurydirect.gov

TODAY'S TIP: When the Treasury posted new rates for savings bonds yesterday, it also issued a reminder that some bonds have stopped earning interest -- or will stop earning interest soon -- and should be cashed in.

For example:

Series E bonds issued from May 1941 through May 1976 have stopped earning interest.

All Savings Notes, issued from May 1967 through October 1970, have stopped earning interest.

Series E Bonds with issue dates from June 1976 through October 1976 will reach final maturity during the next six months and should be cashed in then.

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline@projo.com

Sorry, no personal replies; as many questions and issues as possible will appear here.