Dedicated to Deposits: Deals, Data, and Discussion

New I Bond Composite Rate of 4.52% - Fixed Rate Remains at 1.40%

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This morning the Bureau of the Public Debt issued new earnings rate for the Series I Savings Bonds. The fixed rate remains the same at 1.40%. The new inflation component increased from 1.0% to 3.10%. This results in a composite rate of 4.52% which will be in effect until May 2007 for new I Bond purchases.

This is better than the composite 2.41% rate that was in effect the last 6 months. Inflation returned to a more normal rate. However, the fixed rate still remains rather low. I've been hoping to see the fixed rate return to 2% or higher. Between 1999 and November of 2002, the fixed rate had been at 2% and higher. Before November 2001, it had been 3% and higher. But in the last four years it has been around 1% and 1.6%. The table below shows the full history of the I Bond fixed and inflation components (based on this data) and the fed funds rate (based on this data).

Date Fixed Infl Targeted
Rate Cmp Fed Funds
May 2008 0.00% 4.84% 2.00%
Nov 2007 1.20% 3.06% 4.50%
May 2007 1.30% 2.42% 5.25%
Nov 2006 1.40% 3.10% 5.25%
May 2006 1.40% 1.00% 4.75%
Nov 2005 1.00% 5.70% 4.00%
May 2005 1.20% 3.58% 2.75%
Nov 2004 1.00% 2.66% 1.75%
May 2004 1.00% 2.38% 1.00%
Nov 2003 1.10% 1.08% 1.00%
May 2003 1.10% 3.54% 1.25%
Nov 2002 1.60% 2.46% 1.75%
May 2002 2.00% 0.56% 1.75%
Nov 2001 2.00% 2.38% 2.50%
May 2001 3.00% 2.88% 4.50%
Nov 2000 3.40% 3.04% 6.50%
May 2000 3.60% 3.82% 6.00%
Nov 1999 3.40% 3.52% 5.25%
May 1999 3.30% 1.72% 4.75%
Nov 1998 3.30% 1.72% 5.00%
Sep 1998 3.40% 1.24% 5.50%

Even with the special tax treatment of I Bonds, it's hard to get excited with 4.52% when we can get a savings account paying 5.50%. For info on the benefits of I Bonds, please refer to this previous post.

Update 12/9/07: Updated I-Bond and Fed Funds rates for 2007.

Comments
13 comments.
Comment #1 by Finance Junkie (anonymous) posted on
Finance Junkie
I'll start re-directing money into I-Bonds when the fixed rate raises to 2.5%. I'll start really piling into them when the fixed rate cracks 3.0%

My mom has some from the early 2000s with fixed rates at 3% or above (I forget exact year and rates).

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Comment #2 by Anonymous posted on
Anonymous
If the Democrats win the election next week, I'll start look into tax-sheltered investments like I-bonds......Grin.....

That's about the only advantage I see outta I-bond investments at the moment: delaying paying taxes til whenever you decide to cash your bonds out, which can be as long as 30 years.

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Comment #3 by Anonymous posted on
Anonymous
I wonder when the interest is posted in the ELOAN money market. Nothing posted in mine yet...

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Comment #4 by ThinkSmart (anonymous) posted on
ThinkSmart
It's not an attractive rate at all. Guess we'll have to wait to see...

Anon- Eloan interest posts monthly, if its been longer than a month contact E-Loan using their secured msg service and ask about you statement date.

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Comment #5 by Anonymous posted on
Anonymous
Your remarks are spot on, Banking Guy. I swallowed the penalty and cashed in a bunch of these turkeys this morning. Of course my most recent interest rate (circa 2% per annum) was so low the three month penalty was only 0.5%, so it didn't hurt too bad. And therein lies a lesson and warning for all: the early cashout penalty you pay is a function of the MOST RECENT six month interest rate. So if interest rates go up, and you decide down the line (but prior to five years of holding) to cash out, your penalty will also have gone up. So I cashed out this morning and collected twelve month's interest minus the penalty. This with the funds only having been invested for eleven months, since the end of November, 2005. Still I got skunked. But at least I have my money back and can invest it right now at 6% APY or better. And I have learned my lesson.

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Comment #6 by Banking Guy (anonymous) posted on
Banking Guy
That 1% inflation rate last May was a disappointment. Thanks for pointing out that you can now redeem I bonds that you purchased last Novemer. Also:

For those who have purchased I Bonds in October 2005 and earlier, refer to this post for the best times to redeem the I Bonds.

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Comment #7 by ThinkSmart (anonymous) posted on
ThinkSmart
On the E-loan Comment. My statement was mae available yesterday and I saw that I earned some interest but it has not been reflected in my account. I have contacted them and will let you know what I find out!

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Comment #8 by Banking Guy (anonymous) posted on
Banking Guy
About E-LOAN's monthly interest. I see the same thing: e-Statement shows interest, but it doesn't show in the account.

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Comment #9 by Weiwen Ng (anonymous) posted on
Weiwen Ng
does anyone think the fixed rate is ever going to get up into the 2.5 to 3% range again? my guess is that if it ever does, it's going to be a long, long time. the Treasury has a lot of better ways to fund their operations than selling I-bonds. and besides, their duty is to fund the government's operations, not to line citizens' pocketbooks.

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Comment #10 by Banking Guy (anonymous) posted on
Banking Guy
Yup, I think it is going to be a long time before we see 2.5% or 3% fixed rates.

Last May would have been a good time for the Treasury to bump the fixed rate to 2% when the inflation rate was only 1%. They chose only a modest 0.4% increase.

I've also wondered if they get any pressure from banks regarding the fixed rate. The banks have less competition when the I bond rate is low.

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Comment #11 by Anonymous posted on
Anonymous
I know this is a long delayed comment since the last few, but here is my take. I think it will be a long time before we see fixed rates go to 3%. I think the 3% days were teaser rates to get investors to notice. When stocks were doing double digit gains, few people thought I bonds with 3% fixed were special. My own strategy is simple. I buy $1,000 worth of paper I bonds per month, no matter what rate (fixed + variable). But if the fixed rate goes up, I add a bit more investsment in electronic I bonds at Treasury direct for my monthly investment than the previous 6 months. If the fixed rate goes down, I decrease my monthly purchase of electronic I bonds and invest my money elsewhere. I was lucky enough to grab the opportunity in 2001 and buy a lot of I bonds at the 3% fixed rate. They perform beautifully, especially when the variable rate is substantial, like these current 6 months! I bought a few I-bonds in 2002 also. But I've been buying lots of them monthly for the last 24 months. I stopped buying EE bonds when the guaranteed rate decreased. Instead of those, I buy T-bills.

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Comment #12 by Banking Guy (anonymous) posted on
Banking Guy
You make a good point about the high fixed rates when the I Bonds first started. It was likely a teaser to get attention for the I Bond. However, long-term CD rates were much higher before 2001. So it could be a combination of the two.

You have a good strategy. I really like the tax deferred feature of the I Bond. The ability to choose when to redeem them and pay federal taxes is a huge benefit.

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Comment #13 by Hesh (anonymous) posted on
Hesh
Why did the Pentagon Credit Union Bankrate.com rank go down to 3 stars. What does 3 stars mean? average? problems?

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