As I described last month, The inflation component was already known based on the previous CPI numbers. However, the fixed rate component is determined secretly by the Treasury. The increase of the fixed rate from 0.10% to 0.30% is a small step in the right direction. I don't know why the Treasury lowered the fixed rate to only 0.10% last May when the inflation component was a negative 5.56%. The 0.30% fixed rate is still low compared to past fixed rates. Before 2008 the fixed rate had always been 1% or higher, and before 2001 it had always been 3% or higher.
The new composite rate of 3.36% is competitive when compared to current long-term CD rates. However, it's important to understand that this I Bond rate will vary every six months from the date you purchase the I Bond. The new inflation-based component will be added to the 0.30% fixed rate. With the possibility of future high inflation, it seems reasonable to assume we won't see many periods with rates below 3%. However, as we learned this year, the inflation component can go negative and wipe out the fixed rate resulting in a zero percent composite rate. Below are some of the important I Bond features that need to be considered if you're comparing I Bonds to CDs:
- Can't be redeemed within 12 months of issue date
- Lose 3 months interest if redeemed within 5 years (last 3 months)
- Fixed rate component remains for life of bond (up to 30 years)
- Inflation-based component changes every 6 months from issue date
- New rates announced every six months on November and May 1st
- I Bond rate can never be negative (but it can be zero)
- Federal tax can be deferred on interest until bond is redeemed
- Interest is exempt from state and local tax
- Some or all interest is tax exempt when used for educational expenses
- $10,000 maximum of I Bond purchases per year, per SSN ($5K online and $5K paper) - total was $60,000 before 2008 (Treasury's press release).
Thanks to the reader who mentioned these new I Bond rates in the bank deals hub page.
Update: The Savings Bond Advisor mentions one possible reason why the fixed rate increased:
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.
Also, the post mentions EE bonds:
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%.