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Treasury Announces New I Bond Rate of 3.36% - Fixed Rate of 0.30%

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The Treasury just released the new I Bond rates this morning. The new fixed rate is 0.30%. When combined with the new inflation rate of 3.06%, the total rate is 3.36%.

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).
For the official information, refer to the Treasury Direct website.

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%.

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Comments
9 comments.
Comment #1 by franco (anonymous) posted on
franco
good post

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Comment #2 by franco (anonymous) posted on
franco
good post

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Comment #3 by Anonymous posted on
Anonymous
At least I won't be giving an interest free loan to the US Treasury for the next 6 months. With an six figure investment in these bonds, anything above 0% will be appreciated.

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Comment #4 by Anonymous posted on
Anonymous
EE bonds at 1.20%.

Rate fixed for 20 years.

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Comment #5 by Uncle Fester (anonymous) posted on
Uncle Fester
The I-bonds I bought in June thru Oct. 2001 (with 3% fixed rate) are all in their 6-month period of 0% return now. This is the first such period since the inception of I bonds in 1998, and is something I don't ever expect to see again. The average interest rate (not including compounding) has been about 5.6%. Probably (and sadly) among my best-performing investments since 2001.

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Comment #6 by Anonymous posted on
Anonymous
The CPI-U, annualized, is added to the fixed rate. At -5.56% (-2.78% x 2) we've got 0% for six months, since the effective rate can't fall below 0%. If you are three months into your 0% period, you can withdraw "penalty free" -- except for the tax liability.

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Comment #7 by Anonymous posted on
Anonymous
Uncle Fester I have looked at my ledgers and found several long term CD's paying 7% up to 10% purchased between 2000 and 2001. Just looked and have few left. I have some at Flagstar still paying 7.76% until 2010, and at Capitol 1 paying 7.83% % 8.10% that will mature next year as well. Had some at Provident that matured last year paying 7.71%. National City did purchase Provident a few years back.

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Comment #8 by Anonymous posted on
Anonymous
I worked at a bank in the 80's and I remember typing up a CD for a customer that was for $100,000 at 15% for 15 years.

In those days there was not a big penalty for cashing in CD's and customers kept us busy changing their minds the following day or week as the rates went up. Spent a lot of time just doing CD's. In those days prime and interest rates could and would change several times during the week.

It was very time consuming figuring the interest due on the farm loans and business loans. I tried to get this done for the branch loans every Monday (in between customers) in case the customers came in to pay, Of course if they did not the figures were all wrong because penalty interest would apply then and that would change also but backdated. These loans were not on computer during those days at least at our bank. I remember figuring the interest for a golf course that was past due for several months. The machine tape was 32 feet long when I got thru. Had no time to double check the figures. Had 2 hours to get it done and had to back track on the calender to see when and what the prime was add the penalty and this loan was prime +2 and the prime changed every few days. A few days later my boss said that my figures were double checked and my work was perfect and bought the branch lunch to celebrate.

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Comment #9 by Anonymous posted on
Anonymous
I had great to good rates on I bonds I bought starting in 2000into 2007. When I wrote to the Treasury "why no interest" their response is below if anyone is interested in some hocas-pocas math.There is no interest posted on my acct for the Nov 09-through May10, so I hope come May this will change.


Hello,

The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate, which changes every six months.

The most recently announced composite rate of 0% for I bonds is the result of deflation. The annualized inflation during the previous six months prior to May 1, 2009, was -5.56%. This is the first deflationary period we've experienced since the inception of Series I Savings Bonds.

The regulations provide that if deflation more than fully offsets the fixed rate of return and produces a negative composite rate, the composite rate will not be reduced below zero. The earnings rate for I bonds will always be equal to or greater than 0.00%. The unprecedented rate of 0% will be in effect for the next six months for all I bonds entering their next semiannual earnings period from May through October 2009.

Additional information can be found at: www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

A Series I Savings Bond's composite earnings rate changes every six months after its issue date. This means there can be a delay of several months from the time of a composite rate announcement to the time that rate determines interest earnings for a bond. For example, the earnings rate for a Series I Savings Bond issued in March changes every March and September. New rates are announced each May and November.

If the bond is issued in: The new rate will be applied in:
January or July January and July
February or August February and August
March or September March and September
April or October April and October
May or November May and November
June or December June and December

Find out what your bonds are worth with one of our online calculators, the Savings Bond Calculator or the Savings Bond Wizard. Features include bond values for all denominations, current interest rate, next accrual date, final maturity date, year-to-date interest earned, and more.

The Savings Bond Calculator is available at: http://www.treasurydirect.gov/BC/SBCPrice

The Savings Bond Wizard is available at: http://www.treasurydirect.gov/indiv/tools/tools_savingsbondwizard.htm

Charlotte
Customer Service Assistant

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