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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Treasury Announces New Series I Savings Bond Rate of 1.76%

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The Treasury just released the new I Bond and EE Bond rates. As I had calculated on October 16th, the new I Bond inflation rate is 1.76% which is down from 2.20%. The I Bond fixed rate remains at 0.00%.

The EE Bond rate has fallen from 0.60% to 0.20%. The EE bond fixed rate applies to a bond's 20-year original maturity. However, if EE bonds are held for 20 years, they are guaranteed to double in value which equals an annual return of 3.50%. With a rate of only 0.20%, the only reason I can see for buying EE Bonds is if you plan to hold them for 20 years. That might actually be a good deal if you're very pessimistic about future interest rates.

Hopefully, those who were interested in I Bonds made their 2012 purchases last month when we were able to know 12 months of the I bond inflation rate. Those who bought I bonds in April will receive 6 months of 2.20% and 6 months of 1.76%. Even if you plan to redeem them as early as possible, you will be able to get yields of around 1.68%. I described the calculation of this in my October 16th post.

For those who plan to buy I bonds with the current inflation rate of 1.76%, it's not as good of a short-term deal as the previous 6 months when the inflation rate was 2.20%. However, it's still a good deal when compared with alternatives like short-term CDs. We won't be able to calculate the exact short-term return on these purchases until mid April when March inflation numbers are released. At that time, we can compute the next I Bond inflation rate.

Current I Bond Holders

If you have old I bonds, you'll have 6 months of rates that range from 1.76% (for I bonds with a 0% fixed rate) to 5.39% (for I bonds with a 3.60% fixed rate). Back in the good old days, the I bond fixed rates used to be above 3.00%. The highest I bond fixed rate was 3.60% during the period from May 2000 to October 2000. If you have any of those I bonds, you'll want to keep them as long as you can. They will mature after 30 years from the issue date. You can see the entire history of the fixed rates in this Savings Bond Advisor post.

Remember that the 6 months with the 1.76% inflation rate may not begin this month. It depends on when you purchased the I bond. An I bond's new inflation rate takes effect every six months after its issue date. So if you purchased an I bond on October 2010, the 1.76% inflation rate won't take effect on that I bond until April 2013.

Series I Savings Bond Features

Below is a summary of the I Bond features. More information is available at this Treasury Direct I Bond page:

  • Can't be redeemed within 12 months of issue date
  • Lose 3 months interest if redeemed within 5 years
  • Interest is composed of fixed and inflation-based rate
  • Fixed rate remains for life of bond
  • Inflation-based rate changes every 6 months after issue date
  • New rates announced every six months on November and May 1st
  • 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 (excluding purchases using your tax refund) - total was $60,000 before 2008 (Treasury's press release).

For more details about the purchase limit, please refer to the Treasury's press release on the new annual purchase limit and the Treasury Direct's purchase limit FAQs.



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Comments
9 Comments.
Comment #1 by Anonymous posted on
Anonymous
Even in today's dismal interest rate environment you can find 20 year high rated muni bonds with YTM of 3.5% or more AND they are exempt from federal taxes. While those do not have the US Govt's guarantee, it's a risk I would be willing to take: 1. who knows how high federal taxes will be in 20 years - could be quite high 2. better liquidity - the bonds actually have some value if sold early, esp. if rates remain low for a long time. The 20 year savings bond returns almost nothing until 20 years.

2
Comment #3 by Anonymous posted on
Anonymous
#1-Good point and good for some people. My worry is having to keep money someplace for 20 years.....and the risk of losing money when/if you need to sell it.

1
Comment #2 by Anonymous posted on
Anonymous
At least with EE there is a put option if the rates jump, same with I bonds.  With TIPS you can lose badly if the interest rates jump.  Now, if you bought EE bonds with a fixed .6%, does it jump down to .2% after 6 months?

2
Comment #4 by Anonymous posted on
Anonymous
#2 - What you say is true.

However, you can't cash them at all for a year, and there is a small penalty (small because it's based on 3 months of interest, and the interest rate is puny) if cashed after 1 year but before 5 years.

Conversely if rates DON'T jump and you want to access your money, you'd probably do better selling a muni bond a few years from now and might even make a bit on the sale.

For EE bonds, issued since May 2005 the rate is fixed at the time you buy the bond, for the life of the bond.  So those 0.6% bonds from a few months ago will earn 0.6% until maturity.

3
Comment #5 by Truthseeker (anonymous) posted on
Truthseeker
I own a chunk of I-bonds, which I bought back at the turn of the 21st century, when Greenspan began unleashing the floodtide of Federal Reserve so-called "liquidity". That liquidity was supposed to be removed, but, just as the Bernanke liquidity will never be removed, so, too, the Greenspan liquidity was never removed. Instead, it has just grown and grown, over time. Translated into language that the average person can understand, when the Fed creates "liquidity", it is essentially printing money by making what have turned out to be ever-renewable ultra-low interest loans to the various casino banks that are members of its primary dealer network.

As a result of Federal Reserve money printing operations since year 2000, which sharply accelerated in 2008, inflation is rampant. My business car rentals, for example, have risen by approximately 250% since 2000, even though the US Labor Dept. BLS repeatedly issues what are bogus inflation numbers. Everything else I buy has risen by a huge amount, too. When you calculate inflation, using the BLS' base data, but removing all their statistical gimmicks, like hedonic adjustment and product "substitution", the real inflation rate is now about 10% per annum, and has been much higher than reported ever since 1982.

Regrettably, it took me until around 2006 to fully understand these realities. But, I've still got a six-figure chunk of I-bonds that are not keeping up, even remotely, with the real inflation. The problem is that they are indexed to the official CPI, which is bogus. Since 2006, the vast majority of my fortune has been placed in precious metals, which have risen spectacularly, although not that spectacularly when you view them through the prism of the real inflation rate. But, I've still got these I-bonds. I intend to cash them in a manner that will minimize my tax liability, since the bonds are very taxable, including the inflation component, as soon as you choose to get rid of them.

 

1
Comment #6 by NYCDoug posted on
NYCDoug
Truthseeker wrote (in #5 above) "since the bonds are very taxable"  . . .  but less so than CDs, since there is no local (state/city) tax, correct? Which is why, for real [after-tax] return even the current -- if paltry --  1.76% iBond seems way better to me than the 1.25% CD/Savings/Money Market account. Yes, a lousy return in the grand scheme of things [e.g., inflation] but, for savings, safer than precious metals -- which are better purposed as vehicles for investment. [I'm surprised to see precious metals proposed here as anything else; they're certainly not a risk-free sure bet . . . but luck and Truthseekers "fortune" may well go hand in hand.] Since this site is nominally about Deposit Accounts, I'm wondering what other on-topic Bond strategies people might have to offer to a novice [me]. Are iBonds, reported on consistently by Ken over the years, still/currently the best game in town?

1
Comment #7 by RIFSLAW posted on
RIFSLAW
DOUG: In an extraordinary low interest rate environment we have seen, for what seems like forever, you will get the crazies or crooks suggesting that there are alternatives to the safe component of one's asset allocation, such as precious metals or limited partnerships for horse semen. Sometimes the language is not couched in those terms, but this site simply is, or seems should be, about deposit accounts with the occasional discussion of similar (I-bonds, T-bills) products. I-bond rates change 5/1 and 11/1 so shortly before Ken usually will post what the rates, or at least the variable portion, will be and then shortly after he will post again. They are, like evry one of his posts in my opinion, helpful, educated, and spot on. If you want to invest an extremely low percent of your asset allocation is a precious metal, by all means. But for anyone to suggest that such as investment's risk is similar to insured deposit accounts, well....you can guess what business they might be in.

4
Comment #8 by Anonymous posted on
Anonymous
You guys might be surprised to know that the inflation indexed bond actually hasn't done too badly long term when compared against the volatile stock market.  In fact it looks an awful lot like the returns of the Series EE.  Chart showing what I'm talking about is here but also found in other places showing very similar story.

1
Comment #9 by Anonymous posted on
Anonymous
I am happy to report that I bought 30,000 of I Bonds in 2002, and another $30,000 in 2003, and finally $20,000 more in early 2004.  They're worth about $120,000 today.  The interest on these has been around 3 - 5% over the years.  I would be frustrated to try to buy I-bonds now because the fixed portion of the formula for determining the interest earned is 0%.  This is meant to serve as the very safe portion of my portfolio. During the time of the worst of the stock  market drop, knowing I had this amount saved in my I-bonds was a source of comfort.

As far as precious metal investments, they aren't a bad idea for a small portion of one's assets. I never bought gold for some reason, and as it kept going higher in price I always figured that the drop in gold was just around the corner. It feels way too risky, I remember gold dropping quite a bit from it's high point in the early 80's.

1