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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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Update on the New Rates for I Bonds and EE Bonds


Update on the New Rates for I Bonds and EE Bonds

On Monday the Treasury announced the new rates for the I Bonds and EE Bonds. I did a thread about this in the discussion forum on Monday. Since the rates are so low, I wasn't going to do a blog post. However, several readers have asked about them, so I thought it would be a good idea for a short blog post.

In short, the rates are disappointing. When the Treasury slashed the yearly purchase limits of I Bonds and EE Bonds in 2008, I was hoping that would allow them to be a little more generous in the yields. However, that has not been the case.

For the I Bonds, the fixed rate fell from 0.20% to 0.00%. Yes, that's zero percent. So if you buy I bonds now and until May 2011, the fixed rate of the I Bond will be zero percent for the life of the bond.

The total rate combines the fixed rate with the inflation component. We had already knew the inflation component due to September's CPI. It's 0.74%. So the combined yield is 0.74%. This will be the yield for any new I Bonds purchased until May 2011. The yield will last for 6 months from the month it was purchased. It will then change every 6 months based on the  new CPI numbers.

For your old I Bonds, I'm afraid this new inflation component isn't good news. If you keep your I Bonds, you'll have a six month period with this inflation component added to your fixed rate. That six month period will start based on the anniversary date of your I bond purchase.

With the rates so low, are I Bonds a good deal compared to CDs?

I think the old I Bonds are still a good deal. Those that have fixed rates of 3.00% or higher are definitely good deals in my opinion. I wished I had purchased more I Bonds back before 2001 when the fixed rate was as high as 3.60% and the annual purchase limit was $60,000 (It's now $10,000).

For new I Bonds, it's hard to like them with a zero percent fixed rate. If inflation does become severe and is reflected by the CPI, the inflation component of the I Bond could make today's new I Bonds into good deals. The I Bonds have some nice features such as being exempt from state income tax. Also, federal tax can be deferred until the bond is redeemed.

EE Bonds

The Treasury also announced a new rate on Monday for EE Bonds. The fixed rate is now 0.60%. Unlike the I Bond, the EE Bond interest will remain at this rate for at least 20 years. As you can see in this Savings Bond Advisor post, this 0.60% is the lowest that the fixed rate has ever been.

One nice feature that the EE Bond has that the I Bond doesn't have is that its value is guaranteed to double at 20 years. Here is what is stated by the Treasury Direct:

They are purchased for 50% of their face value (for example, a $100 EE bond costs $50). This means that they take longer to mature than electronic bonds, as their value is based on interest rates. They are guaranteed to reach face value in 20 years.

A doubling of the value in 20 years is equal to an annual yield of about 3.50%. That's a nice guarantee, but 20 years is a very long time, and if you redeem anytime before 20 years, you'll only get 0.60% annual return for the entire time you held the EE Bond.

I have more details on I Bonds in this 2009 I Bond review. For the official information, please refer to the Treasury Direct website.

David   |     |   Comment #1
I have often heard that I-Bonds were the better choice between the these two types of savings bonds. However, the I-Bond composite rate was zero as recently as 2009. Because there is a risk that I-Bonds will pay nothing I buy EE Bonds with the intent to hold them for 20 years. By the way, my bank is going to stop administering paper bond purchases in 2011. They said the Treasury wants to direct people toward the electronic bonds as they phase-out the old paper bonds.
Mark Davis
Mark Davis   |     |   Comment #2
 At this point, i'm sorry I sold my 2% Ibonds. Mistake.

 But I kept the 3's

Linmarie   |     |   Comment #3
Isn't the 10k limit split between 5K electronic and 5K paper?
Anonymous   |     |   Comment #4
The 3% fixed-rate I-bonds I bought back in 2001 may well have been my best investment over the last almost-a-decade.  The average 6-month yield since purchase has been about 5.5%.  I bought them online with a frequent-flier credit card and piled up the bonus miles.  (Back when you could buy them online with a credit card, and I think you could buy up to $30K a year that way.)

The fixed rate dropped to 2% in Nov. 2001 and I didn't buy any more, hoping that it would be higher later.  But it stayed at 2% for a year, then between 1-2% for the next 5 years, and has been under 1% since May 2008.
Ed   |     |   Comment #5
Its my understanding that "TIPS" are selling at a premium (cost is more than face value @ maturity) for the first time since inception.  If this is true, is the smart money (eg. "sophisticated investors") telling us small guys that they think the inflation aspect warrents invensting in these "inflation products".  I understand the gov't zeroing out the fixed interest part, since their objective is to get people to borrow and spend - just the opposite of the original savings bond program objective. (the borrow & spend mentality - what got us into this mess in the first place).  Its not a big deal with the current investment limits, but I'm wondering what others are doing with the "vintage" purchases, say if someone has "maxed out" for the past nine years and has all they want to have exposed to stocks.??     Ed    

Steve   |     |   Comment #6
For several years Treasury has been doing its best to make savings bonds of any type less attractive and more difficult to purchase.  They simply do not believe that the amount of money the government receives for them is worth the cost of running the system.  If they had their way, the program would come to an end for I's and EEs.  TIPS would remain as they are not considered to be bonds.  Since the minimum purchase amount for Treasury bills is so low now, there really is a legitimate question as to why savings bonds still exist.  I will keep my 3% fixed I bonds until they cease to earn interest, but I think I am finished with adding to them.  I also still have some HHs paying 4% I inherited, but am slowly redeeming them when they hit their 10 year point and the rate drops to 1.5%.