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.
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.