The Treasury just released the new I Bond and EE Bond rates. Just as we had calculated on October 19th, the new I Bond inflation rate is 3.06%. The I Bond fixed rate remains at 0.00%. The EE Bond rate fell from 1.10% to 0.60%. 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%.
Hopefully, those who were interested in I Bonds made their 2011 purchases last month when we were able to know 12 months of the I bond inflation rate. Those who bought I bonds in October will receive 6 months of 4.60% and 6 months of 3.06%. Even if you plan to redeem them as early as possible, you will be able to get yields of around 3.30%. I described the calculation of this in my October 19th post.
For those who plan to buy I bonds with the current inflation rate of 3.06%, it's not as good of a short-term deal as the previous 6 months when the inflation rate was 4.60%. 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. Currently, we can only guess about the next I Bond inflation rate. We can calculate the worst case return by assuming a zero percent inflation that takes effect next May.
The calculations of the yields below assume that the I bond purchase is made at the end of November 2011. Also, it's assumed that the inflation rate of the second six months is the worst case scenario (zero percent).
- 1.67% - redeem on 11/1/12, 6mo of 3.06%, 3mo of 0.00%, and 3mo of 0% (penalty)
- 1.53% - redeem on 12/1/12, 6mo of 3.06%, 4mo of 0.00%, and 3mo of 0% (penalty)
- 1.41% - redeem on 1/1/13, 6mo of 3.06%, 5mo of 0.00%, and 3mo of 0% (penalty)
- 1.31% - redeem on 2/1/13, 6mo of 3.06%, 6mo of 0.00%, and 3mo of 0% (penalty)
The same rates would also apply if the purchase is made in the months from December 2011 through April 2012. If you wait until mid-April when CPI-U is released for March, we'll know the inflation rate for the second six months. The above rates will be higher if that inflation rate is higher than zero.
Current I Bond Holders
If you have old I bonds, you'll have 6 months of rates that range from 3.06% (for I bonds with a 0% fixed rate) to 6.72% (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.
Remember that those 6 months with the 3.06% inflation rate may not begin this month. It depends 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 3.06% inflation rate won't take effect on that I bond until April 2012.
Other Savings Bonds News
If you have an account at TreasuryDirect, be prepared for some changes to how you log in. Here's an excerpt from TreasuryDirect:
To make our customers' experience better, we're updating TreasuryDirect's authentication process. The change will make it easier for you to access your new account.
If you open an account now, we'll send you an access card in about two weeks which you'll use to login. The access card will soon be phased out, so it will only be needed for a short period of time.
The new process replaces the access card with an equally secure method of logging in. So, you may wish to delay opening your account until the new process is in place on or about November 4, 2011.
You will no longer have to worry about the access card. I know some people disliked this extra overhead in the login process. However, I appreciated the fact that hackers would be unable to break into the account without the physical access card. Hopefully, their claim that the new process will be just as secure as the current one is true. It's very important that TreasuryDirect's security be 100%. An excerpt from the Savings Bond Advisor shows why it's so important:
Regulation E doesn't apply to Treasury Direct. This is the banking regulation that says if a thief gets your credit card number, your liability is limited.
If a thief gets your TreasuryDirect details, changes the bank account, and cashes in your funds, you likely won't know until months later when you receive the 1099-INT tax form telling you how much interest income you earned. Meanwhile, the Treasury is adamant that it will not cover your losses.
Series I Savings Bond Features
Below is a summary of the I Bond features. More information is available at this Treasury 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
The current I Bond purchase limit is $10,000 per year ($5K online and $5K paper). However, starting in 2012, you will no longer be able to purchase paper I Bonds from banks and credit unions (see my post on this change).