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.