The Treasury released the new I Bond and EE Bond rates today. New rates are announced on every first business day of May and November.
As I had expected, the I Bond fixed rate remains at 0.00%. The zero fixed rate has been common for I Bonds in this type of interest rate environment. During the seven years from 2008 to 2015 when the Fed held rates near zero, the I Bond fixed rate had been set to zero many times.
As I had calculated three weeks ago, the I Bond inflation rate is 3.54%. This results in a composite I Bond rate of 3.54%.
Yet again, the Treasury kept the EE Bond rate the same at 0.10%. With this low rate, in my opinion, the only reason to purchase an EE Bond is if you’re planning to hold it for 20 years. In that case, the EE Bond is guaranteed to double in value. This is equivalent to an annual return of about 3.5%, which is much higher than the current yield of the 20-year Treasury bond (2.19% at Friday’s market close).
I Bond Rates:
Composite Rate: 3.54%
Fixed Rate: 0.00%
Inflation Rate: 3.54%
EE Bond Rate: 0.10% (EE Bond is guaranteed to double in value in 20 years)
Rates effective May 1, 2021 through October 31, 2021
The I Bond composite rate is high compared to today’s CD rates from online banks, but it’s important to remember that the inflation rate on the I Bond changes every six months. Even if future inflation numbers average close to the Fed’s 2% target, that would result in a competitive return for I Bonds over the next couple of years.
For those looking for a safe inflation hedge, I Bonds are a good choice. One nice thing about I Bonds is that the composite rate is guaranteed never to fall below zero. So if we get deflation, the I Bond composite rate will never be lower than zero. That’s an advantage over Treasury TIPS which can go negative. With current TIPS yields, I Bonds are currently a much better deal. A good comparison is provided in this TIPS Watch post. The primary downside of I Bonds is the purchase limit. The maximum that an individual can purchase per year is $10,000 at TreasuryDirect and $5,000 in paper bonds purchased with an IRS tax refund.
The TIPS Watch post also makes a good point about the value of having both EE Bonds and I Bonds:
A combination of I Bonds and EE Bonds also makes sense, providing both inflation protection and strong deflation protection. But EE Bonds only make sense for an investor committed to holding them for 20 years.
It’s also mentioned that the feature in which EE Bonds double in value in 20 years is something that could change for future EE Bond purchases.
Retaining this 20-year doubling is a big deal. The Treasury has changed this holding period several times in the past, so there was a real possibility the terms could change in 2021, with the 20-year nominal Treasury currently yielding 2.19%, well below the EE Bond’s potential of 3.5%
Current I Bond Holders
If you have old I Bonds, you'll have six months of rates that range from 3.54% (for I Bonds with a fixed rate of 0%) to 7.20% (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 TreasuryDirect page.
Remember that the six months with the 3.54% 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 April 2012, the 3.54% inflation rate won't take effect on that I Bond until October 2021.
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
- The combined rate will never be less than zero
- 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
- Maximum purchases per year and per social security number is $10,000 in TreasuryDirect and $5,000 in paper bonds purchased with IRS tax refunds (This excludes trust/business purchases) - 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.