May Savings Bond Rates - I Bond Fixed Rate Falls to 0%
The Treasury released the new I Bond and EE Bond rates on Friday. New rates are announced on every first business day of May and November.
As I had feared, the I Bond fixed rate fell from 0.20% to 0.00%. With the Fed cutting rates to near zero and with Treasury yields falling to record lows in the last couple of months, I had anticipated this drop in the I Bond fixed rate. 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 1.06%. This results in a composite I Bond rate of 1.06%.
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 (1.04% as of yesterday).
Summary:
I Bond Rates:
Composite Rate: 1.06%
Fixed Rate: 0.00%
Inflation Rate: 1.06%
EE Bond Rate: 0.10%
Rates effective May 1, 2020 through October 31, 2020
The I Bond composite rate is low compared to today’s CD rates from internet banks, but it’s important to remember that the inflation rate on the I Bond changes every six months. If the inflation rate averages 2%, that would result in an average composite rate of 2.00%, which is competitive compared to today’s long-term CD rates. Of course, inflation could average lower than 2.00% for several years due to the economic problems from the coronavirus pandemic. One good thing about the I Bond 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.
Current I Bond Holders
If you have old I Bonds, you'll have six months of rates that range from 1.06% (for I Bonds with a fixed rate of 0%) to 4.68% (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 1.06% 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 1.06% inflation rate won't take effect on that I Bond until October 2020.
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.
that's one of the tricks on how to lower prices without lowering prices - by reducing the size of the product.
I do have EE bonds from the that I purchased in the 90s paying 4% and some I bonds with a 3% floor. The I bonds I purchased with reward credit cards.
If you bought one in Jan of 1982 for $500, and you redeemed it today (may 2020) it would be worth $14,184.40. If you bought one in Jan of 1975 (when they first came out) for $500, it would only be worth about half as much ($7,150.20 today) as the interest rate offered at issue increased over the years of the program due to the infamous inflation of the 70s.
curious to know if anyone here had known about and purchased one of these back in the day.
Think they knew something in advance?
I do have to say though that the inflation numbers are about as trustworthy as the unemployment numbers. With I Bonds you are playing against the house, and the house is the scorekeeper. Did I mention they also make the rules?
Unlike the government at least banks don't have the ability to manipulate rates. They are forced to go with the market and can't change the rules in the middle of the game unless it's in the contract. Not so with the government. They can make any laws they want. And they don't even have to pass constitutional muster... what are you going to do about it?
In the 1940s when US Savings Bonds had their origin, the unspoken contract between the people and the government was a whole different ball game. In more recent decades, sadly, an adversarial component and a lot more distrust has developed; and not without reason.
Yeah, you can pick apart CPI-U for sure, my biggest pet peeve is their deflationary treatment of most technology products. For example, if an iPhone this year is 50% faster than last year, but costs 10% more, the BLS thinks it is actually 40% cheaper (because you got 'increased utility per dollar' and so that makes the effective inflation on that product negative), while everyone else would say it is 10% more expensive. Same with cars, computers, refrigerators, washing machines, pretty much any high-tech equipment that gets a jazzy new feature or faster processor or whatever, they work that increased utility in and they become deflationary products. That then balances out the inflation in the more mundane products (food, clothing, etc.) that have actually gone up 5-10% or so. Sneaky, eh?
Think it will cause inflation?
I do agree with thanking President Trump for pushing the proper strategy for trying to head off rampant inflation, but that is not his strategy.
His strategy is to get people back to work and back to being productive and to get businesses profitable again ASAP. That is the only hope of heading off catastrophic inflation not to mention saving the entire country from economic ruin.
Unfortunately there seem to be those who oppose this strategy and would prefer to keep the economy shut down indefinitely.
Whether or not President Trump will prevail against this headwind is not yet known.
Buying series I bonds is one way of betting against the success of his strategy.
3 trillion is only about 15% of GDP, but with GDP tanking, very likely it's going to be closer to a wash, and that would not be significantly inflationary.
And in this case, the Fed is buying most of the new treasury debt issued during this crisis.
The bottom line, no matter how convoluted, is that the government is "printing money" as fast as the pressures will run. Not necessarily in the literal sense, but with the same effect by doing things like issuing banks credit to meet their reserve requirements.
What they are doing is an attempt to get back to where we were a few months ago and continue the stellar economy. Can't imagine any other way it could be done.
What other option is there?
Obviously creating money out of nothing and buying corporate debt to prevent bankruptcies is not a long term solution. But it is the only solution to ward off a short term catastrophe. It's risky, but what are the options? No choice but to take the risk.