May Savings Bond Rates - 3.54% Inflation Rate Makes I Bonds a Good Deal

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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).

Summary:

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.


Comments
CDmanFL
  |     |   Comment #1
Hello Friends,
I’m not familiar with I Bonds but this appears to be a very good deal. I’m seriously considering it. Would love to know what others think. Thank you as always to Ken.
NYCDoug
  |     |   Comment #2
Keep in mind that the annual purchase limit for the EE Bond, like the I bond, is capped at $10,000. It might not be worth it to you. But at least you'll have $20,000 in 2041 ~ taxable then (Federal only) deferred for 20 years . . . or you can pay as you go, annually.

No such certainty with the I Bond. I suppose your decision there is based on your interest rate forecast -- for at least the next five years (to avoid the early withdrawal penalty of 3 months of interest).

My take, in both instances, is that $10k is such a piddling amount. And, from having experimented with purchasing an iBond several years ago, I found the government website at Treasury Direct such an arcane interface; it required many, many clicks to ensure that your interest had been posted, what your current balance was, and what your balance would be were you to withdraw your iBond early (prior to the 5-year commitment). I wound up creating my own spreadsheet . . . also to track those regular yet unforeseeable semi-annual changes in interest rates.

I'd say the true value of iBonds largely evaporated ever since the "fixed rate" component went to 0%.
GreenDream
  |     |   Comment #18
Yeah, the Treasury Direct website's interface leaves a lot to be desired.

As for whether the limited amount is "worth it" really depends a lot on
1) How soon the individual thinks they'll need access to that money
2) what other options an individual is considering for that money and
3) where they think interest and inflation rates will be going in the time period they plan to keep the money locked up in the bonds.
w00d00w
  |     |   Comment #6
to me, the main differences between the I Bond and a standard term deposit are: the 1 year lockout period during which the I Bond cannot be redeemed, the variable inflation rate determining the rate of interest paid, the option of deferring tax on I Bond interest, no access to the cash flow of the I Bond until bond redeemed, and earning full month interest credit regardless of what day in month I Bond is purchased.
P_D
  |     |   Comment #3
Purchasing I Bonds might be right for someone who wants incentive to go on a diet.

Let's say you spend about $20 a day for food. That's $7,300 a year.

Food inflation over the past year according to government statistics was about 3.5%.

Just about everybody predicts that it's going to be higher over the next year, let's say it's 5%.

So next year, your food will cost you an extra 5% which works out to an extra $365.

If you buy a 3.54%, $10,000 I Bond, which is the maximum you are allowed (not counting tax refunds because if you're smart you're not getting tax refunds and we know everyone here is smart) then after taxes you may end up with about $300 a year in net interest.

Unfortunately the $300 from your I Bond won't even cover the $365 extra that your food is going to cost you this year.

That is unless you eat less! Eat about 18% less food this year and the I Bond will cover your extra food costs due to inflation for the year.

That's food for thought... If your brain is on a diet.
NYCDoug
  |     |   Comment #4
And, with brain in gear, recall that that 3.54% is only good for 6 months . . . after which, who knows if your I Bond will keep pace with your inflated appetite (or deflated diet).

Then again, most financial outlets these days offer a much more restrictive menu than 3.54% in calories for a "fast food" 6-month CD.

Something else to keep in mind, and chew on. Cogitate; perhaps regurgitate!
Choice
  |     |   Comment #5
And the alternative is? Roughly...one can get around 1.75apy for 11 months (buy at end of month and sell at beginning of month) and that assumes the next November 1st rate is zero! Soooo, wizards what is an alternative for petty cash that is risk and state tax free? Nada
NYCDoug
  |     |   Comment #8
Here's some wizardry for you, Choice:

Consider using a 2% cash back credit card to purchase 6-month (or less) CDs at credit unions that allow such financing. Rinse & repeat, with as much $$ as your credit card allows -- also factoring in any limitation on the amount(s) that your credit union permit to be purchased on credit.

Do the math, and you may find that your "petty cash" can net you, tax free, a significantly higher annual yield. And your money need not be tied up for 5 (or 20) years. Just 6 months at a time.

Staying under my 2% cashback credit card's current limit, rotating $7,500 per statement cycle into a new 6-month CD (on a base of 6 x $7,500 = $45k, somewhat more than $10k) I'm accruing $150 in cash rewards each month.

If you do the math, that's a tax-free 4% gain ($1,800 / $45,000) . . . equivalent to a taxable gain of 5%~6%. So, by the same logic -- and with a little legwork -- $10k could be earning you $400/year in tax-free cashback "rewards" instead of being tied up for years, inaccessible, and at a fluctuating rate.

I'm a little hesitant to foreground this finesse again; don't want to jinx it . . . The concept has been brought up here before (it's not my idea), and when I first saw it, I was skeptical. But it works; call me a convert :-)

Desperate times call for resourcefulness (and a little elbow grease).
P_D
  |     |   Comment #10
"Consider using a 2% cash back credit card to purchase 6-month (or less) CDs at credit unions that allow such financing."

Not in on that game but doesn't it not only require an FI that allows it but one that codes the transaction in a way that the credit card issuer doesn't treat as a cash advance? That kind of limits the field doesn't it?  And trial and error can be costly.
Yu
  |     |   Comment #25
Would you mind giving several credit union/banks that allow CD funding from CC? Thanks.
GreenDream
  |     |   Comment #7
As choice rightly points out, what is the alternative for your $10k? Sit in a major bank's account earning 0.01% /year? or in a "high yield" online bank account or CD for somewhere between 0.5% to 1%/year? Talk about going on a diet!!! Outside of playing the stock market casino, the options for cash are not that great these days.
P_D
  |     |   Comment #9
#7
Although I don't think these bonds are apples to apples replacements for liquid bank accounts or CDs, I agree with the gist of what you said.

My analysis was facetious and not meant to be taken seriously. It is technically badly flawed in several ways, that being one of them.
Wolfpack91
  |     |   Comment #39
If inflation is "going to be higher over the next year, let's say it's 5%," then the interest rate of your 3.54% I bond will surely increase. The November '21 or May '22 interest rates will rise because either the fixed-rate increased and/or the semiannual inflation rate rose.
Rickny
  |     |   Comment #11
Another benefit is if the bonds are used to pay for qualified college expenses, the interest earned is generally free of federal, state, and local taxes. There are income limits and other rules on this. Probably better to invest in a 529 than savings bonds.
P_D
  |     |   Comment #12
No need right. They are saying that college is going to be free now!

Who knew it grew on trees!
Choice
  |     |   Comment #13
Rick, that is what I did years ago...I think rules have changed now, ie Bought paper bonds in daughter’s name, file a tax return at 2 to change accounting to accrual, did for many years recognized interest/gain each year and never owed income taxes b/c exemptions at that time. Accrued enough bonds to cover almost all college education when redeemed later (Recently had my copy of this first return framed and provided it to her)

As to those that use cc for cash back...as much as I (don’t) spend each year..not worth the effort
Matt76
  |     |   Comment #21
Choice, can you explain how that works? I'm interested if this is still possible today. Is the goal for the kiddos to file so the I-series bond's interest is not taxed federally in the future since they have no other income as kids and the interest falls below exemptions? Do you lose the ability to claim your child as a dependent on your tax return if they have to file?
Choice
  |     |   Comment #22
Worked for EE bonds…don’t know about now…I use to put together tax avoidance plans then and (then) stay in tune but now only looking (generally) as to those plans for seniors. Was able to claim child since her income (interest income) each year was never close to what I provided…but I did keep records, eg most overlooked fair value of rental space in house, etc. by child being on accrual, interest tax (if any) would be “recognized” and due each year rather than when bonds redeemed (as cash basis taxpayer has to do) have to be creative but legal….like I said, IRS was aware of all! I use to use something called Tax Management Portfolio series of tax topics/booklets…I thought it was excellent…my approach was then, as now, there has to be a way to….minimize taxes….federal and state. Good luck!
Rickny
  |     |   Comment #14
I have 529s for my kids when they go to college. Started the accounts when they were infants so the have a tidyvsum and NY has tax advantages for 529s. Our income is to high to take advantage of using bonds to pay for education.
cloudeleven
  |     |   Comment #15
Do you still have to get a Medallion Signature Guarantee or bank corporate stamp to open a Treasury Direct account? I have my own account and had to get the medallion stamp to open it back in ~2014, but my mom doesn't have an account. Was thinking about opening an account for her. The website seems to say all you need to open an account is a SSN, checking account, email address, etc. Standard stuff. Doesn't mention medallion/bank stamp.
Choice
  |     |   Comment #16
That’s my recollection…no requirement …try it, or read more on the site or give them a call. I do not recall when I opened spouse and my treasury accounts…withdrawals ? I always keep the accounts open with small $ amount
GreenDream
  |     |   Comment #17
"Do you still have to get a Medallion Signature Guarantee or bank corporate stamp to open a Treasury Direct account? "

Not that I'm aware of. Pretty sure it didn't require me to have one when I opened a Treasury Direct account a couple of years back particularly considering I've never had one (and indeed still don't). As I understand it, Medallion Signature Guarantees are usually required when dealing with physical certificates, not so much for electronic records. Though if you're really concerned about it, you can always contact their support and ask them as they can give a more authoratative answer than anyone here could.
ERIF
  |     |   Comment #23
I just opened a Treasury Direct account for me and another one for my girlfriend. My account opening went smoothly with no paperwork required. Hers required a medallion signature guarantee because they claimed they were having trouble verifying her information.  They put a hold on her account and we couldn't access it online.  I mailed the form with the signature guarantee on 5/7. The hold was removed today, 5/18. Not too bad, all things considered.
vladimir
  |     |   Comment #19
Purchase I bonds while you can. The limit was $60K. Now it is $10K. If inflation keeps up, then we cannot afford to offer I bonds anymore. So, the I bond program may close. However, those who did buy I-bond will still get the benefit of inflation adjusted interest for up to 30 years. I-bonds are a good deal for the saver who needs to save for retirement, education, health care and those minimally essential goods and services that the US government or other state governments will not be able to afford to pay for everyone today or later. I am looking forward to the day when the United Socialists States of America (USSA) will have decided the income & wealth distribution scheme that pays the minimum to those who need (it won't be the minimum) and makes everyone else work according to their abilities (taxes would not cover it but money printing will). The I bonds will be history by then, but those who got in the earlier better times will come out ahead.
Choice
  |     |   Comment #20
The April CPI released today shows annualized 4.2% up tick in inflation and when coupled with recent energy price movement bodes well for potential higher November IBonds rates
Yu
  |     |   Comment #26
if inflation goes up as predicted, what's the chance do you think the fixed rate goes up in November. I am new to I-Bond, and I am wondering if someone can educate me how they decide the fixed rate .
GreenDream
  |     |   Comment #27
basically, the inflation component of the I-bond is calculated off the CPI-U (Consumer price index for Uban Consumers) As long as that's going up then you can expect the I-bond rate will likely be going up as well.

see:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
for more details
Yu
  |     |   Comment #28
Do you know how the CPI-U impacts the fixed rate part?
NYCDoug
  |     |   Comment #29
@ Yu: The fixed component is fixed for the duration of the bond, based on the time of purchase. It's been next to nothing the past decade . . . Unlikely to rise in November, methinks; certainly not suddenly. (That's what the variable component is for!)

Historical data can be found here  http://www.ibonds.info/I-Bond-Rates/I-Bond-Fixed-Rate.aspx
Yu
  |     |   Comment #30
Thank you @NYCDoug.
Yu
  |     |   Comment #24
Since there is 10K limit for each year, I was wondering if I should buy 10K now or if I should wait until November. The only reason for me to wait until November is to hope the fixed rate is above 0 in November. If the inflation keeps going up, what's the chance we will see a big fixed rate in November? Thanks.
vladimir
  |     |   Comment #31
The fixed rate will be zero until inflation rates come down. When inflation was low, the fixed rate was much higher. I predict the fixed rate in November will be zero because our federal reserve is allowing more money to be printed or its electronic equivalent.
GreenDream
  |     |   Comment #32
Vladimir, when you look at the numbers, there really is no such direct correlation between the fixed rates and inflation as you describe. (that's what the inflation component is there to handle). If anything, It's the fed Funds rate that has a stronger correlation with the fixed rate as far as I can see.

In answer to Yu's question (which is an invitation to speculation, as nobody really knows what the fixed rate will be at this point, least the high horse rider comes galloping in because speculation isn't labelled as such to his satisfaction), I personally wouldn't expect the fixed rate to increase much until the Fed increases the funds rates (which are currently zero) - my personal take is that if it does than by only 0.1%, though given the history of the last ZIRP, I suppose 0.2% is also possible.

Last time, when the funds rate was 0 for years, the fixed rate was mostly 0.0% (with no particular correlation with changes in inflation). Of the 14 I-bond rate sets in the 2009-2015 ZIRP, over half had a fix rate of 0% (8 out of the 14) with half of the rest being at the very beginning of the ZIRP period (ranging for 0.1% to 0.3%) with the other half closer to the end of the period than the beginning (and ranging from 0.1% to 0.2%),

As the Funds rate began to climb in 2017/2018 so too the fixed rate managed to consistently get out of the 0% doldrums to reach a peak of 0.5% somewhere around the time the Funds rate topped out at 2.25-2.5% in 2019. As the funds rate dropped from that peak, so too did the fixed rate until both returned to zero in 2020.

the tl/dr of the above being: I wouldn't rate the chance of a "big" fixed rate in November very high. At best I'd expect nothing higher than 0.2% for the fixed, with 0.0% being the most likely IMO.
Yu
  |     |   Comment #33
Thanks GreenDream. I maxed out this year's quote at the end of May.
Choice
  |     |   Comment #34
The May CPI released today shows annualized 5% up tick in inflation and increases likelihood for potential higher November IBonds rates
CapeCodBob
  |     |   Comment #35
I was about to buy $20,000 of I Bonds ($10,000 for each my wife and me); however, given the uptick in inflation, would you recommend waiting until 11/1/21 to see if the fixed rate component of I Bonds is increased from the current 0.0%? Thanks
Choice
  |     |   Comment #36
I have no concern of/if fixed rate as any decision point. Personally, I have some CDs mature next month and thinking about buying $20k at end of July (never buy earlier in any month, US Treasury deems any purchase as being on the first…thus free month). Why july?    I like the current ibond rate which would apply for 6 months from issue date AND then earn the rate for 6 months applicable on November 1st..which takes it out to June 2022 for this July purchase…not a bad return for 11 months…less 3 month penalty if redeemed. But right now I plan to hold them…I cash in when other long term CD rates increase and need the cash AND figure what my taxable income is for that redemption year. It’s a parking lot for petty cash. I’m also going to have $5k withhold for federal taxes from Ira distribution to use to buy $5k in ibonds as part of tax refund next year. There it is in a nutshell
CapeCodBob
  |     |   Comment #37
Thanks for your input - very helpful!
Choice
  |     |   Comment #38
Happy Days are here again? CPI over 5% for June 2021. CD rates are trailing ibonds…not for long?  As a friendly reminder in an inflationary time…greater focus on managing the manageable, i.e. expenses 
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