New Savings Bonds Rates - I Bond Fixed Rate Falls to 0.20%

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.

It appears the falling interest rate environment impacted the Treasury’s decision about the I Bond fixed rate. It fell from 0.50% to 0.20%.

As I had calculated three weeks ago, the I Bond inflation rate is 2.02%. This results in a composite I Bond rate of 2.22%.

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 (2.00% as of yesterday).

The I Bond composite rate is comparable to today’s CD rates from internet banks. For example, the 5-year CDs from Ally Bank and Goldman Sachs Bank both have a 2.25% APY. Of course, the I Bond rate fluctuates every six months based on inflation. Also, it’s important to note that I Bonds do have tax benefits that CDs don’t have (see the I Bond features list below.)

It’s definitely disappointing to see this 30 bp rate drop in the I Bond fixed rate. Unfortunately, the I Bond fixed rate has a history of being low since 2008. During the last 11 years, the I Bond fixed rate has varied from 0% to 0.70%. For 8 of those 11 years, the fixed rate was either 0% or 0.1%. Thus, it’s not surprising to see this 30 bp rate cut.

After the I Bond fixed rate increased to 0.50% last year, I was hoping this would start a sustained period of higher fixed rates similar to what we saw during the years from 1998 to 2008 when the fixed rate never fell below 1.00%. We’ll have to keep waiting for a return to the higher-rate days.

Current I Bond Holders

If you have old I Bonds, you'll have six months of rates that range from 2.02% (for I Bonds with a fixed rate of 0%) to 5.66% (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 2.02% 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, 2.02% inflation rate won't take effect on that I Bond until April 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
• 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 the 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.

Treasury Direct Loss Liability Concerns

There are some concerns over the liability of loss of electronic savings bonds due to fraud. If you're a victim of fraud that drains your Treasury Direct account, will the Treasury provide reimbursement? There's a useful thread at the Bogleheads Forum that researches this issue. This Treasury Direct page describes the security features that protect your Treasury Direct account.