The Treasury released the new I Bond and EE Bond rates on Monday. New rates are announced on every first business day of November and May.
The I Bond fixed rate remains at 0.00%. This was expected due to the Fed’s zero rate policy with no end in sight combined with the ultra low Treasury yields. 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 1.68% This results in a composite I Bond rate of 1.68%.
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 (1.41% as of yesterday).
I Bond Rates:
Composite Rate: 1.68%
Fixed Rate: 0.00%
Inflation Rate: 1.68%
EE Bond Rate: 0.10% (guaranteed to double in 20 yrs)
Rates effective Nov 1, 2020 through Apr 30, 2021
The I Bond composite rate is high compared to today’s CD rates from online banks and credit unions, but it’s important to remember that the inflation rate on the I Bond changes every six months.
Due to the Fed’s new inflation strategy (in which they will likely keep policy rates near zero even if inflation exceeds its 2% target for a period of time), the I Bond has become more appealing as an alternative to CDs. It’s possible that a period of low inflation would make I Bonds unappealing. However, future inflation would have to be very low for I Bond rates to offer worse returns than today’s CD rates. If inflation remains low, the Fed will almost certainly maintain its zero rate policy and CD rates will probably stay at the current record lows, or even fall lower. On the other hand, if inflation rises, the I Bonds will directly benefit. It will probably take longer for higher inflation to result in higher CD rates.
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.
Of course, for many savers, I Bonds can’t be a complete replacement for CDs due to the annual purchase limits. An individual can only purchase a maximum of $10,000 of I Bonds at TreasuryDirect.gov per calendar year. An additional $5,000 (paper I Bond) can be purchased using your federal income tax refund. Note, EE Bonds have a separate purchase limit of $10,000. Thus, an individual can buy $10,000 of I Bonds and $10,000 of EE Bonds at TreasuryDirect.gov per calendar year.
Current I Bond Holders
If you have old I Bonds, you'll have six months of rates that range from 1.68% (for I Bonds with a fixed rate of 0%) to 5.31% (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 1.68% 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 2015, the 1.68% inflation rate won't take effect on that I Bond until April 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.