May Savings Bond Rates - 3.54% Inflation Rate Makes I Bonds a Good Deal
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.
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.
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%.
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.
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.
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!
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).
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.
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.
Who knew it grew on trees!
As to those that use cc for cash back...as much as I (don’t) spend each year..not worth the effort
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.
see:
https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
for more details
Historical data can be found here http://www.ibonds.info/I-Bond-Rates/I-Bond-Fixed-Rate.aspx
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.