I bond fixed rate 1.40%; EE 3.70%

Monday, May 1st, 2006
Categorized as: Yesterday's News (old post archive)

The Treasury will raise the fixed interest rates it will pay on Savings Bonds issued during the next six months, it announced this morning.

For Series I Savings Bonds, the fixed base-rate will be 1.40%, up from the previous 1.00%. For Series EE Savings Bonds, the fixed rate will be 3.70%, up from the previous 3.20%.

During their first six-month rate period, I bonds issued beginning today will have a composite rate of 2.41%. The inflation component, which changes every six months for all I bonds, will be 1.00% for the next six-month rate period.

In their next six-month rate period, older I bonds will pay a variety of rates, depending on issue date, ranging from a low of 2.01% for I bonds with the lowest fixed base-rate of 1.00% to a high of 4.62% for I bonds with the highest fixed base-rate of 3.60%.

The new Series EE bond rate, which is set “administratively” but is based on the average rate for 10-year Treasury securities, continues to lag well behind the rates set for EE bonds issued from May 1997 through April 2005. The rate for those bonds is set by formula – 90% of the average 5-year Treasury rate. They will pay 4.11% during their next six-month rate period.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

5 Comments

On May 1st, 2006 Paul said:

I was hoping for at least a 1% rise in the fixed rate to make them comparable to TIPS and to compensate for the very low inflation component.

Treasury doesn’t seem to be in any rush to get the fixed rates back to where they were before 2002.

Wonder if there’s any political influence on this fixed rate? The bankers must like a low fixed rate.

On May 1st, 2006 Dan said:

I knew the fixed rate would be 1.4%…

I was planning on laying off the I-bonds for another 6 months if it was 1.2% or below, or returning to my monthly purchases if it was 1.6% or above, so of course the Treasury had to make the decision difficult, lol!

On May 1st, 2006 Tom Adams said:

Dan – In the next edition of my book I’m adding some material on the benefits of tax deferral. It turns out you can calculate the additional annual yield you can get. It’s highly sensitive to how long you hold the bonds and the regular yield of the investment and also a little sensitive to your tax rate.

In my calculations I assumed your tax rate didn’t change, which simplifies things. If your tax rate goes down before you cash the bond, of course, things are even better.

With a fixed base rate of 1.40% and an inflation yield of 3.6% you’d get about 5% composite. Tax deferral adds an extra 1% a year to that at about 22 years if you’re in the 35% tax bracket and at 30 years if you’re in the 15% bracket.

Of course if inflation ran higher, then I bonds would be even better than TIPS. If you didn’t plan on staying invested that long, TIPS would be better.

And it’s really hard to figure out how long you’ll stay invested, because if rates continue to rise you’ll be tempted to rollover your I bonds into new issues with higher base rates. I’m already getting questions about when that makes sense.

On May 2nd, 2006 Sam said:

How high would the EE’s need to be before you would consider them a better long term investment than the I bonds? Is a guarantee of 3.7% for 20 years a better bet than 1.4% tied to an unknown variable?

On May 2nd, 2006 Tom Adams said:

Sam – certainly the EEs are looking better than they did before. But the difference between the 3.7% EE rate and the 1.4% I rate is only 2.3 percentage points.

While inflation is indeed an “unknown variable,” over long periods in the U.S. it has tended to run in the 2.5% to 4% range. So even at the low end of that range it looks like today’s I bond should outperform today’s EE.

My book includes an extensive look at historical inflation trends if you’d like to go deeper on this question.

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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