I bond investments plummet in May

Friday, June 16th, 2006
Categorized as: Savings Bond investment rate

According to statistics released yesterday by the Treasury’s Bureau of Public Debt, I bond sales in May were $252.2 million, which represents an annual rate of $4.86 billion. This is down drastically from the annual investment rate of $12.83 billion during the previous six months.

During those previous six months, of course, the I bond composite rate was 6.73%, which attracted a lot of investors who didn’t really understand how I bonds work. Now the composite rate is 2.41%.

All I bonds receive the same inflation component, so what makes one I bond better than another is their fixed base-rate. The bonds issued during the previous six months had a base rate of 1.0%, while those issued in May had a base rate 40% higher – 1.4%.

So May’s I bonds are a better long-term investment, but they aren’t nearly as popular. It’s so hard to be rational when it comes to money!

In May, EE bond investments were $153.1 million, which is also down slightly from recent levels. Likewise, investments through TreasuryDirect made up only 9% of the dollars invested, which is a large decline from previous levels.

If you’re a reader of my book, Savings Bond Advisor, you have access to an online graph showing the level of Savings Bond investments since Series I bonds were introduced in 1998. Check your Book Notes for the link.

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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:


On June 21st, 2006 Chris said:

I fully understand that “May’s I bonds” are better for the long term due to their higher fixed base-rate, but why buy I-bonds right now with the paltry 2.41% composite rate?

Why not temporarily put the money in a high yield online savings account (e.g. HSBC, Emigrant), earn close to 5%, then pull out of the savings account in mid-October and snap up your I-Bonds then to “lock-in” the nice 1.4% base rate? Seems to me this is the “rational” choice. Why pass up ~2.5% between now and then?

Perhaps I’m missing something?

Would this also not explain, at least part of the plummet, i.e. those holding out until the end of the 6-month period before buying in?

On June 21st, 2006 Chris said:

I think I’d like to retract my previous post 🙂

It just hit me that due to the way the rate periods work, if someone were to wait until October to purchase I-bonds (like I suggested above) then they still have 6 months of the current, lower rate, though just delayed (due the newer rate not taking effect until the next rate period).

So I guess that means it’s not possible to avoid 6 months of the lower rate in the grand scheme of things for someone who makes regular I-bond contributions.

Please let me know if I’ve got this wrong.

On June 22nd, 2006 Tom Adams said:

You’ve got it right. To get the 1.4% base rate, you have to accept six months of the low inflation component, even if you wait until October to invest.

On July 7th, 2006 LM said:

I’m looking for a short term investment on a school loan that will allow me to get access to the $ without much of a consequence. The previous high rate of the I bonds – 6%+ seemed to be a good option – but it seems they have plummeted. It does not seem to be such a great investment anymore for short term purposes. Perhaps the high yield savings account is a better choice in this case. Any thoughts?

On July 7th, 2006 Tom Adams said:

LM – I don’t see how Savings Bonds would work for you anyhow, since you can’t redeem a Savings Bond investment until after it’s a year old.

Wouldn’t you have to spend all the money you borrow with a school loan during that first year? I think a bank savings account is your best bet.

On July 8th, 2006 Ken said:

Hopefully, with this low demand for I-Bonds, the Treasury will raise the fix rate again in November. I think it’s time for them to get it back to at least 2%. I’m a little worried that inflation will spike again and the Treasury will again keep the fix rate low to compensate.

Back in late 2001 and most of 2002, the I bond fix rate was 2% while the fed funds rate was only around 2%. Now the fed funds rate is 5.25% while the I bond fix rate is only 1.4%.

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.

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Tom Adams

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