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.
(Average rating: 3.00 stars)
Loading...6 Comments
Comments Closed
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
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?
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.
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.
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?
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.
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%.