New I Bond fixed rate 0.00% – EE 1.40%

Thursday, May 1st, 2008
Categorized as: Yesterday's News (old post archive)

The Treasury will lower 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 nothing at all – 0.00%, down from the previous 1.20%. For Series EE Savings Bonds, the fixed rate will be 1.40%, down from the previous 3.00%.

Yesterday, the 10-year TIPS rate was 1.50%. The 150 basis point difference between the TIPS rate and the I bond rate is the worst the Treasury has offered since I bonds were introduced. Moreover, the 120 basis point drop from the old rate of 1.20% is the largest six-month change in the fixed-rate since I bonds were introduced. Previously the largest six-month change was 100 basis points (from 3.0% on May 2001 to 2.0% on Nov 2001).

Combined with the EE bond rate and the reduction in maximum purchase limits, it’s like the Treasury is heaping scorn and ridicule on Savings Bond investors.

During their first six-month rate period, I bonds issued beginning today will have a composite rate of 4.84%. The inflation component, which changes every six months for all I bonds, will be 4.84% 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 5.04% for I bonds with the previous lowest fixed base-rate of 1.00% to a high of 8.53% 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 2.74% 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:


On May 1st, 2008 Ken said:

What else can the Treasury do to make the I Bond any less attractive? My guess is that by the end of the year the 3-mo early redemption penalty will be raised to 12 months.

On May 1st, 2008 Andy said:

This flies in the face of advertising series-I bonds as “earning a real rate above inflation.” What’s their answer now? That zero is a real number?

On May 1st, 2008 Harvey said:

I could not believe it when I saw the 0% for fixed.Guess I won’t buy any during this period. I did buy two late in the month of April but it looks like the government is not wanting to sell I -bonds

On May 1st, 2008 Tim said:

Well, sure. The government is effectively telling us they expect prolonged high inflation, IMO. Why would they want to sell I-bonds into an inflationary environment when Treasuries without the protection are going for only 3-3.5%?

If I were a borrower for a long term debt, I know I’d rather borrow at a fixed 3.5% than with an adjustable rate corresponding to the CPI. By setting the ‘fixed’ rate to zero, I think this is what the feds are saying, too, and in doing so implying that they think inflation will remain pretty high for a while.

On May 1st, 2008 Vince Gallo said:

This is an outrage! These bonds do not pay above the inflation rate as Andy said above. Oh Well, I guess Uncle Sam would rather pay to have our national debt sold back to us by Secretary Paulson’s buddies at Goldman Sachs & the other big boys who can’t make an honest buck without taxpayer bailouts (i.e. Bear Stearns).

So much for the people “taking stock in America.”

The only reason that I will continue to buy them for now is that I am too lazy to change my payroll allocation! But wait! If the inflation rate goes below 4.5% on these new I bonds after the initial 6 month period, I will cash them all.

On May 1st, 2008 Mr. Nickle said:

How discouraging. Unless I am missing something, I see no reason to purchase additional I-Bonds until the fixed rate returns.

On May 1st, 2008 Nik said:

I’m not surprised by this at all. I think it’s indicative of the state of the national economy. I AM glad I managed to buy my final I-bonds last week before the fixed rate drop.

On May 1st, 2008 Steve said:

There is nothing so weird in the 0% fixed rate: assuming the next 6 mos. inflation rate doesn’t change, you can buy Series I’s at the present conditions and in 12 months decide whether to sell them (and realize 3.61%, penalty included), or keep them.

As you can see Series I’s are not so disgusting, after all. Instead they still seem more inviting than the 5 years I Bonds, for instance.

On May 1st, 2008 david said:

junk bonds.

On May 1st, 2008 david said:

great news the fixed rate is zero.why should the fed hand out my tax dollars when there are less expensive ways for them to fund goverment.lets face it this program will go the way of the balanced budget.

On May 1st, 2008 Scott said:

While I agree this is total BS, I am going to at least try and put a positive spin on the upcoming 6 month period… For those of you who have purchased I-bonds in the past, look at the rate of return you will be getting for the next 6 months. 5.86% – 8.53% rate of return. Pretty darn good. Where else are you gonna find that these days with no risk?

On May 1st, 2008 Joe said:

On the positive side, even with zero fixed rate, the 4.84% rate still beats any 1-year CD! Granted that we don’t know what the rate will be in Nov, but it doesn’t take an economist to see inflation continuing to rise. Nowadays, one has to view I-bonds no more than a 1-year CD. With their 1.40% fixed rate now, I wonder if anyone would buy the EE bonds. Guess many could still be buying without knowing it…

On May 1st, 2008 Harvey said:

I like Scott’s approach, the bonds we already hold will reap a reward from the higher inflation rate set

On May 1st, 2008 Andy said:

Can the fixed rate ever go negative?

The composite rate cannot go negative. Or can they change that rule too?

On May 1st, 2008 mike said:

I must say that the 0% isn’t unexpected considering the rate of TIPS. Government almost gives money away to banks at their new lending window that was created to restore confidence in the credit market.

While I agree that the fixed rate of 0% is outrage, the adjustable rate of 4.8% is very competitive with other investments. Please show me any fixed-rate security that pays this ROR. We can always sell it in a year or two.

On May 1st, 2008 mike said:

Be grateful that the fixed rate is 0% instead of being negative!

On May 1st, 2008 Joe said:

Andy, I don’t think the fixed rate would go negative. Treasury can discontinue the I Bond, but a negative fixed rate would go against the mission and spirit of an inflation adjusted security. So in my opinion the fixed rate has now bottomed out. In theory the worst composite rate would be zero if there is deflation, for Treasury cannot use deflation rates in computing the I Bond’s composite rate.

On May 2nd, 2008 mike said:

How can you explain buyers of the 5-year TIP who were buying inflation adjusted securities with negative rates!

On May 2nd, 2008 Joe said:

Mike, I confess I know nothing (meaning zero) about marketable Treasury securities (I’ve only bought EE and I bonds in my whole life), but a look at TIPS seems to suggest that for TIPS price and interest are determined at auction. If I understand it right, there is no Treasury-set fixed rate as in the case of I Bonds. TIPS are inflation adjusted in that their principal increases with inflation and coupons are calculated on the adjusted principal. While the coupon rate is fixed, investors will determine whether there will be a discount or premium on the par value, so TIPS are completely subject to market demand. Once the discount/premium is set, the principal amount will change along with inflation rates. So if you think buyers of the 5-year TIPS got a bad deal, it was really caused by market demand (resulting in a smaller discount). But that TIPS are inflation adjusted cannot be denied. Mike you are welcome to enlighten me whether my above comments from a novice are correct.

On May 2nd, 2008 Steve said:

Treasuries compete against each other; what counts is the “real” yield, not the “nominal” one.
It makes perfect sense for an I-bond to have a negative fixed rate, if the fixed-rate treasury with the same maturity has a “real” (i.e. nominal rate minus projected inflation) rate which is negative as well.

Japanese treasuries, for one, have been issued at negative real rates for several years.

On May 2nd, 2008 greg said:

yeah it must be cheaper to print money than to encourage savings via saving bonds. Be a “patriot” and load up on ee bonds.

On May 2nd, 2008 Tom Adams said:

All – I bonds cannot have either a negative fixed rate or a negative inflation component. The lowest composite rate allowed is 0%. Another way to say this is that the redemption value of a Savings Bond can’t go down.

As Joe explained, TIPS are traded in the open market, and during a “flight to safety” like we saw last March, investors wanted 5-year TIPS so much that the price went to a level where the fixed-rate equivalent, the yield, was negative. The value of TIPS can go both up and down because they are traded, unlike Savings Bonds.

If you could trade Savings Bonds, those I bonds that are paying 8.5+% right now would have far higher redemption values than they actually have.

Tom Adams

On May 2nd, 2008 Piper said:

I believe that the zero percent fixed rate’s intent is to serve a similar purpose as the stimulus checks we will all be getting soon: to promote spending and help stimulate the economy. If people are saving less (regardless if it’s bonds, CDs, savings accounts, the stock market, ect) then they are probably spending more. That’s the entire purpose of the Fed cutting interest rates every time they meet. So you are really being more “patriotic” if you don’t by bonds and instead spend your money at the local mall.

On May 2nd, 2008 Steve said:

“All – I bonds cannot have either a negative fixed rate or a negative inflation component. The lowest composite rate allowed is 0%. Another way to say this is that the redemption value of a Savings Bond can’t go down.”

They cannot have a “composite” rate below zero, but could still have a negative fixed rate, though.

On May 2nd, 2008 david said:

everyones an expert.

On May 2nd, 2008 Joe said:

Thanks Tom for concurring with my layman’s comments on TIPS — so I actually understood it correctly. I think what the others are suggesting is that, say, if the inflation component is 8%, can Treasury make a fixed rate of -4% so the composite rate will be 4% (the composite rate would certainly never reach zero — there being no single person knowingly willing to buy such a bond :-). My take is no, for a negative fixed rate would be against the mission and spirit of the very I-bond program, but apparently there is no law or regulation to prevent Treasury from doing so. I guess the worst would be for Treasury to discontinue I-bonds altogether when inflation reaches say 15%…

On May 2nd, 2008 Tom Adams said:

I’ve checked the Code of Federal Regulations for I bonds and, sure enough, there’s nothing there, that I can find anyhow, that says the fixed rate has to be zero or more. So I guess the Treasury could make it negative.

However, the rules (CFR 359.39) do say the composite rate can’t be below zero.

Tom Adams

On May 3rd, 2008 Dave said:

I think we’re a little delusional to believe that the inflation component isn’t somewhat rigged too. Anyone ever notice how the CPI seems to always go down the month before it’s set for the bonds? The real inflation rate i.e. for the things that we mortals buy seems a lot higher than indicated (Harpers Mag has a great article on this fact this month).

So long as Bush et al are surprised at the price of gas there’s no reason for the game not to be rigged.

On May 3rd, 2008 danny pierce said:

Don’t Make This Mistake!

I bought my $5000 limit in paper I bonds from my bank and them started the process of opening a treasury direct account to buy the other $5000.
By the time I was ready to buy the electronic bonds it was the last day of the month.

Guess what, all electronic purchases have the next day’s date…..0%….oh, well.

On May 3rd, 2008 Rev Wright said:

Goddamn Treasury, Goddamn Paulson, Goddamn Bush!

On May 3rd, 2008 eugene losch said:

The government must plan to borrow money and pay high rates of interest to their friends on wall street (that have exhibited impeccable financial skills at writing crap off the books). Oh silly me its election year!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

On May 3rd, 2008 william said:

this is what broke people do.

On May 4th, 2008 Mike McCune said:

“Consumption is not a patriotic duty”.

-M.G. McCune

On May 4th, 2008 Mark said:

I agree with david.(May 2)Could this program go the way of the balanced budget? Whats really “safe” anymore? Consider: the gov’t always cuts the “little” programs first. Guess I’ll start feeding my mattress…

On May 4th, 2008 Robert Walker said:

Just an idea to ponder. There have been major changes–the decrease in the total yearly purchase limit of savings bonds to 10,000 for EE and 10,000 for I series (paper and electronic), The 0% fixed rate for I bonds, the abysmal 1.4% rate for EE bonds this rate period, and the policy changes the will allow other treasury securities to now be purchased in $100 increments. Is this the begining of the end for the US savings bond program? Any thoughts? Savings bonds are not exactly the easiest investment vehicles to understand but they have been the safest and most accessible vehicle; the venue of Treasury Bills, Notes, And TIPS seem even more daunting for the average small investor.

On May 5th, 2008 Mark said:

Notice the treasury hasn’t sent any reassuring comments in this column, have they! Wonder why?

On May 6th, 2008 Nik said:

I see that today the Congress is considering making both pennies and nickels out of steel. When I get around to cashing my I Bonds, they’ll probably be paying out with $1000 plastic coins.

On May 7th, 2008 Danny Pierce said:

ok now….
I bonds are down to 0% so how about TIPS?
I don’t understand how to read the prices so if someone could help me understand if they are a good or bad investment I would appreciate it.

On May 8th, 2008 Tom Adams said:

Danny – On TreasuryDirect, TIPS are available about a dozen days a year or less. Typically there are four offerings of 5-year TIPS, four of 10-year TIPS, and two to four of 20-year TIPS. The rate you get depends on the rates in the market the day of the offering.

You can also buy and sell TIPS through a stock broker. Each issue of TIPS will have a different rate – you can see the averages here.

On June 19th, 2008 walt banze said:

Iam considering buying I bonds this month Good Idea? or Not?

On June 25th, 2008 Tom Adams said:

Hi Walt – In the sense that I bonds currently earn nothing but the inflation rate, it’s a bad idea.

In the sense that the current inflation rate is higher than what most other investments are paying, it’s a good idea.

Take your pick.

Tom Adams

Comments Closed

June 1, 2010

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Tom Adams

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