New I bond fixed rate 0.10%; EE 0.70%

Any thoughts on why Treasury Direct does not yet calculate a current interest rate for a $500 May 2000 I-bond?

With the negative inflation component, will the value of my existing E bonds or I bonds decrease, or do they hold their present value?

Nik - the calculators haven’t been updated yet, but as of this morning the rate on any I bond issued in May or November (of any year) is 0% for the next six months.

Mary - They hold their present value. There is no situation in which the redemption value of a Savings Bond goes down.

Tom Adams

I thought the I-Bond base rate was guaranteed so this is a surprise.

Faye - The guarantee has not changed. The guarantee is that your I bond earns a fixed rate plus the inflation rate.

You didn’t anticipate that the inflation component might go negative and wipe out your fixed rate, but that’s always been part of the guarantee.

Tom Adams

Hi Tom - Looking for you to get our your crystal ball - I keep hearing they think inflation is going to soar as the economic recovery takes hold. Do you subscribe to this theory? I am considering cashing out a sizable chunk of my I bonds and paying off my mortgage… I figure there is no sense in paying 4.5% out when I have the funds earning 0…. but I also would rather hang on if in 6 months or a year they will be earning a nice rate of return (6% or greater)…. I guess it obviously depends on how fast the recovery will happen, but I truly wonder about the lofty inflation rates that some are predicting…. Thanks, and great site!

Scott - The people who control these things are targeting inflation, but whether they will succeed or overshoot is impossible to say.

However, for your situation, please recognize that 4.5% is historically low for home mortgage rates. With even a little inflation the real rate on that mortgage is just a pittance. I wouldn’t recommend paying it down even if you do cash in the I bonds. You want to pay that off as slowly as they’ll let you.

Tom Adams

Hi Tom,

Do you think that as long as the I bond rate was going to be zero anyway, then its good that the CPI went down a lot (-5.56%)? That way when prices go up again we can capture the same gains that we captured before. In this way with I bonds, over the long run, we can benefit from downward fluctuations in the CPI better than TIPS can.

Let me be sure I get this right. Right now bonds issued in any year in May or November go to zero interest for the next six months. However, a bond issued in an October will continue to earn the rate it enjoyed prior to May 1st and will not go zero interest until October 1st?

Tom,with the rates being so low on I bonds do I still make my monthly investment or do I take my money and put it my banks MM acct that is paying 2%
Thanks

Alex - Exactly right.

Lee - Exactly right - however, let’s add that the October bond’s rate just changed in April, so it will earn that new April rate (based on the Nov 2008 rate announcement) for six months (April to September), then will go to zero in October (for the six-month October-March rate period).

Mike - I think new investments would be better off in the bank account until Nov. I also think old investments have done well enough to suck up six months of zero and should not be cashed in.

Tom Adams

Hi Tom,

This is in reply to your answer to cashing out bonds to pay off a mortgage. Is your opinion the same for credit card debt?

My situation is that I have been diligently buying bonds twice a month, but I also have been stupid with my credit cards. Starting in January, I decided to get out of debt, and I have been making great progress, but I still have about 14-16 months to go.

I have enough principle in my Bonds to cover my credit card debts.

My question is would it be worthwhile to cash out the bonds and get out of credit card debt?

A couple of facts that may influence your answer, are that I’m 30, I have 26 years left to pay on my house at 5%, no car payments, and I absolutely will not ever go into credit card debt again.

I’m not sure how to do the math, but it feels like once I am out of debt, I can fairly quickly make up the savings.

How do you feel about this?

Thank you very much!

Jeff - It depends on what interest rate you’re paying on the credit card debt, but typically it’s so high that it’s always better to pay off the cards with your Savings Bonds.

However, for this to work out as a good deal, you really do need to make up the savings. Just put the money you would have paid to the credit card company back into Savings Bonds or an alternative investment every month.

Tom Adams

Hey Tom: I am somewhat confused about which I-Bonds continue to earn interest and when they go to zero interest. Here are my bond dates:
04/2008
10/2003
09/2003
01/2003
11/2002
12/2002

Thanks

Buzz - Your 2002 and 2003 bonds are over five years old; no penalty to cash those. Your 2008 bond is over a year old, so you can cash it with a penalty. All I bonds earn interest for 30 years. With that out of the way, the year of issue is no longer relevant to your question.

The September bond’s rate won’t go to zero until September.
The October bond’s rate won’t go to zero until October.
The November bond’s rate went to zero on May 1.
The December bond’s rate goes to zero in June.
The January bond’s rate goes to zero in July
The April bond’s rate goes to zero in October.

Every bond earns its initial rate for six months and the rate changes on every six-month anniversary of that bond.

Tom Adams

Tom, I have 3 series E bonds (approx $2100)that have just matured, and I wanted to roll them over into my daughters names, and didn’t know what investment would be best EE or I. In 20 years I will be paying for college, and I believe the EE bonds can be redeemed with no tax liability to pay for college is that true? What would be my best bet? Or should I put it in a CD until the I bond rates come back up?

Chad - If you want to get the education deduction you have to put the bonds in your own name, not your daughters’. There’s complete info on that deduction here.

Historically I bonds have done much better than EE bonds, but the Treasury seems to be actively discouraging new investments in Savings Bonds by setting artificially low rates.

Tom Adams

Hi Tom:

Need to get it right about what happens in November. I have 11/02 I-bonds that just went to zero interest on May 1. I believe that the fixed rate was about 3%. Does that mean if the CPU index inflation rate does not change from the current negative rate these bonds will be starting November at 3% interest plus any CPU increase between now and October?

I have an opportunity to have the co-owner cash the bonds with no tax liability and use the funds to pay down a mortgage.

Buzz - the fixed rate on 11/02 I bonds is 1.6%. In November the rate will change to 1.6% plus the inflation rate between Mar and Sep.

Tom Adams

I have 2 $5,000 I bonds purchased May 2003. Now that I bonds growth rate is 0, I’m thinking of cashing them in after 3 months so that I ‘ll be penalized hardly any thing.

I’d then invest the 10,000 in a CD I’ve found paying 3.25 and could go back to I bonds when they start paying more interest, maybe a few years. Am I planning this right?

Carolyn - May 03 I bonds have a fixed rate of 1.10%, which isn’t particularly high historically, although it’s a lot more than the fixed rate on recent issues.

If you redeem in August, the penalty will be zero. Of course, by then the CD will rate will have changed. You don’t say what the term of the CD is - make sure you know how many years you’re locking up your money.

And consider that inflation is already back up to about 3%. If that sticks your I bond will earn over 4% beginning next November.

Tom Adams

Tom. I’m also confused as to current interest earning on I bonds purchased May 2003 and May 2005. Also my broker suggests buying SHY now earning over 3%

Gary - The May 03 bond has a fixed rate of 1.10% and the May 05 bond has a fixed rate of 1.20%. What you earn is that fixed rate plus the inflation rate between March and September.

For Sep 08 - Mar 09, the inflation rate was negative 5.56%, so you should be getting minus 4% something, but there’s another rule that says the rate can’t go below zero, so that’s what you’ll get for the May 09 to Nov 09 rate period. At that point the rate will change again, based on inflation from Mar 09 to Sep 09.

You can cash the May 03 I bond without penalty, but the May 05 bond won’t be five years old until next year. However, if you wait until August, the penalty - which is the most recent three months of interest - will be zero.

SHY is a short-term Treasury bond exchange traded fund (ETF). It’s currently trading around $84. Two years ago it was around $79.50 and it will go there again if interest rates go up. Nonetheless, as investments go, SHY is a reasonable alternative to I bonds. Make sure you read and understand the prospectus, which your broker will be happy to email you, before you invest.

Tom Adams

Tom,

Your calculator and the one on the savings bond wizard show the rate for a 10/2001 I bond at 7.99. My understanding is that the fixed rate for a 10/2001 bond is 3.00% and the 01 Nov 08 inflation rate is 2.46%. I would expect to see a rate of 5.46 from the calculators. What am I missing? Thanks,

Jim

Jim - The fixed rate on the 10/2001 I bond is indeed 3%. However, the inflation component announced on November 1 2008 was 4.92% (you can get these numbers from the chart on this page). The 2.46% rate you quote is from November 2002, not 2008.

The actual formula is a bit more complicated than just adding the two together and always makes the final number a big larger - thus the 7.99%.

This bond just started earning this high rate in May and will earn it through September. In October the rate will drop to zero. So for the year you get essentially 4%. Not too shabby.

Tom Adams

Hi Tom:
If I have an I-Bond that drops to zero interest in October, does that bond stay at zero for six months, or does it reset on November 1st at the fixed rate plus any inflation factor between March and September?

Also in a previous response you stated that the inflation rate in April so far was 3%. I read that the inflation rate was 0.3% for April. If that rate remained steady wouldn’t the six-month increase be about 2% through September?

Thanks

Buzz - every time the rate changes your I bond earns the new rate for six months. So if your rate changes in October, the next time it changes is April, over and over.

The 3% figure is annualized. The 0.3% figure is a monthly figure and they round it at one decimal, so it can only be 0.1% (1.2% annually), 0.2% (2.4% annually), 0.3% (3.6% annually) etc. In other words, the monthly change is a very rough measure.

Tom Adams

Tom:

I have two questions. I have I bonds bought in January, 2003. I just used the Calculator and the interest shows 6.56%. Do I understand correctly that that interest rate will continue thru July 31, 2009, then go to 0% for the six months starting August 1, 2009, then return to approx. 6.50% beginning February 1, 2010?

Is there a chance it will stay at 0% after the six months ending December 31, 2009? I find it very hard to believe that the inflation was below 0 when they did their calculation. Everything, and I mean EVERYTHING, has gone up continually for the past many, many months. How was it determined to be below 0%? Would it be wise to cash in these bonds now. I have not yet paid taxes on the interest, which I can probably do this income tax year.

Second: I also have about 30 EE bonds purchased in October, 1992. Has the interest rate on those already gone to 0%? If not, when will it reduce to 0%? What will the interest rate be (approx.) when the six months is up at end of October, 2009? I do not plan to use this money for college, etc. Are there any penalties for either for cashing in either EE or I bonds at this time?

Diane - you understand how your I bond’s rates will change, except for your prediction of the rate in Feb 2010. That rate will be fixed rate of your I bond, which is 1.6%, plus the inflation rate between March and September. It could be zero, though that’s unlikely.

The inflation rate is calculated every six months. Gasoline prices were much higher in September 2008 than in March 2009, which accounts for a lot of the price decline. I would keep the I bonds if you can, although there’s no penalty to cash them.

Series EE bonds pay interest for 30 years - in your case until October 2022. The rate on these bonds is currently 4.0% and will likely stay there. But you can cash them now without penalty.

Tom Adams

Concerning I bonds, I have always read that “the fixed rate is good for the life of the bond.” Yet now I see “the inflation component for the next 6 month period will wipe out the fixed-based rate on all issues of I bonds”.

I’m confused. Are my 8/03 I bonds currently earning 1.1% or 0%?

John - 8/03 I bonds are currently earning 6.05%. On August 1 the rate will drop to zero for six months. They still have a fixed rate of 1.1%.

To determine the composite rate that an I bond earns in each six month rate period, you add together the fixed rate (1.1%) and the inflation component (-5.56%). That comes out to -4.46%.

However, the rate can’t go below zero, so your I bond will earn zero during its next six month rate period (Aug 09 to Jan 10).

Tom Adams

Why isn’t the “saving bond wizard” updating redemption values beyound 5/2009? Is it because the interest rates have dropped to 0?

Kevin - you have to update the Savings Bond Wizard data file every six months. While connected to the internet, select Redemption Values… from the Savings Bond Wizard’s Tools menu, then click the Automatic Update button.

Depending on how strong your anti-virus software is, you may have to turn it off while updating the Wizard.

Tom Adams

Tom - I know it’s a little late, but in your answer to Buzz of May 11, 2009, you state correctly that a 04/2008 bond will start earning 0% interest in 10/2009. However, because of the 3 month penalty, the value of the bond will continue to rise for 3 more months, as the interest earned in July-September is added on. So if you’re going to sell, I think the right time is January 2010. Correct?

Mike - your calculations are correct.

It’s puzzling that the value of recent I bonds continues to increase for three months after the zero rate starts, but it’s because of the early redemption penalty becoming lower and lower.

Tom Adams

Hi Tom,

Am I reading this right? I have I bonds purchased in December, 2001. Will the interest rate drop to zero in December?

Steward - no, for December 2001 bonds, the rate dropped to zero in June. In December the rate will change again.

Tom Adams

I bought Series EE Bonds from Sep 1992 (my son was born) thru Jun 2001 and Series I Bonds from Oct 01- thru Dec 04, when I was medically discharged from the AF Active Duty. It was the only way I could save since I was married to a spendaholic. It was for my son for college. Since the economy has gone crazy I am very confused. Question: My son is going to be 17 this September. Can he cash the bonds without paying taxes? The Series I read my name and or my sons name, meaning we both can cash them. The Series EE has POD with my name. I looked up 4 bonds, 2 had notes in red to cash now. What is you advice? He is going to be a Junior HS and is wrecking my 1999 car which I love and gets honors etc. Honestly, I’d like my car back.

Lori - No, he cannot cash the bonds without paying tax on the interest.

I can’t tell from your message who the owner of the EE bonds is. But if you’re the owner and he’s the POD, you may be able to get a tax deduction by paying his college tuition. There’s more info on that here.

Where did you look up these bonds that advised cashing them now? There’s no reason to cash them now.

Sorry about your car. But your relationship with your son is way more important than your car. It’s very difficult being the parent of children this age, but it gets much better as they get older if you don’t let the teenage years permanently damage your relationship.

You want my advice? Keep the savings bonds for his college tuition as you originally planned.

Tom Adams

I want to thank you for helping everyone. I Savings Bonds are a great small-investor vehicle to use as insurance against inflation, but they are confusing, and it does look like the Fed is discouraging their purchase. Keep up the great work! I am going to buy your book to support your efforts.

Tom, You have indicated that the Treasury is discouraging new investment in savings bonds by setting artificially low rates. Should I assume the party’s over and my I bonds (02/2003) interest will be permanently low (maybe 0%)and begin bailing out of this sinking ship? I just yesterday discovered the negative inflation rate trick.

Ken - 2/03 I bonds have a fixed rate of 1.6%. None of the I bonds issued since then have a fixed rate that high.

As of today, no Treasury security of less than 3 years duration pays that much. Plus you get the inflation rate! Banks are going down weekly and you’re going to invest the money where exactly?

Why do you call it a “trick”? The rule has always been that you get the fixed rate plus/minus the CPI-U-determined inflation rate.

I’d happily buy your I bonds if that was possible.

Tom Adams

Tom, It’s clear from reading all the comments that people are confused that a “fixed” rate does not imply an absolute positive return. How could so many people be caught thinking a “fixed rate” does not mean a fixed positive return? As so often is the case, rules and marketing are different. Like the ads for home mortgages at some really low rate, but the fast talk at the end says something different, or how about the load percentages on A shares of mutual funds? Have you ever sat down and wondered what math they use to come up with what they say and what you have left over? I have noticed for some time the CD rates at the credit union are expressed as APR and APY. But I don’t think people study and read the fine print before buying I-bonds - I mean really, we don’t expect to be snookered by our government. People just listen to the phone message or read the placard at the bank like I did. I have mentioned before I actually thought that 7+% with a 6% rate floor on EE savings bonds from 1988 meant they would never pay below 6%. And they did’nt - until the Treasury changed the rules, now they only pay 4%! I can’t believe I did not understand that a guaranteed 6% rate floor meant I could end up with a 4% rate? Live and learn, and now one is afraid to get out of I-bonds temporarily because the buy limits are so low you can’t get back in.

As risk-free returns approach zero, people hoard cash - and banks fail. The Fed has pushed the gas pedal to the floor targeting zero percent (wide-open throttle!) and we were not only not accelerating, or holding a constant velocity, but we decelerated. And now we have also had fiscal policy injected (perhaps analogous to nitrous-oxide injected with extra fuel in our engine)and our economic vehicle (the economy) has continued to decelerate albeit at a slower rate. We may find that we have steadied out for the third quarter at some lower velocity ($ GDP / year) but our engine, having been abused at wide-open throttle along with the nitrous injected, analogous to an athlete who takes steroids, has traded long-term future reliability or quality for a little short-term performance. Avoiding a “Depression” may be good for us, but we may also have avoided any chance of a great growth period like the 1950’s for our children or grandchildren, and most likely increased the probability of an even worse financial crisis later. Perhaps our (economic) “engine” is not strong enough now because of past abuses (moral hazards).

Whether or not the “rules” were in place does not matter; the fact that so many people “misunderstand” “fixed rates” (or guaranteed rate floors)or moral hazards created when government behaves unpredictably and unfairly, is symptomatic of the larger picture - that our perception of civil government of stableness, fairness and security is changing. Perhaps the damage is done and our future is already here. -Mike M.

Hi Mike - I appreciate your comments.

I knew we were in trouble back in the 80s when my bank tried to get me to pay for insurance in case my credit card was stolen without mentioning that by law my maximum possible loss was $50. If you can’t trust your bank to treat you fairly, why would you trust it with your money? How could the President of that bank not get it?

People say capitalism is based on greed, but the fact is it’s based on trust. When you can’t trust the companies you deal with to treat you fairly, it adds friction to your transactions, because you have to spend time reading the fine print and asking others about their experiences. This friction slows down the economy and eventually destroys capitalism.

Which is pretty much where we are now. We’ve been lied to so much by people who are only pretend capitalists we’ve stopped buying stuff. I think your economic analysis is right on.

Tom Adams

Hi Tom:

I am trying to decide about investing some money in I-bonds or TIPS. I can purchase TIPS now on the open market or wait until April.

Is there any historical or other type of info that shows if it is more advantegeous (less expensive) to wait until an auction vs. buying TIPS on the open market?

Also while I read all the relevant info about I-Bonds and TIPS I cannot figure out how to decide which one makes more sense to buy now (or in the next few month).

Any advice? Thanks.

Susan - the difference is that when you buy at an auction you get the same price everybody else gets, including the bond dealers. When you buy on the open market (from a bond dealer) you will pay more in fees and hidden commissions.

In the TIPS vs. I bonds question - I bonds are better when prices are going down because the interest rate can’t drop below 0. TIPS actually decline in value in this situation. If prices are going up TIPS earn more than I bonds. On the other hand, I bonds are tax-deferred and TIPS aren’t. It’s not easy to figure out which one is better for your situation. Maybe some of each?

Tom Adams

Wow! Hi Tom, great website. Wish I would have found this earlier. Have been buying I-bonds since they were first offered. Unfortunately, those early issues were redeemed shortly after purchase “since I needed the money”. Sometimes I plug in some of the early years original purchase dates and denominations to see what they would be worth today. Ouch! Oh Well. All is not lost, though — I have a newer “slug” of bonds that I purchased from Feb 2005 through May 2008. The bonds are yielding between 3.45 and 4.78 per cent, but my Savings Bond Wizard is showing a rate of Zero (0) for all issues. A google search of this led me to this site, and trying to catch up on all the posts.

I thought I understood I-bond features well enough, now I am not so sure. It was my understanding that the fixed rate portion of the bond was good for the life of the bond, but now it appears this is not so??

Tom, It’s now 10/23 what do you thinks the interest rate will be on 11/1? Looking to use the bond for my retirement in about 10 yrs. Great web site. Thanks.

Ted - your I bond rate is fixed and unchanging. The rate you earn, however, is the fixed rate plus the inflation rate. If the inflation rate is more negative than your fixed rate is positive, the two add up to zero or less. They can’t give your I bonds a negative rate, so this stops at zero.

Walt - Yesterday the 10-year TIPS rate was 1.49%. I suspect the next I bond fixed rate will be in the 0% to 0.25% range.

Tom Adams

What is the fixed rate for I Bonds bought Jan “02 and Jan ’03 and what is the inflation rate - what are my bonds earning now?

Myra - Here’s where you can look up the fixed rate of any I bond.

Here’s the page that has the current I bond inflation rate.

Finally, you can use the calculator at the top of this page to find out what your bonds are earning now.

Tom Adams