Savings Bond Alert #001

New Series EE rate: 2.84%; new Series I rate: 3.39%

The U.S. Treasury announced today that the initial interest rate for new Series EE Savings Bonds purchased for the next six months will be 2.84%, up from the previous 2.61% rate.

The initial interest rate for new Series I Savings Bonds purchased during the same period will be 3.39%, up from the previous 2.19% rate.

The new Series I rate is made up of a 1.00% fixed base rate, and a 2.38% inflation component. The inflation component applies to all Series I Savings Bonds and is up signficantly from the previous level of 1.09%.

The new 1.00% fixed base rate is the lowest the Treasury has ever offered on Series I Savings Bonds since their first issue in 1998.

Rates for older Series E and EE bonds haven’t yet been released. A follow-up issue of the Savings-Bonds-Alert News will notify you when those rates are available on our web site.

Savings Bonds rates crush one-year CDs, money markets, and other treasuries

Although there’s a three-month interest rate penalty for cashing a Savings Bond before five years, competing one-year rates are currently so low that you can pay the penalty and still come out way ahead.

Note that at one year, the penalty is 25% of the interest you’d otherwise earn (three months out of 12). You keep 75%; 75% of the new Series EE rate is 2.11%; 75% of the new Series I rate is 2.54%.

One-year CD rates are currently average about 1.75%, Treasury securities with one-year maturities are paying 1.5%, and Money Market rates are currently average about 1.35%, although 2% rates are available from some online banks that are competing for new customers.

Series I or Series EE – which one earns more?

For the next six-months, new Series I Savings Bonds will have a higher interest rate than Series EE, rather than the reverse. Will this relationship hold?

Since 1997, the Series EE Savings Bond rate has been set to 90% of the average yield on 5-year Treasury securities. Treasury data on these average 5-year yields is available back to 1962. Using this data, it’s possible to figure out what the Series EE rate would have been over the 41-year period from 1962 to 2003.

Over that period, the implied Series EE rate averages 1.96% more than the inflation rate. If this average holds into the future, Series I bonds that have a fixed base rate of 2% or higher would earn more than Series EE bonds, while those with a lower fixed base rate – including those available now – would earn less.

However, the history of inflation rates from 1962 to 2003 looks like a pyramid, with the peak in 1980. From 1962 to 1980, when inflation was increasing, the Series EE rate was only 0.33% more than the inflation rate. From 1981 to 2003, when inflation was decreasing, the Series EE rate has been 3.30% more than the inflation rate.

What’s going on? The rate on Series I bonds follows the inflation rate immediately, while the 5-year Treasury rate lags behind the inflation rate.

If inflation and interest rates soon head upwards at the 1962-1980 rate, then even Series I bonds with today’s low 1.00% fixed base rate should outperform Series EE bonds. On the other hand, if inflation and interest rates are steady, then Series EE bonds should be the better performers.