Savings Bond Alert #016
Tuesday, November 1st, 2005
Categorized as: Savings Bond Alerts
Treasury drops I bond fixed rate to 1.0%
The U.S. Treasury slapped small investors with lower Series EE and I Bond rates today, even though interest rates in the open market have risen during the last six months.
The Series I Bond fixed base-rate was set at 1.0%, down from the previous 1.2%. The EE bond rate was set at 3.20%, down from the previous 3.50%.
Large investors who buy TIPS, the Treasury’s marketable security comparable to I Bonds, have seen the 5-year yield rise in the last six months to 1.81% from 1.28%, an increase of 53 basis points. By dropping the I bond fixed base rate 20 basis points, the Treasury is forcing small investors to take a rate 0.73% less, in comparison to large investors, than what it offered six months ago.
Large investors who buy 10-year Treasury Notes, which the Treasury “uses” to set the EE bond rate, have seen their yields rise in the last six months to 4.57% from 4.21%, an increase of 36 basis points. By dropping the EE bond rate 30 basis points, the Treasury is forcing small investors to take a rate 0.66% less, in comparison to large investors, than what it offered six months ago.
Because of the jump in inflation during the last six months, the initial interest rate for Series I Savings Bonds purchased during the next six months will be 6.73%, up from the previous 4.80% rate.
The new Series I rate is made up of the 1.0% fixed base rate and a 5.70% inflation component. The inflation component applies to all Series I Savings Bonds and is up from the previous level of 3.58%.
Older Series I bonds will earn from 6.73% to 9.39%, depending on issue date, during their next six-month rate period.
Older Series EE Savings Bonds issued between May 1997 and April 2005 will earn 3.61% during their next six-month rate period, up from the previous 3.42%. Rules for these bonds force the Treasury to set the rate at 90% of the 5-year Treasury Bill rate, which has also risen during the last six months. Series EE bonds issued prior to May 1997 pay a variety of rates.
Also this month, the final issue of Series E bond that paid interest for 40 years reached final maturity and stopped paying interest. All Series E bonds issued before December 1975 are now stinker bonds and should be redeemed.