Savings Bond Alert #026
Wednesday, November 1st, 2006
Categorized as: Savings Bond Alerts
I bond fixed rate held at 1.40%; EE rate drops to 3.60%
The Treasury announced this morning that it will hold the fixed-base rate on I bonds at the current 1.40% for the next six months.
Combined with the new inflation component of 3.10% that I told you about in my last Savings Bond Alert, the rate gives new I bonds purchased between now and the end of April a six-month composite rate of 4.52%.
If you own older Series EE bonds, their rates also held steady or went up. EE bonds issued from May 1997 through April 2005 earn a market-based rate, which will be 4.39% for upcoming six-month rate periods. This is 28 points higher than the previous 4.11%.
The rate for EE bonds issued during the next six months, on the other hand, was dropped 10 points to 3.60% from the previous 3.70%. The 10-year Treasury rate on which the EE rate is supposedly based dropped 30 points over the last six months, so perhaps a 10 point drop isn’t so bad.
Nonetheless, at this point, investing in new EE bonds is for chumps. The EE bond rate-setting process the Treasury changed to in May 2005 is simply taking advantage of the people who don’t know any better than to invest in EE bonds.
Fortunately, investors have gotten the message. New investments in Series EE bonds in September were just $125.7 million, which is a record low. For the government’s 2006 fiscal year (Oct 2005 to Sep 2006) new investments in EE bonds were down more than 25% from the previous year. Moreover, they were down more than 46% from the 2002-2004 years before the EE bond rate-setting formula was changed.
I just got an email from my daughter asking what my wife and I want for Christmas. It’s still a little early to think about the holidays, but if you’re a Savings Bond investor, you could do a lot worse than to find a copy of my book, Savings Bond Advisor, in your stocking Christmas morning. (If it fits, by the way, you have really big feet.)
If that’s what you want to ask for this year, tell Santa it’s available from and Barnes and Noble stores (look near the beginning of the investment or personal finance section). If your bookstore is sold out and has to order it for you, they’ll appreciate the ISBN number, which is 0-9760645-2-9. Savings Bond Advisor by Tom Adams. Cheaper than an EE bond and it pays better.
(Average rating: 2.33 stars)
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Tom Adams
I am oh so glad I followed the analysis on this page and when Pedersen made his prediction that the fixed rate would go down was able to resist following his advice. Keep up the good work. Oh what a difference a day makes: you buy on Oct. 31 and get 3% and change, you buy on Nov. 1 and get 4.52%!
Thanks for the info earlier this week regarding I bonds vs. EE bonds. I held off until today and bought 10k in I bonds, and further chose to hold off buying any EE bonds. For whatever reason, the treasury must not want to sell EE bonds.
I bought your book, and just wanted to let everyone know that is it wonderful. It explains so many things about the bonds that one would never know otherwise about a very changing and complicated subject. It’s worth far more than it’s price.
I am asking this more as an informed opinion, not as much for advice. I currently purchase Series EE savings bonds biweekly, as well as Series I. Since the new rate rules for EE bonds have be in force the returns are abyssmal. I am gambling for now that with the near 25% drop in Series EE purchases that the government will coming up with an alternative way to determine rates to slow the hemmorrage of invested funds. Is there any sign that this may happen in the near future?
Robert - my guess is that the Treasury wouldn’t change the way it determines rates. If it was concerned about the level of EE bond sales, it could use the current process of “secret criteria” to set the EE bond rate higher.
But this is really very complicated. Savings Bonds rates have to be set low enough to offset the cost of servicing individual investors making small purchases of paper bonds.
Most of the money the Treasury borrows comes from big financial institutions and foreign governments that buy millions of electronic bonds at one time.
Those financial institutions are happy to sell you some of their bonds, but they charge brokerage fees to cover their cost of servicing the transaction.
There are plenty of people in government who think the Treasury should get out of the Savings Bond business altogether. They say Savings Bonds cost too much to service and that the government shouldn’t “compete” with financial institutions.
On the other side, however, Savings Bonds have emotional momentum and history in the public mind. Doing away with Savings Bonds would be somewhat like taking a wrecking ball to the Statue of Liberty to make way for a shopping mall. Not gonna happen.
I don’t think the government competes with financial institutions in this regard - more like, with itself. I know a lot of people who have started investing in marketable treasuries instead of savings bonds through TreasuryDirect (and I have too). Certainly the details, tax treatment, etc. are different but I can’t see myself going back to 1.4% I bonds when 2.7% is available through the same interface.
I wonder if the Treasury even has an economic basis for the way it sets the savings bond rates. Certainly they would be based on meeting a total savings bond sales goal of some sort, but if they miss the goal, do they really care? Savings bonds are such a small amount of their total bond sales that it really wouldn’t matter. Perhaps this is what drags the rate so low … there is no incentive for them to get their savings bond sales figures right.
Tom, I understand paper bond costs are an issue, and small sales to individuals, but don’t you think this would have been a bigger cost back before they went to an electronic system? And curiously, rates were much higher then? (compared to alternative investments)
Mario - all true, but the political climate was different and the levers of power were in the hands of people with a different philosophy then.
For many of the decades after World War II, political power was aimed at reducing the gap between the people at the top and everyone else.
Now the politicians are helping the folks at the top to skyrocket away from everyone else.
These things run in cycles and we’re probably at the peak of this cycle now.
Tom.
I am a little confused. If I purchased an I Bond in Oct 2001 with a 3% inflation rate, does that rate change every 3 months. I originally thought that the inflation rate was permanent and would not change.??Was?I wrong??
Emil - I bonds have a fixed rate that’s permanent and an inflation component that changes every six months, starting from the issue month of your I bond. So in your case, your October 2001 I bond has a fixed base-rate of 3.00% and it earns the current inflation rate on top of that. Your rate is adjusted for inflation every April and October. It’s a keeper!
For complete details, see How Series I Savings Bond interest rates work.
Tom:
Wow, Thanks for the quick response. I will keep it.
Tom,
Would like to purchase 3 bonds on 11-30-06. Would you recomment EE or I bonds. Am thinking I bonds.
Elizabeth
Elizabeth - from an historical perspective, I bonds have outperformed EE bonds ever since they were introduced in 1998. I don’t see any reason at this time to think things have changed.
Tom Adams