Savings Bond Alert #030

Tuesday, May 1st, 2007
Categorized as: Savings Bond Alerts

Treasury lowers Savings Bond rates

The inverted yield curve continues to wreak havoc with Savings Bond interest rates. When the yield curve is inverted, it means that short-term interest rates are higher than long-term rates. Normally long-term rates are higher. A long lasting inversion, such as the current one, signals a coming recession.

The Treasury looks at long-term rates when calculating what Savings Bonds should pay, because investors can hold them for 30 years. Investors, however, tend to look at competing short-term rates when calculating whether to invest in Savings Bonds.

This morning the Treasury lowered the fixed-base rate on new Series I Savings Bonds to 1.3%, from the previous 1.4%. The Treasury also lowered the rate on new Series EE bonds to 3.40%, down from the previous 3.60%.

The new rates give the current fiscal year a decent chance of setting a new record the lowest amount of investment in Savings Bonds. The government’s fiscal year starts in October. During the year’s first six months, new investments in Savings Bonds were less than a third of the dollars invested during the same months the previous year.

Typically, Savings Bond investments are lower during the second six months of the year than during the first six months. With an annual investment rate of $3.4 billion for the first six months of FY-2007, a weak second half could push investments for the year below $3.11 billion, the record low point set in FY-1982. That year both short and long term rates were above 14%.

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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:

5 Comments

On May 2nd, 2007 Mike said:

The yield curve has been inverted for awhile, and I heard threats of recession. It seems that everybody believes that this time is different. Many think that Federal Reserve has mastered its technique to eliminate the down cycle of economy.

Everything has been appreciating in value: stocks, bonds, gold, etc. In the last several years, we learned that we can have butter and guns at the same time, so everybody is in the buying frenzy. The only people who suffer are savers!

On May 3rd, 2007 Tom Adams said:

Mike – Well, either that or it’s a world-wide bubble that will eventually pop.

Tom Adams

On May 3rd, 2007 Larry said:

I think Mike is right. Seems we have the chineese and 3rd worlds making the butter (and it is sweet), while the US makes the guns paid for by the chineese, or other 3rd world countires. there seems to be money, chasing money.

I’m just trying to figure out the next bubble so I can get in on the ground floor. Real estate worked well for some, but the down payments that are now required are creating a flow into stocks.

On August 15th, 2007 joseph digeronimo said:

CPI is running higher lately. Does that mean that the next I-bond rate will be higher than the current rate? Are I-bonds and EE bonds dependant of the FED’s rate decisions? Speculation is that the FED will lower rates soon because of credit crunch. Will this effect next change in bond rates?

On August 15th, 2007 Tom Adams said:

Joseph – the part of the I bond rate that is adjusted every six months for all I bonds is based on the CPI, so yes, a higher CPI means a higher I bond rate for all.

The fixed part of the I bond rate, which you get for all time when you buy the bond, is sensitive to market interest rates, so to the extent the Fed is successful in lowering interest rates, yes, that could have an effect on the fixed portion of the I bond rate.

Of course, that could be inflationary – which would raise the other component of the rate – so you can see this is very complex and no one can really predict the future in this area.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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