How Series I Savings Bond interest rates work
Thursday, December 15th, 2005
Categorized as: Savings Bond interest rates • Series I US Savings Bonds
If you’re interested in finding out what interest rate your Series I bonds are earning right now, use my Savings Bond Calculator. It will give you both the current rate and current value of your Savings Bonds.
However, if the rate isn’t what you expected, read on – most investors in Series I Savings Bonds have only a murky idea about how I bond rates work. Every Series I bond’s rate not only changes every six months, but can swing widely between an eye-poppingly high rate and zero. Here’s why:
Series I interest rates are made up of two components that are added together, a fixed rate component and an inflation rate component.
Fixed rate component
All I bonds issued within the same standard six-month window (either November-April or May-October) have the same fixed rate component. Once a bond is issued, the fixed rate will never change for that I bond. The fixed rate is good until the bond stops paying interest 30 years later.
However, while the fixed rate on a bond that has been issued never changes, the Treasury does announce a new fixed rate for new I bonds each May and November.
The fixed rate component that the Treasury has assigned to Series I bonds at issue has ranged from a low of 0% to a high of 3.60%.
My page on Series I Savings Bond fixed base-rates includes a table showing the fixed-rate component for each issue of I bond.
The I bond inflation rate component
The Treasury bases the I bond inflation rate component on the Consumer Price Index for Urban Consumers (CPI-U), which is published by the Bureau of Labor Statistics.
The Series I bond inflation rate component announced in November reflects the annualized percentage change between the unadjusted March and September CPI-U indexes. The rate announced in May reflects the annualized percentage change between the September and March indexes.
Since I bonds were introduced in September 1998, the annualized inflation rate component has ranged from a low of negative 5.56% to a high of 5.70%.
Over long periods, you can expect the I bond inflation component to give you a yield in the 2.5% to 4% range. My book includes charts showing the historical rate of inflation and a discussion of historical factors that have led to higher or lower inflation rates.
My page on the current inflation trends includes more detail on the semiannual changes in the I bond inflation component.
Understanding rate periods
The one thing that Series I bond investors find most confusing is the relationship between when the new inflation component is announced and when it actually applies to their own Savings Bonds. To clear up this confusion you have to understand rate periods.
Every Savings Bond has a series of six-month rate periods that begin with the month in which the bond is issued. Series I Savings Bonds earn interest for 30 years, so they have 60 rate periods.
What’s confusing is that the Treasury announces new inflation rates in May and November, but the announced rates don’t apply to a specific Saving Bond until its next rate period begins, which is zero (for bonds purchased in May or November) to five (for bonds purchased in April or October) months later.
I bond composite rates
For each rate period, an I bond’s composite rate is the sum of:
- the bond’s fixed rate
- the inflation rate
- an inflation adjustment to the fixed rate (the fixed rate times the inflation rate divided by two)
In the event that the inflation rate is negative, which happens when the CPI-U declines during a six-month period, it is possible for the inflation component to cancel out all or part of the fixed rate component, leaving an I bond composite rate that is lower than the fixed rate.
However, the Treasury has guaranteed that the composite rate will never go below zero. I bonds will never have a negative interest rate, although they can have (and have had) a zero rate when the level of deflation was larger than the I bond’s fixed rate.
Because the composite rate includes both a component related to the bond’s issue date and a component related to the current inflation rate, Series I bonds pay a wide variety of interest rates.
My book, Savings Bond Advisor, includes an extensive historical look at inflation and interest rates. It will help you understand why Series I Savings Bonds compare favorably with other investments.