In a bit of a surprise, the US Treasury just announced it is dropping the I Bond fixed rate from 0.2% to 0.1% for I Bonds purchased from May 1 to Oct. 31, 2014. The fixed rate will be paired with an inflation rate of 1.84% to result in a six-month combined rate of 1.94% (annualized) for I Bonds purchased during this period.
From the announcement:
I Bond Earnings Rate of 1.94% includes a Fixed Rate of 0.10%
The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate. The 1.94% earnings rate for I bonds bought from May 2014 through October 2014 applies for the first six months after the issue date. The earnings rate combines a 0.10% fixed rate of return with the 1.84% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 234.149 in September 2013 to 236.293 in March 2014, a six-month increase of 0.92%.
What this means. The Treasury dropped the fixed rate from 0.2% to 0.1%, disappointing buyers who were hoping the rate would continue at 0.2%. On the other hand, the inflation-rate component is getting a nice boost from 1.18% to 1.84% for the next six months.
- If you bought your 2014 allocation before May 1, you’ll get a combined rate of 1.38% for six months and then 2.04% for six months.
- If you buy anytime from May to October, you’ll get a combined rate of 1.94% for six months, and then 0.1% plus the next inflation rate, which will be set Nov. 1.
Series EE Bonds get a boost
The Treasury also announced it was bumping the base interest rate of Series EE Bonds from 0.1% to 0.5% for bonds sold from May to October 2014. Here is the announcement:
Series EE Bonds Issued May 2005 and Later
Series EE bonds issued from May 2014 through October 2014 earn today’s announced rate of 0.50%. All Series EE bonds issued since May 2005 earn a fixed rate in the first 20 years after issue. At 20 years, the bonds will be worth at least two times their purchase price.
What it means. This does make EE Bonds slightly more attractive as a short-term investment. You can sell them after a year, with a three-month interest penalty and after five years with no penalty. But you can probably do better in a bank savings account, such as the 0.87% offered by Ally.
The real appeal of EE Bonds comes when you hold them for 20 years and get double your original investment, in effect earning 3.5%. At that point, cash them in.