Treasury drops Series I Savings Bond fixed rate to 0.0%

Savings-Bond-IThe US Treasury just announced that is it lowering the fixed rate paid on Series I Savings Bonds to 0.0% for bonds purchased from Nov. 1, 2014, to April 30, 2015. It also announced that the new variable (inflation-adjusted) rate for I Bonds will be 1.48%, as I predicted back on Oct. 22.

This means I Bonds purchased through April 30, 2015 will carry a composite, annualized rate of 1.48% for six months.

The move to drop the fixed rate to 0.0% is a disappointment, because the fixed rate carries with an I Bond for its entire life, up to 30 years. The variable rate changes every six months for all I Bonds. But the Treasury did follow its typical pattern. With a 10-year TIPS yielding only 0.40% today (plus inflation), there wasn’t much justification in keeping the fixed rate above zero.

The fixed rate dropped to 0.0% in November 2010 and stayed there for three years, until November 2013, when the Treasury surprised everyone by raising the fixed rate to 0.2%. At the time, a 10-year TIPS was yielding 0.52%. That lasted six months, and the rate dipped to 0.1% in April 2014, and now to zero in November 2014.

Prediction. I bought my full allocation of I Bonds ($10,000 per person through TreasuryDirect) back in February, so I locked in that 0.2% fixed rate. I suspect most potential buyers have already purchased their 2014 allocation, so the Treasury won’t be selling a lot of I Bonds through Dec. 31, 2014.

In January, when the 2015 allocation limit reopens purchases, there won’t be any reason to buy, and smart investors will wait until later in 2015 to see if the fixed rate rises again. It will be reset on May 1 and Nov. 2, 2105. So the Treasury won’t be selling a lot of I Bonds in the first quarter of 2015, either.

EE Bonds. The Treasury also gave a little slap to holders of Series EE Savings Bonds purchased after May 2005, which were paying 0.5% interest annually with a guarantee to double the principal balance in 20 years. So if you hold these for 20 years, you get 3.5%. The Treasury today dropped the annual interest rate for all EE Bonds to 0.1%, but the 20-year guarantee still holds.

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5 Responses to Treasury drops Series I Savings Bond fixed rate to 0.0%

  1. Pingback: Buy I Bonds now, or wait until later in 2014? | Treasury Inflation-Protected Securities

  2. mike says:

    Probably because they expect inflation to increase so they’re offsetting future costs.

  3. Len says:

    They can be d*mned sure I won’t be buying any, especially considering the after-tax return, no matter how many years you might hold them. Pretty funny in a way, each year the federal government goes ever deeper in debt but would like me to loan them money for essentially nothing. No thanks.

  4. tipswatch says:

    Len, you are guaranteed to get a negative real return, because of the federal income taxes when you eventually sell. But I will probably still buy them in 2015, even with a 0.0% fixed yield, because the idea is to build a stockpile of I Bonds for the future, given the purchase limits. Later, if the yield rises, I can sell those and buy back a new allocation with a higher fixed rate.

  5. Pingback: I don’t like this new I Bond interest rate, should I sell and invest elsewhere? | Treasury Inflation-Protected Securities

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