May 1 update: Series I Savings Bonds to pay 0.0% interest; EE Bonds bump up to 0.3%

Savings-Bond-IThe US Treasury just announced that the fixed rate on Series I Savings Bonds will remain at 0.0% from May to October, meaning I Bonds purchased in this period will earn a composite rate of 0.0% for six months. In addition, the Treasury raised the EE Bond fixed rate to 0.3% and left intact the guarantee that EE Bonds will double in value if held for 20 years.

The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the 30-year life of the bond, and the semiannual inflation rate, also called the variable rate.

The new I Bond variable rate of -1.60% (annualized) was set in stone when the Bureau of Labor Statistics released the March inflation number. This May 1 adjustment is determined by non-seasonally adjusted CPI-U for September to March. Here are the numbers, from my Tracking Inflation and I Bonds page:

six monthsThe composite I Bond rate is determined by adding the variable rate (-1.60%) to the fixed rate (depends on when the I Bond was issued). Any I Bond with a fixed rate of 1.60% or less – and that is every I Bond issued in the past 13 years – will get a composite rate of 0.0% for six months. This is because I Bonds cannot pay negative interest; the lowest they can go is 0.0%. The starting date of that 0.0% period depends on which month you purchased the I Bond, but they will all get six months of it.

One point to consider: Since inflation fell at an annual rate of 1.60% over the last six months, your I Bond paying 0.0% is beating inflation by 1.60%. This is one of the benefits of I Bonds: They lose no value in times of deflation, which isn’t true of the principal balance of TIPS, which declines with each deflationary month.

Should you dump your I Bonds paying 0.0%? One word answer: No. Since you are limited to I Bond purchases of $10,000 a year per person (plus $5,000 as a tax refund), I don’t think selling your I Bonds is a good idea. Unless: 1) you need the money today to meet current expenses, or 2) the I Bond has reached its 30-year maturity (none have as of yet, of course). The idea in I Bond investing is to build as large a cache of inflation-protected money as possible, to use as a resource in the future. Selling out of I Bonds will keep you from reaching that goal. Just be patient; wait out the six lousy months.

Should you buy I Bonds paying 0.0%? One word answer: No. It makes no sense to buy I Bonds in this May to October period. Instead, wait until the November 1 adjustment, which could bring a positive variable rate and the possibility of a fixed rate higher than 0.0%. You’d still have two months to buy your 2015 allocation. Inflation has already started ticking up, rising 0.6% in March on a non-seasonally adjusted basis. There is a good chance I Bonds will be paying a decent variable rate starting November 1.

What about EE Bonds? The Treasury’s decision to pump the fixed rate from 0.1% to 0.3% was a nice gesture, but in effect it is meaningless. The key to EE Bonds is this clause:

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.

The Treasury kept intact the 20-year doubling of value, which in effect creates a 20-year, tax-deferred Treasury bond paying 3.5%. This is an outstanding value, given that a 30-year traditional Treasury is currently paying 2.75%, and a 20-year is paying 2.49%, more than 100 basis points lower. That is a huge difference in a 20-year investment.

EE Bonds are the investment of choice in mid-2015, if … and only if … you can afford to hold them for the full 20 years.

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11 Responses to May 1 update: Series I Savings Bonds to pay 0.0% interest; EE Bonds bump up to 0.3%

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

  2. Mike says:

    You should do a section on how to breakdown, read, and understand charting and the mathematics involved. Only a suggestion.

  3. Mike says:

    Which is better a ROTH IRA paying 1.5% compounded or an EE Bond that will double in 20 years?

  4. tipswatch says:

    Mike, I’d prefer the Roth IRA, figuring you won’t have a 20-year term and will be able to step up to a higher return in the future, and the proceeds will never be taxed.

  5. pamela says:

    If one had an ibond from the last few years with a 0% base rate, would they be better off paying the 3 months of zero interest penalty, tax on the ~43$ in earnings and use IRA funds to purchase a 5 or 10 year tip at auction?

    Do you have to wait 3 months to have that zero penalty or is it whatever the current interest rate is ?

  6. tipswatch says:

    Pamela, the penalty is the ‘last 3 months interest’, and the 0.0% rate will kick in at different times, depending on when you first bought your I Bond. So if you wait three months after the zero interest begins, the penalty will be zero for selling within 5 years.

    I Bond versus a 5-year TIPS? An I Bond with a 0.0% fixed rate is guaranteed to earn the rate of inflation over the time you hold it (at least; it will do better in times of deflation). A 5-year TIPS is currently yielding -0.18% and so it will return 0.18% less than inflation. The I Bond is the better investment.

    A 10-year TIPS is yielding 0.25%, but the interest earned and all inflation adjustments are taxable in the current year, unless held in a tax-deferred account. So I Bonds are still equal to or better than a 10-year TIPS at this point, I’d say.

    • pamsummers says:

      Am also trying to balance the ticking time bomb of deferred interest so individual TIPS in an IRA feel best v.s. putting in a roth or ibonds right now. Went wild with ibonds when you could buy 60K/yr and they all come due after my 70th BD…Too good to eliminate but have to plan around the maturity-assuming I am lucky enough to be alive then,. thank you for the helpful response and all the useful info you provide.

  7. tipswatch says:

    Pam, you say you ‘ Went wild with ibonds when you could buy 60K/yr and they all come due after my 70th BD.” …. Nice problem to have. I assume all of those have a nice fixed rate, you definitely want to hold those until you need the money. The next step is to figure your exit strategy. I don’t think I’ve ever seen anything written about this, but possibly one strategy would be to sell one-third in the 28th year, one-third in the 29th year, and one-third in the 30th year, to spread out the tax hit. Or, if you need to start taking IRA minimum distributions in your 70th year, maybe move all those sales one year earlier?

  8. Joe McQuade says:

    Hi Dave, Looking fwd to your assessment of next week’s TIPS reissue. I’ve got some cash to invest, and I wonder if you’re still bearish on TIPS at the moment.

  9. tipswatch says:

    Joe, the 10-year TIPS reopening is scheduled for Thursday, May 21. I will be taking a look at that next week. I don’t expect it to be an astounding buy, but at least 10-year real yields have risen to about 0.30% and seem to be on a very slow upward crawl.

  10. Pingback: I Bond oddity: Understanding how the 0.0% rate rolls out | Treasury Inflation-Protected Securities

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