I Bond’s fixed rate holds at 0.0%; composite rate soars to 3.54%

Treasury also maintains EE Bond’s doubling period at 20 years

By David Enna, Tipwatch.com

The U.S. Treasury just announced the May to October 2021 terms for U.S. Series I Bonds and EE Bonds, and … as we expected, there were no surprises. Both of these Savings Bonds remain exceptional investments in our current low-interest-rate market.

I Bonds

Here are details from the Treasury’s announcement:

“The composite 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. The 3.54% composite rate for I bonds bought from May 2021 through October 2021 applies for the first six months after the issue date. The composite rate combines a 0.00% fixed rate of return with the 3.54% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 260.280 in September 2020 to 264.877 in March 2021, a six-month change of 1.77%.”

Here is my translation:

  • An I Bond earns interest based on combining a fixed rate and a semi-annual inflation rate. The fixed rate – which will continue at 0.0% – will never change. So I Bonds purchased from May 3 to October 30 will carry a fixed rate of 0.0% through the 30-year potential life of the bond.
  • The inflation-adjusted rate (also called the variable rate) changes every six months to reflect the running rate of non-seasonally adjusted inflation. That rate is currently set at 3.54% annualized. It will update again on November 1, 2021, based on U.S. inflation from March to September 2021.
  • The combination of the fixed rate and inflation-adjusted rate creates the I Bonds’ composite interest rate, which was 1.68% but now rises to 3.54%. An I Bond bought today will earn 3.54% (annualized) for six months and then get a new composite rate every six months for its 30-year term.

It’s important to note, however, that all I Bonds — no matter when they were issued — will get that 3.54% inflation-adjusted rate for six months, on top of any existing fixed rate. So an I Bond purchased in April will receive 1.68% for six months, and then 3.54% for six months.

Here is the formula the Treasury used to determine the I Bond’s new composite rate:

The composite rate for I bonds issued from May 2021 through October 2021, is 3.54%
Here’s how we set that composite rate:
Fixed rate0.00%
Semiannual inflation rate1.77%
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)][0.0000 + (2 x 0.0177) + (0.0000 x 0.0177)]
Composite rate  [0.0000 + 0.0354 + 0.0000000]
Composite rate0.0354000
Composite rate0.0354
Composite rate  3.54%

None of this was a surprise, but the new terms do mean I Bonds become a very attractive investment, earning at least 1.77% over the next year, and probably much higher. That compares to 0.05% for a 1-year Treasury and maybe 0.60% for a best-in-nation 1-year bank CD. In other words, in a worst-case scenario I Bonds will return close to triple the earnings of the next-best very safe investment. The actual return will likely be much higher than 2% over the next 12 months.

(An I Bond has to be held one year before it can be redeemed, but an investor can purchase the I Bond near the end of a month and get full credit for the month. That means an I Bond can be, effectively, an 11-month investment. I Bonds redeemed from 1 to 5 years face a penalty of three months interest; after 5 years there is no penalty.)

The fixed rate of an I Bond is equivalent to the “real yield” of a Treasury Inflation-Protected Security. It tells you how much the I Bond will yield above the official U.S. inflation rate. Right now, an I Bond will exactly match U.S. inflation.

I track the correlation between the I Bonds’ fixed rate and the current real yields of 5-year and 10-year TIPS. In the past, a 10-year TIPS generally yields about 50-75 basis points higher than an I Bond. In our current market, the equation has swung wildly in favor of the I Bond, with the I Bond having a 171 basis-point advantage over a 5-year TIPS and an 76 basis-point advantage over a 10-year TIPS. Given these market conditions, there was no way the Treasury was going to raise the I Bond’s fixed rate.

Here are the fixed rate versus TIPS yields going back to 2008. As an interesting aside, notice that the 10-year TIPS yield has risen 6 basis points over the last year, while the 5-year TIPS yield has shot 50-basis-points lower.

I have noticed a lot of chatter recently about I Bonds on financial forums. I expect this to be a very popular investment in 2021. I Bonds carry a purchase limit of $10,000 per person per year, and must be purchased electronically at TreasuryDirect. Investors also have the option of receiving up to $5,000 in paper I Bonds in lieu of a federal tax refund. Learn more about I Bonds.

EE Bonds

Here are the Treasury’s terms announced Monday:

“Series EE bonds issued from May 2021 through October 2021 earn today’s announced rate of 0.10%. 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 bonds will continue to earn interest at their original fixed rate for an additional 10 years unless new terms and conditions are announced before the final 10-year period begins.”

And here is my translation:

  • The EE Bonds’ fixed rate remains at 0.1%, where it has been since November 2015. Awful, right? (Check out your current money market savings rate, somewhere around 0.05%, or less.) But the EE Bonds’ fixed rate is irrelevant because…
  • An EE Bond held for 20 years immediately doubles in value, creating an investment with a compounded return of 3.5%, tax-deferred. So, if you invest $10,000 at age 40, you can collect $20,000 at age 60, with $10,000 of that total becoming taxable.
  • After the doubling in value at 20 years, the EE Bond reverts to earning 0.1% for another 10 years.

Retaining this 20-year doubling is a big deal. The Treasury has changed this holding period several times in the past, so there was a real possibility the terms could change in 2021, with the 20-year nominal Treasury currently yielding 2.19%, well below the EE Bond’s potential of 3.5%

What this means: You should only invest in EE Bonds if you are absolutely certain you can hold them for 20 years. They are an ideal “bridge” investment for someone around age 40, who can build an annual stream of income starting at age 60, potentially delaying Social Security benefits until age 70.

The EE Bond will also outperform an I Bond if inflation averages less than 3.5% a year over the next 20 years. I think that is a fairly strong possibility. For anyone with a secure 20-year timeline for investment, an EE Bond is extremely attractive.

A combination of I Bonds and EE Bonds also makes sense, providing both inflation protection and strong deflation protection. But EE Bonds only make sense for an investor committed to holding them for 20 years.

Any questions?

I will be writing more about I Bonds and EE Bonds in coming weeks, since interest will be high in these investments (and TIPS aren’t particularly attractive right now). If you have questions, let me know.

* * *

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he discusses can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
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21 Responses to I Bond’s fixed rate holds at 0.0%; composite rate soars to 3.54%

  1. Chad says:

    Hello David, I am hoping you can clarify something that just happened to me. My wife and I purchased our annual allotment of I Bonds at the end of June. I made the purchase on 6-28 and the Treasury issued the security on 6-29. The bond shows an issue date of 6-1, however, there is no credited interest for June. I have purchased I Bonds in the past using the end of the month strategy and been credited interest for the whole month. Do you have any thoughts on why we did not receive interest for June? Thanks!

    • Tipswatch says:

      Chad, I’ve never looked to see exactly when the monthly interest gets credited, but I do think you will get the interest for the full month of June. In the Savings Bond Calculator, at least, for I Bonds less than 5 years old the last three months of interest is not shown. So that may be your issue.

      • Patrick says:

        It’s credited on the first day of month. That particular month is based on when you bought the bond. Remember, always sell at the end of the month, unless you can find something paying a higher yield (unlikely in this environment). I calculate my interest twice a year when Treasury resets the rates. I can calculate interest for the next six months.

  2. Tom says:

    Thanks David! This is very helpful information. A friend thinks the fixed rate is correlated with the Fed Funds rate. Is that true? What are the odds of the fixed rate changing in November with the recent focus on inflation?

    • Tipswatch says:

      Hi Tom. The Treasury does not say how it sets the I Bond’s fixed rate, but I think the best indicator is the real yield of the 10-year TIPS. If that yield (currently about -0.84%) rises to 0.35% to 0.40%, I think there’s a good chance the Treasury will raise the I Bond’s fixed rate. So you can see we are a long way (120+ basis points) from getting there. The Federal Funds Rate probably has some influence, because as it rises, the 10-year nominal yield should also rise, and that will drag the TIPS yield higher, too. But it isn’t a direct correlation.

      • Tom says:

        In 2019 when the real yield was 0.59%, the fixed rate was 0.50% and when the yield was 0.15%, the fixed rate was 0.20%. I wasn’t going to wait until November to purchase if the fixed rate was going to be 0.10%, bu it might be worth waiting for if it could be 0.30% or 0.50%.

        • Tipswatch says:

          There are definitely anomalies in the Treasury’s decisions. When it held the fixed rate at 0.50% in May 2019, it was in the middle of a revamp of its site in an effort to give savings bonds more prominence. That could have played into the decision. The fixed rate has never been higher than 0.0% when the 10-year TIPS yield was negative. Anything can happen, though. Waiting until October to make a purchase decision won’t effect anything but the start date of your investment.

  3. I’ve been telling everyone I know too be buying I bonds since the inflation adjustments. They are happy as I am. Can’t get a better intrest rate anywhere else.

  4. Chang says:

    Thanks to David for the detailed explanation about IBond and EE Bond. I was wondering whether you can explain the TIP (Symbol for iShares TIPS Bond ETF), which currently trades at about 127 with yield of 1.17%. It is supposed to be inflation protected but it doesn’t seem to be going anywhere in recent years. How does this compare to the Ibond?

    • Tipswatch says:

      Hello Chang, yes TIP is inflation protected, but as a fund holding a wide range of TIPS, its net asset value will rise and fall with real interest rates. When real rates go up, the value of TIP falls. When real interest rates go down, the value rises. This fund has a current SEC yield of 5.80%, which is misleading because it reflects a very-recent rise in inflation. Its net asset value is near an all-time high, which means real yields remain near an all-time low. This fund had a total return of 10.8% in 2020 (don’t expect that to continue) and that has dropped to 0.75% so far in 2021.

      Buying a TIPS mutual fund is not a high-risk gamble, but remember that at today’s prices reflect very low interest rates, and the value of your investment will decline if interest rates rise. However, if inflation also rises, that could be a wash. The TIP ETF has a downside potential of 15%, in my opinion, if interest rates begin rising quickly. But when will that happen? It’s very hard to say.

  5. Tim says:

    EE bonds also sound like a great legacy gift to give to a young grandchild who would be in his/her 20’s when the bond doubles. TreasuryDirect makes it seem very complicated to do. Since you’ve asked for questions, I am wondering if you have interest in translating the governmentese into the steps that oldtimers could follow to accomplish this.

    • Tipswatch says:

      I think this is one reason the Treasury leaves the doubling terms at 20 years, which probably should be higher in this current market. I think 18 years would be the ideal to help fund a college education, buy them every year for the child’s first four years, get double the money back in each year of the college education. Right now, 20 years stretches that limit. Any more would be impractical. … On the TreasuryDirect policies, I agree they are a bit opaque and raise complex issues when you are talking about legacy gifts. But EE Bonds and I Bonds can be redeemed tax-free for college education expenses, which is a big plus.

  6. Jim says:

    If the wife and I both want to buy our annual limit of I-bonds can I do that in one Treasury direct account or will we need to open an account for each of us?

    • Tipswatch says:

      You need to have separate accounts linked to two different Social Security numbers. Ownership can be Spouse1 (with) Spouse2 and then Spouse2 (with) Spouse1.

  7. Kate says:

    Thank you very much for your timely updates on I-Bond! You are my go-to source for I-Bond information.

  8. Bob says:

    Thank you sir for being the indisputed go-to source for I bond news. 3.54% is about as exciting as it gets despite the overheated printing press environment.

  9. Carlos Rodriguez says:

    David, when was the last time UST lengthened the Series EE holding period to 20 years?

    • Tipswatch says:

      — Back in 1992, EE Bonds paid 6% a year and were guaranteed to double in 12 years. After 12 years, they reverted to paying 4% a year to maturity.
      — In March 1993, the doubling term was adjusted to 18 years.
      –In May 1995, it was adjusted 17 years.
      –In June 2003, it was brought to 20 years, where it has remained.

      • Carlos Rodriguez says:

        Thanks David! Seems we are overdue for revised terms.

        • Sponsored Lynx says:

          I’ve been expecting them to lengthen the doubling period further, but I’m starting to think the number of people buying their full allocation of EE bonds each year is relatively small, and that plus the fact that many owners (particularly smaller owners) will not redeem the bonds promptly upon “first maturity” (so that the Government will have a nearly-free loan at that point) means there may not be much motivation for Treasury to mess with this.

          At least—that’s what I’m hoping.

          • Carlos Rodriguez says:

            Yes, we can only hope. My expectation is that the Fed won’t move to raise the FFR until the U-3 UER has a 2-handle and it won’t be bothered by Core PCE as high as 3.0%. Savings bonds seem to offer the only refuge against the Fed’s continued policy of financial repression in it’s accidental war against savers. “Fun” fact: the mid-point of the FFR has averaged a meager 54 bps during the last 12.4 years and has been at the zero lower bound ~66% of that time. If only I had purchased $30k each year of both I and EE bonds all those years ago.

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