Treasury also maintains EE Bond’s doubling period at 20 years
By David Enna, Tipswatch.com
The U.S. Treasury just announced the November 2021 to April 2022 terms for U.S. Series I Bonds and EE Bonds, and 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 7.12% composite rate for I bonds bought from November 2021 through April 2022 applies for the first six months after the issue date. The composite rate combines a 0.00% fixed rate of return with the 7.12% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 264.877 in March 2021 to 274.310 in September 2021, a six-month change of 3.56%.”
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 Nov, 1, 2021, to April 30, 2022, 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 now set at 7.12% annualized. It will update again on May 1, 2022, based on U.S. inflation from September 2021 to March 2022.
- The combination of the fixed rate and inflation-adjusted rate creates the I Bonds’ composite interest rate, which was 3.54% but now rises to 7.12%. An I Bond bought today will earn 7.12% (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 7.12% inflation-adjusted rate for six months, on top of any existing fixed rate. So an I Bond purchased in October will receive 3.54% for six months, and then 7.12% for six months. I Bonds purchased back in September 1998 (with a fixed rate of 3.4%), will receive a composite rate of 10.64% 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 November 2021 through April 2022 is 7.12% | |
|---|---|
| Here’s how the Treasury set that composite rate: | |
| Fixed rate | 0.00% |
| Semiannual inflation rate | 3.56% |
| Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)] | [0.0000 + (2 x 0.0356) + (0.0000 x 0.0356)] |
| Composite rate | [0.0000 + 0.0712 + 0.0000000] |
| Composite rate | 0.0712000 |
| Composite rate | 0.0712 |
| Composite rate | 7.12% |
None of this was a surprise, but the new terms do mean I Bonds remain a very attractive investment, earning at least 3.56% over the next year, and probably much higher. That compares to 0.15% 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 six times the earnings of the next-best very safe investment. The actual return will likely be higher than 5% 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. Because the Treasury held the I Bond’s fixed rate at 0.0%, it will track official U.S. inflation, but not exceed it, except after a period of extended deflation.
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 in the I Bonds Manifesto.
EE Bonds
Here are the Treasury’s terms announced Monday:
“Series EE bonds issued from November 2021 through April 2022 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 possibility the terms could change in 2021, with the 20-year nominal Treasury currently yielding 1.98%, 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. (And after 20 years they should be immediately redeemed.) 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 reasonable possibility (but who knows, given current inflation trends). For anyone with a secure 20-year timeline for investment, an EE Bond remains very attractive.
I Bonds vs. EE Bonds
I Bonds are the talk of the financial world right how, sporting a gaudy 7.12% annual return for six months. No one is talking about EE Bonds, which the financial media typically report as returning 0.1% without ever mentioning the doubling in value over 20 years.
EE Bonds remain a solid, very safe investment for someone who can hold them for 20 years. Their effective yield of 3.5% over 20 years is 157 basis points higher than the yield of a 20-year nominal Treasury. That is huge, and equivalent to about 30% of extra value over a 20-year Treasury bond.
I Bonds are the most attractive, very safe inflation-protected investment in the world. The real yield of an I Bond is 171 basis points better than the real yield of a 5-year TIPS. When it comes to inflation protection, there is no contest.
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.
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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.
Treasury Inflation-Protected Securities 
Has I bonds’ composite rate historically been outperforming EE bonds? I’m debating which one to get and I know I can hold the bonds for 20 years. I just can’t decide whether to play it safe to get EE bonds knowing I will double my investment or invest in I bonds that seem to outperform EE but not guarantees….? Any suggestions?
Inflation over the last 20 years, ending in October, has averaged 2.11% a year, so under current terms and looking backward, EE Bonds would have easily out-performed with a 3.5% return. But we can’t predict the future. I do “think” inflation will average less than 3.5% over the next 20 years, but no one can be certain. I prefer I Bonds right now but I am biased against the EE Bonds because the 20-year term is too long for me. I Bonds offer a lot more flexibility, and insurance against high inflation, but the return may be lower.
Question on the purchase limit for digital I-bonds for a married couple: Can a couple purchase 20,000 at once under a Treasury Direct joint account (owner with co-owner)? Or is that limited to 10K based on the primary owner only?
The $10,000 limit applies to one account with one Social Security number. So you need a separate account for a spouse, based on a different Social Security number. You can register your purchases Spouse 1 WITH Spouse 2, and for the other account Spouse 2 WITH Spouse 1. More info … https://tipswatch.com/2021/05/09/ready-to-open-a-treasurydirect-account-here-are-some-tips/
Thank you for the reply. I was thinking the “WITH” type of account applied the bonds to both SSNs, but I guess that’s not how it works. What you describe makes sense.
So the tax refund should be $5,000.00 and not less to be able to buy extra I Bond ?
No. Any amount in $50 increments. The IRS says: “You can use all or part of your tax refund to purchase I bonds. Your request for bonds must be in increments of $50. Any remaining refund amount not used to purchase bonds will be mailed to you as a paper check or you may elect to have the remaining amount direct deposited into a checking or savings account.”
“An EE Bond held for 20 years immediately doubles in value, creating an investment with a compounded return of 3.5%, tax-deferred.” So does this mean if I buy an EE Bond for $100, it will double in 20 years to $200, plus an additional 3.5%?
No, the doubling creates the 3.5% return over 20 years. After 20 years, the value doubles and the EE Bond will then pay 0.1% interest for 10 more years.
Not unexpected, but still awesome to see my I Bonds doing what they’re supposed to do. I get unreasonably happy whenever I see a new post from you. Thanks for keeping us updated!
Those receiving tax refunds are permitted to purchase an additional 5K with their refund. Individuals not receiving a tax refund are limited to 10K per calendar year. Why does this disparity exist?
It’s not really a disparity, since most of the people using this strategy are purposely overpaying withholding or estimated taxes (which anyone can do). Then you can get access to the $5,000 in paper iBonds.
Hi David, I am a long time follower of yours and an avid fan of I bonds. I need your help. There is lots of confusion out here as to what I bonds, purchased last week, were paying, and what they are paying now with the new rate set at 7.12%. Any help you can offer will bemuch appreciated. Thank you,
Lyle Coleman
>
I was commenting on THE I BOND CALCULATOR did not compute what the new rates were, it was not until several hours later that they listed the actual rate for each bond. I have most if the info I need now .
Thanks Barbara
On Mon, Nov 1, 2021 at 2:29 PM Treasury Inflation-Protected Securities wrote:
> Lyle Coleman2 commented: “Hi David, I am a long time follower of yours and > an avid fan of I bonds. I need your help. There is lots of confusion out > here as to what I bonds, purchased last week, were paying, and what they > are paying now with the new rate set at 7.12%. Any help you” >
“So an I Bond purchased in October will receive 3.54% for six months, and then 7.12% for six months”
“An I Bond bought today [Nov 1st] will earn 7.12% (annualized) for six months and then get a new composite rate every six months for its 30-year term.”
Thanks David for all of the work you do in reporting on TIPS, I/EE bonds – always appreciated!
Should have pointed out that while the I-Bond can effectively be an 11 month investment (if you sell at 12 months), it carries only 9 months of interest – because of the 3 month penalty for selling prior to 5-year holding.
Yes, as I pointed out in the article, an investment in November will produce a return of at least 3.56% over the next year, all from the first six months. If you sell after a year, the three-month penalty will be on the next variable rate, not the 7.12% rate. If that rate is zero, the penalty would be zero, so you are guaranteed to get at least 3.56%.
when i entered my bonds into the ibondcalculator the interest rate was n/a in most cases
and in a few similar to october rate. when will these changes in %rates be available on
the ibond calculator website
thank you
Barbara
The calculator will show the new composite rate after the previous rate has been applied for six months. So it depends on the month when you bought the I Bond. Here is when the new rates take effect for each month of issue:
January January 1 / July 1
February February 1 / August 1
March March 1 / September 1
April April 1 / October 1
May May 1 / November 1
June June 1 / December 1
July July 1 / January 1
August August 1 / February 1
September September 1 / March 1
October October 1 / April 1
November November 1 / May 1
December December 1 / June 1
RE: purchasing IBonds with tax refund. If you file married filing jointly can you buy $5000 or $10000?
It appears from the TreasuryDirect description that the limit is $5,000 per return, so if you are filing jointly, the limit would be $5,000.