Treasury holds I Bond’s fixed rate at 0.0%; composite rate rises to 9.62% for six months

By David Enna, Tipswatch.com

EE Bonds will have a fixed rate of 0.1%, but continue doubling in value after 20 years, creating an effective interest rate of 3.5%

The U.S. Treasury just announced the May to October 2022 terms for U.S. Series I Savings Bonds and EE Bonds, and there were no surprises. I Bonds remain exceptionally attractive; they will pay an annualized composite rate of at least 9.62% for six months, for all I Bonds, no matter when they were issued.

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 9.62% composite rate for I bonds bought from May 2022 through October 2022 applies for the first six months after the issue date. The composite rate combines a 0.00% fixed rate of return with the 9.62% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 274.310 in September 2021 to 287.504 in March 2022, a six-month change of 4.81%.

And 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 2, 2022, to October 31, 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 9.62% annualized. It will update again on November 1, 2022, based on U.S. inflation from March to September 2022.
  • The combination of the fixed rate and inflation-adjusted rate creates the I Bonds’ composite interest rate, which was 7.12% but now rises to 9.62%, the highest in history for I Bonds. An I Bond bought today will earn 9.62% (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 9.62% inflation-adjusted rate for six months, on top of any existing fixed rate. So an I Bond purchased in April will receive 7.12% for six months, and then 9.62% for six months. I Bonds purchased back in September 1998 (with a fixed rate of 3.4%), will receive a composite rate of 13.18% 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 2022 through October 2022 is 9.62%
Here’s how the Treasury set that composite rate:
Fixed rate0.00%
Semiannual inflation rate4.81%
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)][0.0000 + (2 x 0.0481) + (0.0000 x 0.0481)]
Composite rate  [0.0000 + 0.0962 + 0.0000000]
Composite rate0.0962000
Composite rate0.09620
Composite rate  9.62%
Source: TreasuryDirect.com

Obviously, I Bonds remain a very attractive investment. I had been urging investors to buy in April to catch that 7.12% rate for six months, and then the 9.62% rate for six months. But if you missed that deadline — and I’ve heard from many of you that this happened — don’t worry. Just purchase I Bonds in May and get that 9.62% rate for six months, followed by another variable rate (probably fairly high) in six 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.

If you are looking at an I Bond as a short-term investment, buying late in May 2022 and redeeming in early May 2023 guarantees you a return of 4.81%, even after the three-month interest penalty, which will be applied to the next variable rate. Your return will probably be much higher.

However, I advise using I Bonds as a long-term investment, building up a large store of inflation-protected cash. I’d absolutely advise against selling any I Bonds until the 9.62% rate is complete. The month that it triggers depends on the month that you originally bought the I Bond.

Issue month of your bondNew rates take effect
JanuaryJanuary 1 and July 1
FebruaryFebruary 1 and August 1
MarchMarch 1 and September 1
AprilApril 1 and October 1
MayMay 1 and November 1
JuneJune 1 and December 1
JulyJuly 1 and January 1
AugustAugust 1 and February 1
SeptemberSeptember 1 and March 1
OctoberOctober 1 and April 1
NovemberNovember 1 and May 1
DecemberDecember 1 and June 1

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 and in my Q&A on I Bonds.

EE Bonds

Here are the Treasury’s terms announced Monday:

Series EE bonds issued from May 2022 through October 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 2022, with the 20-year nominal Treasury currently yielding 3.14%, still below the EE Bond’s potential of 3.5%.

But as interest rates have climbed this year, the appeal of EE Bonds is lessening. It’s possible you will be able to get 3.5% in 5-year CDs in the future. The 5-year nominal Treasury is yielding 2.92%.

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 a possible “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 somewhat attractive because of the tax-deferred interest and potential to use gains tax-free for educational purposes.

* * *

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.

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.
This entry was posted in I Bond, Inflation, Savings Bond. Bookmark the permalink.

19 Responses to Treasury holds I Bond’s fixed rate at 0.0%; composite rate rises to 9.62% for six months

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  3. MISTY says:

    Now that I’ve maxed out my I Bond purchases for 2022, what are your thoughts on investing additional savings into shorter term CDs? Should I wait for rates to rise more?

    Currently, I’m only earning .6% in my savings account.

    • Tipswatch says:

      CDs are becoming more attractive for money you will need in the near term, but I am still seeing best-in-nation rates at about 1.5% for a 1-year CD. You could also look at Treasurys purchased through TreasuryDirect. The 13-week Treasury is paying 0.9% and that rate is likely to rise. You could just buy it and let it reinvest every 13 weeks to ride the rates higher. The 1-year Treasury is paying 2.1%, much more attractive than a 1-year CD, and no state or local income taxes. If the 5-year Treasury hits 3.5%, I’d be interested in putting money there (it is at 3.0% right now).

      • Rob says:

        Hello David,

        In your opinion where would the 2 year note have to be versus the 52 week bill, to favor the 2 year over the 1 year?

        Thanks.

        • Tipswatch says:

          Good question. And it depends on where you thinks rates will be heading over the next 24 months. The 1 year is at 2.16% and the 2 year is at 2.78%. I start to get interested when rates rise above 3.0%, and we had a few times in the last 10 years where that happened. Seems like the 1-year is a pretty safe bet right now.

  4. cmdviola says:

    Exactly The information I wanted , but was not confident to calculate myself: ” buying late in May 2022 and redeeming in early May 2023 guarantees you a return of 4.81%, even after the three-month interest penalty” THANKS SO MUCH!! 

    Cathy M Dillon

  5. Joe says:

    Hi David,

    Well it looks like the government didn’t do anything weird this time (ie change the fixed rate). Chances weren’t good, but it is the government as you’ve said lol. With interest rates going up and the Treasury Note going up, it’ll be interesting to see what happens in November. We’ll get a chance to buy more in January. Worse case scenario was it went up this time and we’d miss out if it went back down. I’m very curious to see the numbers later for April to see if inflation has “peaked.” That’s all I’ve heard since March’s numbers came out. Not cheering for more inflation by any means, but if they have then say so. Like we’ve said before, we’re not going to have deflation nor “normal” inflation for awhile. Thanks as always.

    • Tipswatch says:

      Gasoline prices did back off a bit in April, so that could ease the inflation pressure for April. But now they are back up again. There are a lot of supply shortages caused by the war in Ukraine and China’s lockdown, so inflation could stay pretty high in coming months. My guess is that it won’t hold at 8.5% for very long, but also won’t fall to anywhere near 2.5%.

  6. Quoting from this newsletter:
    “I had been urging investors to buy in April to catch that 7.12% rate for six months, and then the 9.62% rate for six months”
    I purchased I-Bond in April-2022. If I understand it correctly, the bond will pay 7.12% rate for six months till October-2022 and then 9.62% rate for six months till October-2023. But how will this bond be affected when the Treasury changes the variable rate on November 1, 2022?
    I would appreciate your response.
    Thank you.
    Best Regards,
    Bill

    • Tipswatch says:

      If you bought in April, you will get 7.12% annualized from April to September and then 9.62% annualized from October to March 2023. After that, you will get the next variable rate (still undetermined) for six months.

  7. Henry Fung says:

    On EEs it is an open question whether STRIPS for the same or similar duration purchased on the secondary market might be better. They are certainly different products but it might be helpful, if you haven’t already, to post a compare and contrast as the 20 year bond rates continue to rise.

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  11. Mikhail Furman says:

    David, hi
    My wife and I bought 20K of I savings bonds in December of 21 and then another 20K in January of 22. Am I right that my next purchase is November of 2022?
    Thanks for your response.

    • Tipswatch says:

      No, you will need to wait until January 2023 for make another purchase. The limit is $10,000 per person per calendar year. In January you will get the same terms that will be announced in November, so no big deal.

      • Jim says:

        David,

        Mikhail could front load next year’s I-bond purchases by buying a gift bond for his wife now and then delivering the gift to her next year. Between now and when the gift is delivered next year it will earn 9.62% for six months and then the new rate set in November. Mikhail’s wife could to the same by buying a gift for him.

        • Tipswatch says:

          Yes, this is a legitimate strategy, and because of the 9.62% for the first six months, it would do very well. There’s a possibility that the I Bond’s fixed rate will increase in November, so you could miss out on that benefit, which lasts 30 years. Still, I can’t argue against the “gift box” strategy.

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