Fixed rate for Series EE Savings Bonds soars from 0.1% to 2.1%; doubling period remains at 20 years.
By David Enna, Tipswatch.com
The U.S. Treasury announced this morning it is raising the fixed rate of the U.S Series I Savings Bond from 0.0% to 0.4% for I Bonds purchased from November 2022 through April 2023. This combines with the new inflation-adjusted variable rate of 6.48% to create a composite return of 6.89% for purchases from November to April.
Here is the 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 6.89% composite rate for I bonds bought from November 2022 through April 2023 applies for the first six months after the issue date. The composite rate combines a 0.40% fixed rate of return with the 6.48% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 287.504 in March 2022 to 296.808 in September 2022, a six-month change of 3.24%.
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 now rises to 0.4% – will never change. So I Bonds purchased from November 1, 2022, to April 30, 2023, will carry a fixed rate of 0.4% 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 6.48% annualized, down from the current 9.62%. It will update again on May 1, 2023, based on U.S. inflation from September 2022 to March 2023.
- The combination of the fixed rate and inflation-adjusted rate creates the I Bonds’ composite interest rate, which was 9.62% but now falls to 6.89%, still very attractive. An I Bond bought today will earn 6.89% (annualized) for six months and then get a new composite rate every six months for its 30-year term. The fixed rate will remain at 0.4% for the life of the I Bond.
Here is how the Treasury calculated the I Bond’s new composite rate:
It’s important to note, however, that all I Bonds — no matter when they were issued — will get that 6.48% inflation-adjusted rate for six months (annualized), on top of any existing fixed rate. So an I Bond purchased in October will receive 9.62% for six months, and then 6.48% for six months.
There has been a lot of news coverage lately noting that the I Bond’s variable rate was “falling off a cliff,” but that 6.48% rate is highly attractive and is the third-highest inflation-adjusted rate in I Bond history.
Here are the inflation numbers used to determine the new inflation-adjusted variable rate:
Obviously, I Bonds remain a very attractive investment. A higher fixed rate is always preferable, since it remains with the I Bond for the entire potential term of 30 years. The composite rate of 6.89% is much better than any other very safe investment, and this one comes with future inflation protection.
I advise using I Bonds as a long-term investment, building up a large store of inflation-protected cash. And I’d absolutely advise against selling any I Bonds you currently own until three months beyond the time when both the 9.62% and 6.48% variable rates are complete. (If you haven’t owned the I Bond for 5 years, you will lose the latest three months of interest.)
The month that triggers the new 6.48% variable rate depends on the month that you originally bought the I Bond.
|Issue month of your bond||New rates take effect|
|January||January 1 and July 1|
|February||February 1 and August 1|
|March||March 1 and September 1|
|April||April 1 and October 1|
|May||May 1 and November 1|
|June||June 1 and December 1|
|July||July 1 and January 1|
|August||August 1 and February 1|
|September||September 1 and March 1|
|October||October 1 and April 1|
|November||November 1 and May 1|
|December||December 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. So, for these new I Bonds issued from November to April, the investment will earn 0.4% above official U.S. inflation for up to 30 years. A higher fixed rate is a very good reason to hold the I Bond long term.
And remember: The I Bond’s purchase cap of $10,000 per person per year will reset on January 1, so everyone will have access to this 0.4% fixed rate in 2023.
EE Bond gets higher fixed rate
Here is the Treasury’s announcement:
Series EE bonds issued from November 2022 through April 2023 earn today’s announced rate of 2.10%. 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 soars from a paltry 0.1% (where it has been since November 2015) to a more competitive 2.1%. This is a huge upgrade for EE Bond investors, but keep in mind …
- An EE Bond held for 20 years immediately doubles in value, creating an investment with a compounded return of 3.53%, 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 will revert to earning 2.1 % for another 10 years.
This change to the fixed rate is a big deal because under the old fixed rate of 0.1%, it made no sense to invest in an EE Bonds unless you could absolutely hold it for 20 years. Now it makes sense to hold for 20 years, but it isn’t an absolute necessity.
But even with the higher fixed rate, EE Bonds in November 2022 aren’t particularly attractive, since you can get 4.66% right now on a 1-year Treasury bill, or 4.44% on a 20-year bond.
The EE Bond will outperform an I Bond with a fixed rate of 0.4% if inflation averages less than about 3.1% a year over the next 20 years. I think that is a possibility (but who knows, given current inflation trends).
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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 be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.