How Series I Savings Bond interest rates work
Thursday, December 15th, 2005
Categorized as: Series I US Savings Bonds • Savings Bond interest rates
If you're interested in finding out what interest rate your Series I bonds are earning right now, use my Savings Bond Calculator. It will give you both the current rate and current value of your Savings Bonds.
However, if the rate isn't what you expected, read on - most investors in Series I Savings Bonds have only a murky idea about how I bond rates work. Every Series I bond's rate not only changes every six months, but can swing widely between an eye-poppingly high rate and zero. Here's why:
Series I interest rates are made up of two components that are added together, a fixed rate component and an inflation rate component.
Fixed rate component
All I bonds issued within the same standard six-month window (either November-April or May-October) have the same fixed rate component. Once a bond is issued, the fixed rate will never change for that I bond. The fixed rate is good until the bond stops paying interest 30 years later.
However, while the fixed rate on a bond that has been issued never changes, the Treasury does announce a new fixed rate for new I bonds each May and November.
The fixed rate component that the Treasury has assigned to Series I bonds at issue has ranged from a low of 1.00% to a high of 3.60%.
My page on Series I Savings Bond fixed base-rates includes a table showing the fixed-rate component for each issue of I bond.
The I bond inflation rate component
The Treasury bases the I bond inflation rate component on the Consumer Price Index for Urban Consumers (CPI-U), which is published by the Bureau of Labor Statistics.
The Series I bond inflation rate component announced in November reflects the annualized percentage change between the unadjusted March and September CPI-U indexes. The rate announced in May reflects the annualized percentage change between the September and March indexes.
Since I bonds were introduced in September 1998, the annualized inflation rate component has ranged from a low of 0.56% to a high of 5.70%.
Over long periods, you can expect the I bond inflation component to give you a yield in the 2.5% to 4% range. My book includes charts showing the historical rate of inflation and a discussion of historical factors that have led to higher or lower inflation rates.
My page on the current inflation trends includes more detail on the semiannual changes in the I bond inflation component.
Understanding rate periods
The one thing that Series I bond investors find most confusing is the relationship between when the new inflation component is announced and when it actually applies to their own Savings Bonds. To clear up this confusion you have to understand rate periods.
Every Savings Bond has a series of six-month rate periods that begin with the month in which the bond is issued. Series I Savings Bonds earn interest for 30 years, so they have 60 rate periods.
What's confusing is that the Treasury announces new inflation rates in May and November, but the announced rates don't apply to a specific Saving Bond until its next rate period begins, which is zero (for bonds purchased in May or November) to five (for bonds purchased in April or October) months later.
I bond composite rates
For each rate period, an I bond's composite rate is the sum of:
- the bond's fixed rate
- the inflation rate
- an inflation adjustment to the fixed rate (the fixed rate times the inflation rate divided by two)
In the event that the inflation rate is negative, which would happen if the CPI-U declined during a six-month period, it is possible for the inflation component to cancel out all or part of the fixed rate component, leaving an I bond composite rate that is lower than the fixed rate.
However, the Treasury has guaranteed that the composite rate will never go below zero. I bonds will never have a negative interest rate, although they could have a zero rate if the level of deflation was larger than your I bond's fixed rate.
Because the composite rate includes both a component related to the bond's issue date and a component related to the current inflation rate, Series I bonds pay a wide variety of interest rates.
My book, Savings Bond Advisor, includes an extensive historical look at inflation and interest rates. It will help you understand why Series I Savings Bonds compare favorably with other investments.
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This is a marvelous site. Thank You. Finally, I have found the answers to my questions about I Bonds!
LAST NOV, THE BOND RATE WAS PUBLISHED AT 6.73%.
I PURCHASED BONDS THE WEEK AFTER THE ANOUNCEMENT, DID I GET THE 6.73% OR NOT?
Loren - Your I Bond will earn 6.73% for the six-month period from Nov 05 through April 06. After that the rate will change as explained on this page.
Great website for bonds…I think you should clarify this explanation: "announced rates don't apply to a specific Saving Bond until its next rate period begins, which is zero (for bonds purchased in May or November) to five (for bonds purchased in April or October) months later".
People might be confused and think they only get zero to five months a particular rate. The deal is that you get six months of whatever rate is in effect when you buy the I-bond. Every six months the rate changes to the current rate, which was announced the previous May or November. That could be zero to five months before your rate changes, depending on the month of purchase.
Thanks.
Whatever you want to say about I bond ups and downs, the best deal in an I bond is when the base rate is up to 2, 3, or 4 percent and not 1 percent. Some people might call it picking the low hanging fruit, but when an I bond base rate is up some above minimum levels, you know you likely got a good deal.
And even if buying an I and EE each 6 months would put I bonds ahead, if you buy more off and on time periods, you can buy too many "lower" I bonds at lower base rates, by chance or luck. Just my own guesswork , right? J
Very nice site, thanks for the answers. I think it's also important to let investors know that it is sometimes OK to turn over your bond holdings. Meaning, redeem the bonds and put that interest income on a particular years tax returns. REMEMBER, this is only a really good idea if your inflation component rate is low…if you have those I-bonds with 3% inflation rates, keep em !!
Why am I redeeming the bonds? My son is 4 and can earn up to (I forget the exact amount) I think $750 in income without a problem. As he will earn less than that in 2006, I will flip the bonds, gather the income, and reinvest the proceeds in new I-bonds. In a few years, hopefully he exceeds that IRS threshold with income but I have sheltered some taxes beforehand.
The issue then becomes do I want that 1.4% inflation component today, or wait until November 2006 and pray ! The other minor issue is of course losing 3 months of interest. But at around 1/2 of 1% right now, that is not really important.
Right now, I am leaning toward keeping the bonds until November and keeping my fingers crossed for at least a 1.3% inflation component.
John - you are correct - rolling over a kid's Savings Bonds makes great sense. Anyone who's a dependent on someone else's tax return doesn't even need to file a federal return if their investment income is $2,050 or less and their wage income is under $4,250.
However, please be aware that some I bonds are still paying 6.73% or more through October! Here's when it's safe to rollover I bonds if you want to minimize the penalty.
Indeed, missing out on that high interest rate payout would seem pretty dumb. I believe the savings bond portfolio program that I downloaded from the US Treasury clearly shows the current interest rate being paid on the bonds. Using that as a reference makes the decision alot easier.
When using the rate calculator I find that I bonds sold at different times have a different yield even though the fixed rate component is the same.
For example, bonds bought on 4/05 yield a lower amount than those bought 11/05 even though the fixed component is the same.
If the rate is calculated as the fixed rate component plus the current inflation component should they not have the same yeild?
Thanks
Danny - the "yield" calculation is for the lifetime earnings of the bond. The "rate" is what the bond is earning in its current six-month rate period. The 4/05 has had one more rate period than the 11/05 bond, so it has a different yield, even though the rate might be the same.
Tom Adams
Tom - I have found your website informative and helpful. However, I have one nit to pick. If you were to sort postings in reverse chronological order so that most recent posts were at the top of the file, it would save your readers time in their search for the latest information. Thanks for shining a light on the murky mysteries of the bond world.
Hi Nik - thanks for your comments; not sure what you mean though. Are you talking about the comments after messages, like yours? It's a rare web site that posts comments starting from the newest - I'm sticking with the expected order.
Otherwise, except in subject categories where the date is irrelevant and posts are sorted most important to least important, postings here are listed newest first, such as here and here.
Tom Adams