How Series I Savings Bond interest rates work

Thursday, December 15th, 2005
Categorized as: Savings Bond interest ratesSeries I US Savings Bonds

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 0% 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 negative 5.56% 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 happens when the CPI-U declines 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 can have (and have had) a zero rate when the level of deflation was larger than the 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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34 Comments

On March 9th, 2006 Carolyn Schurmann said:

This is a marvelous site. Thank You. Finally, I have found the answers to my questions about I Bonds!

On March 16th, 2006 LOREN BLACKSTAD said:

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?

On March 16th, 2006 Tom Adams said:

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.

On March 17th, 2006 Ed said:

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.

On August 23rd, 2006 jim harless said:

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

On September 20th, 2006 JOHN PILAFAS said:

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.

On September 20th, 2006 Tom Adams said:

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.

On September 21st, 2006 JOHN PILAFAS said:

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.

On February 29th, 2008 danny pierce said:

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

On March 3rd, 2008 Tom Adams said:

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

On April 23rd, 2008 Nik said:

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.

On April 24th, 2008 Tom Adams said:

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

On May 19th, 2008 Ethan said:

Hi Tom. Just a “stupid question” to clarify an important point: Do the I-Bonds cumulate interest and then continue to pay interest on the interest? Assuming they do, when are adjustments made to the amount of principal or, alternatively, how is the cumulative interest calculated. Thanks again for your fine work. Ethan.

On May 20th, 2008 Tom Adams said:

Ethan – yes, I bonds earn compound interest (interest on interest). The compounding occurs semiannually (every six months).

Although the redemption value of an I bond goes up every month – that is, interest is added to the I bond for redemption purposes monthly – for compounding purposes the interest is added to the I bond’s value on a six-month cycle.

Tom Adams

On May 20th, 2008 Ethan Finneran said:

Tom:
Perfectly put. Thanks.
Ethan.

On June 5th, 2008 Barbara said:

Thanks for the great information. So, in deciding which I bonds to use first for my son’s education I should start with the ones with the lowest rate not the lowest yield?

On June 6th, 2008 Tom Adams said:

Barbara – start with the ones with the lowest fixed rate. There’s a list here (table at bottom of text).

Tom Adams

On November 21st, 2008 THERESA said:

I WANT YO CASH A BOND AT THE END OF NOV THE 12TH MONTH INTEREST HAS BEEN POSTED AM I SAFE TO CASH NOW OR WILL I LOSE INTEREST

On November 21st, 2008 Tom Adams said:

Hi Theresa – Savings Bonds issued since May 1995 – which includes all Series I bonds – increase in value on the first day of each month. You can’t cash before the bond is a year old and you lose the most recent three months interest if you cash before five years.

Tom Adams

On January 10th, 2009 Susan said:

Hi Tom:

With the current VERY low fixed rate, are iBonds still investments worth considering?

Thanks.

On January 12th, 2009 Tom Adams said:

Susan – there are possible scenarios in which people who buy I bonds now could look like financial geniuses five years from now (ie – Fed manipulations and government stimulus results in hyper-inflation). There are also scenarios in which they could look like dunces (ie – Fed manipulations and government stimulus backfire and we have years of deflation).

Although many will tell you they know what’s going to happen, it’s baloney. The more certain they are, the less likely they are to be right. Nobody knows which scenario will actually play out. If you have enough to diversify across several different investments, that’s the safest thing to do.

And under that scenario, yes, I bonds are worth considering.

Tom Adams

On January 26th, 2009 Jim said:

Hi Tom: Is there a program you could suggest for trading in I bonds for new at higher interest rates?

On January 27th, 2009 Tom Adams said:

Jim – when such opportunities arise – there aren’t any right now – I’ve provided details. For example, see this and this and this.

Tom Adams

On March 27th, 2009 Phil said:

A question for Tom Adams or other knowledgable person:
After an initial decrease in the CPI-U for a six month period (as will happen for The September 2008 to March 2009 period), when will there next be s positive inflation component in the I bond rate: (1) When a subsequent 6 month CPI-U index number first exceeds the March 2009 CPI-U index, or (2) when a subsequent 6 month CPI-U index first exceeds the September 2008 index number?

On March 30th, 2009 Tom Adams said:

Phil – Neither of those choices. Each period is calculated on the most-recent six-month inflation rate and doesn’t look back farther than that.

So the rate announced in Nov is always based on the change between the previous Mar and Sep and the rate announced in May is always based on the change between the previous Sep and Mar.

Tom Adams

On June 16th, 2009 Vanessa said:

If several of my I and EE bonds show a current rate of 0% should I hold on to them or cash them in? When would you anticipate that the rates will increase? Thank you for your advice.

On June 18th, 2009 Tom Adams said:

Vanessa – I bond rates adjust every six months. There are no EE bonds with a zero rate.

Tom Adams

On October 12th, 2009 Norm Ross said:

My I Bonds 2001 came in on the first of Oct 2009 showing 0 interest, but my bonds increased at the same pervious rate of .0799. The same thing happened to my I Bonds 2005 perviously and this month they actually did not increase at all. I was understanding that your fixed interest rate would always be there regardless of the cola. What am I missing?

On October 14th, 2009 Tom Adams said:

Norm – in the text above, read the section called I bond composite rates, paying particular attention to the paragraph after the bullets that begins, “In the event the inflation rate is negative…”

For the record, the inflation rate currently being used to calculate I bonds rates is -5.56%. This was announced last May 1.

Tom Adams

On October 18th, 2009 Norm Ross said:

Tom Adams:

Thanks for the simple answer. Appreciate it.

Norm Ross

On March 1st, 2010 Connie said:

Hi Tom,
I purchase I bonds every year. The I bonds I purchased in Jan 2002 show an increase in value this month over last, however bonds I purchased in Jan 2006 & 2007 do not show any change in value from last month. If they were all purchased in the month of January why are they not all showing an increase in value?

On March 1st, 2010 Tom Adams said:

Connie – the older bond is more than five years old, so there’s no penalty for cashing it.

The newer bonds are less than five years old. They are now earning interest after six months of zero earnings, but the earnings don’t show up because if you cash the bond you lose the most recent three months interest.

Savings Bond calculators all show a bond’s actual redemption value (after the penalty has been subtracted from the value).

This is all pretty hard to understand, but I can assure you they’re doing the calculations correctly. You’ll see the growth resume three months after the zero rate period ends.

Tom Adams

On May 3rd, 2010 Adriana said:

Hello Tom

I purchased I-bonds this past April. I was expecting to see the 3.xx accrual beginning in May. The inventory is showing 0%. Is this because accrual does not begin for a certain period after purchase date?

Thank you for your wonderfully informative website!

Adriana

On May 5th, 2010 Tom Adams said:

Adriana – Do you mean April 2009 or April 2010? And what do you mean by inventory? The accrual begins immediately, but because the penalty for early redemption is subtracted from the bond’s redemption value shown in Savings Bond value calculators, it appears otherwise.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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