Series I Savings Bond fixed base-rates
Friday, August 17th, 2007
Categorized as: Series I US Savings Bonds
The Treasury sets the Series I Savings Bond fixed base-rate administratively, which means the criteria it uses aren't public information.
Because all I bonds receive the same inflation component, what makes one I bond better than another is the fixed base-rate. Since I bonds were introduced, the fixed base-rate has varied from a low of 1.0% to a high of 3.6%.
New fixed base-rates are announced at the beginning of May and November each year and apply to new Savings Bonds issued during the following six-month period. Once an I bond is issued, its fixed base-rate never changes.
The following graph shows the historical level of the I bond fixed base-rate in red. It also shows rates for TIPS, the Treasury's other inflation-protected security, which is traded in the open market.
Because they are traded, the rates of TIPS change daily. The Federal Reserve publishes daily data on TIPS interest rates. This data goes back to January 2, 2003 for 5-year and 10-year TIPS, and to July 27, 2004 for 20-year TIPS. Each Friday's figure is shown as a data point in the following graph.
For data before 2003, the graph shows the yield of each TIPS on the day it was issued. This data series is a mix of 5, 10, and 30-year TIPS.
The table that follows gives the exact fixed base-rate for all Series I Savings Bonds. It also shows the 10-year TIPS rate on the day before the announcement and the difference in basis points (hundredths of a percent) between the two rates.
Series I Savings Bond fixed base-rates |
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| Issue Date | Fixed Rate | 10-yr TIPS | difference |
| Sep 98 - Oct 98 | 3.40% | n/a | |
| Nov 98 - Apr 99 | 3.30% | n/a | |
| May 99 - Oct 99 | 3.30% | n/a | |
| Nov 99 - Apr 00 | 3.40% | n/a | |
| May 00 - Oct 00 | 3.60% | n/a | |
| Nov 00 - Apr 01 | 3.40% | n/a | |
| May 01 - Oct 01 | 3.00% | n/a | |
| Nov 01 - Apr 02 | 2.00% | n/a | |
| May 02 - Oct 02 | 2.00% | n/a | |
| Nov 02 - Apr 03 | 1.60% | n/a | |
| May 03 - Oct 03 | 1.10% | 2.16% | 106 |
| Nov 03 - Apr 04 | 1.10% | 1.97% | 87 |
| May 04 - Oct 04 | 1.00% | 2.11% | 111 |
| Nov 04 - Apr 05 | 1.00% | 1.63% | 63 |
| May 05 - Oct 05 | 1.20% | 1.61% | 41 |
| Nov 05 - Apr 06 | 1.00% | 2.00% | 100 |
| May 06 - Oct 06 | 1.40% | 2.39% | 99 |
| Nov 06 - Apr 07 | 1.40% | 2.34% | 94 |
| May 07 - Oct 07 | 1.30% | 2.25% | 95 |
| Nov 07 - Apr 08 | 1.20% | 2.14% | 94 |
| May 08 - Oct 08 | 0.00% | 1.50% | 150 |
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Interesting stuff!
As far as I can see, the fixed rate has really seemed correlated to TIPS rates until last November's decision to go lower.
I imagine TIPS and I-Bonds usually aren't competing for personal investors' money, as seems to have advantages for tax-deferred accounts and the other for taxable. But with the spread widening, maybe more taxable investors will buy TIPS instead of I-Bonds if the Treasury fails to raise the fixed rate again?
I imagine the Treasury probably has a specific sales volume of I bonds in mind that it wants to achieve, and it sets the fixed rate based on it.
Now, in a period where the inflation component closely tracks average CPI-U changes, as is usually the case, the fixed rate probably will correlate well with TIPS, since they are the market-based counterpart.
On the other hand, in a period where the inflation component is way off created by sudden spikes (like the current and next periods), it makes sense that the fixed rate would have to not correlate with TIPS, since the spike it TIPS would have been short lived.
Of course, the impact of the fixed rate on the 30 year life of the bond also has to figure into the equation, not just the current sales period.
It seems like the Treasury has every opportunity to slight I-Bond purchasers if they choose to.
They can set the fixed rate to any value they want, and don't have to reveal their algorithm or their logic. They could just as well set it to 0% and be done with it.
The treasury has already signaled that selling savings bonds isnt a high priority for it. They make most of their funds on open market bonds, and would probably prefer to dump the administrative costs of this program.
I think it would be great if we could lobby congress to set a mandatory formula for the fixed rate.
I've scheduled my 5-yr TIPS purchase for Thursday's auction on Treasury Direct, to make up for all of the I-bonds I haven't been buying the last six months. (In my opinion, CPI + 2%+ interest without tax deferral easily beats CPI + 1% with tax deferral.)
Hopefully, the next fixed rate will make I-bonds attractive again. Otherwise, there's always the July TIPS auction…
Dan - one other thing TIPS investors need to be aware of is that if they need to redeem before the security matures, there's the possibility of capital losses (or gains).
When interest rates go up, the value of bonds goes down and vice versa.
On the other hand, the TIPS offering later this month is a 5-year security. The interest-rate caused value swings are a bigger problem with the longer term (10-year, 20-year) TIPS than with this one. And since the market isn't giving a premium right now for longer terms, the 5-year TIPS looks pretty good.
Also, just to clarify, Thursday (April 20) is just the official annoucement date - when the Treasury announces for sure whether the securities will be available. The actual deadline for investing in these securities on TreasuryDirect will probably be the morning of Tuesday 4/25. The actual issue date will probably be Friday, 4/28.
Tom,
Thanks - very important point. Any readers considering a TIPS purchase as an alternative to I-bonds should consider those differences!
In my case, my small monthly contributions to I-Bonds were used as an inflation-indexed emergency fund (after 12-mo holding period). But instead I've been leaving that money in an online savings account ever since the fixed rate went south this last time, and it is this money that I plan to use for TIPS. If an emergency should happen that makes me redeem the TIPS early, I'd be stuck with any market price fluctuations plus TD's secondary market fee, which if I remember correctly is $45.
So, if the rule of thumb continues to work, perhaps we will see a 1.70% fixed rate at the next adjustment on Nov. 1?
Ethan - perhaps is the critical word. It depends what happens to the TIPS rate between now and then.
Tom Adams
So, given the 10-year TIPS rate of 2.36% and applying the Tom Adams Rule of Thumb, do we all guess that the fixed portion of the Nov. 1 I-Bond will be up to 1.40%?
Or, to put it another way, do we all agree that the fixed portion will either remain the same or go up to 1.40%?
Hi Ethan - Yes, but….
The rates could still change between now and the end of October. You can follow changes in the 10-year TIPS rate daily on the Treasury's web site.
Tom Adams
Tom:
You sure are right, given the recent volatility. Thanks for the link. Gee, I wonder when the new rate gets decided. I know it is published 11/1, but when do they close the books and make the decision? I guess we will never know.
Ethan - In the chart above I show the price on the day previous to the announcement - in other words, the most recent daily price they have when they make the announcement. But there's nothing that says that's what they have to use.
Tom Adams
It is interesting to note the direct correlation between the graphic fall of I bond rates which begin in the year 2000, and the election of the current administration that same year.
Tom. i have some ee bonds 01/2003 would it be worth it to trade them in for i bonds? the intrest on them is not looking good. or should i let them ride? i will to november anyway