October Savings Bond Interest Rate Forecast: Hold Off On Buying Those I-Bonds

March 27th, 2012 by

(October 2012) – Is now the time to buy I or EE Series US Savings Bonds?

 

EE Series Savings Bond Interest Rate Likely To Improve When Reset in November

EE Series US Savings Bonds offer a current rate of return of 0.6%. A new rate will be set in November based on (but substantially lower than) the 10 year treasury. The last time rates were set in May, the 10 year Treasury was hovering around 1.98%. Currently the 10 year treasury is yielding around 1.64%, so the rate will either remain the same or slightly decrease in November for newly purchased EE bonds.

The EE Series US Savings Bond is currently not a great short-term investment. However, it will yield 3.5% when held to maturity. Because of this we highly recommend it as a long-term investment, in which case the current rate is not relevant to your purchase.

 

I Series US Savings Bond Interest Rates Rates Are Likely To Be Much Lower In November

The current rate of return on I Series US Savings Bonds  is 2.20% . This is composed of a fixed component, currently at 0%, which is fixed for the life of the bond and a fluctuating rate, which is based on the inflation rate (longer explanation here). Both of these rates will be re-set in November. The fixed rate component of I savings bonds cannot go below zero and therefore is likely to remain at zero.

Inflation is based on CPI-U or the Urban Consumer Price Index. During the previous 5 month reporting period (April thru August), CPI-U has increased by 0.043%, for an annualized rate of 0.09%. The September CPI-U is the only month which we don’t have the data needed to calculate the new I savings bond rate. Assuming that inflation was zero in September, the combined interest rate for I Savings Bonds begining in November would be a measly 0.09%. Every 6 months, this rate changes.

Buying I-savings bonds now before the rate change in November will give you a rate of 2.20% for the next six months. The following six months, you will get the rate set in November.

Our suggestion: You Should wait to May 2013 to purchase I savings bonds. By buying an I savings bond now, you will be locking in a rate of around 1.15% ((0.1% + 2.2%)/2) for the next 12 months.  This is similar to the rate on 1 year high-yield CDs. By waiting, you get to see if inflation does start pick up over the next half year.

**Please note, that I Savings Bonds do not earn 3.5% interest when held to maturity.

For tons more information on savings bonds visit our savings bond section here at Learn Bonds.

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