Series I Savings Bond Rate Update (May 2010)

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Treasury Direct Series I Savings BondsAs we near the end of April, we also near the announcement period of Series I Savings Bond interest rates. For the uninitiated, here’s a quick recap – Series I Savings bonds are Treasury bonds whose interest rate is pegged to the rate of inflation. The rate is determined by an equation (I just use my Series I bond rate calculator) involving the bond’s fixed rate and the inflation rate, announced in May and November.

I think Series I bonds are great if you need something 100% safe and a respectable interest rate. My favorite part is that the interest is free of state income taxes plus federal if used for qualified educational expenses. If you have a short term need, like education in a few years, that you want to still accrue interest but not put in the market, a savings bond isn’t a bad idea.

New Semi-Annual Inflation Rate

We know that the new inflation rate, to be announced May 1st, will be 0.77%. It’s easy to guess what the inflation portion of the rate will be, it’s based on the CPI-U as calculated between September and March. The CPI-U in September 2009 was 215.969, the March 2010 CPI-U was 217.631, which is a 0.77% increase.

The mystery is in the fixed rate, since that cannot be as reliably calculated, but it’s still helpful for planning purposes because if you buy a bond in April, you will get this period’s (Nov 2009 – Apr 2010) rate for the next six months.

Buying Series I Bond Today

If you buy a bond today, you will get a fixed rate of 0.30% for the life of the bond plus 1.53% inflation rate for the next six months. That’s a 3.365% APY for six months.

Then, when the May 2010 semi-annual inflation rate kicks in, you will earn 1.842% APY for the next six.

If you close a bond within 5 years, you have to pay a 3 month penalty, which is mitigated by the fact that you can sneak in an extra month just by purchasing near the end of the month (One tiny hack about savings bonds is that you get interest for the month regardless of when you buy it. If you buy the bond on April 30th, you get credit for the entirety of April). Also, the interest is not taxed by the state, which juices the rate a small bit. It’s a little better than 1-year CD rates but it requires a bit of work and you’re limited to $5,000 in electronic and $5,000 in paper I bonds per social security number.

Fixed Rate Guess

It’s always fun to guess what the fixed rate will be and I say they’ll stand pat at 0.30%. The Fed isn’t tooling with interest rates, we aren’t really out of the recession, and the government is still borrowing money. In the end, our environment hasn’t really changed much since November and I don’t see why the Treasury would bump it up especially if the spectre of inflation is on the horizon.

We only have to wait a week to find out if my wild guess is right! What’s your guess? (and reasoning of course!)

(photo by allyrose18)

{ 13 comments, please add your thoughts now! }

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13 Responses to “Series I Savings Bond Rate Update (May 2010)”

  1. nickel says:

    I doubt we’ll see a significant change in the fixed rate. We just bought our electronic allotment last week and our paper allotment today, so hopefully I won’t be disappointed.

  2. eric says:

    I’m still holding on to those that were bought back in April 2008 (fixed rate 1.2%). I just talked to a family friend the other day who still have I Bonds from 2000 when the fixed rate was 3.6%! Hindsight is always 20/20 right?

  3. eric says:

    Oh and personally I don’t see the fixed rate going up that much if at all. It just wouldn’t make sense given how the Fed is still maintaining low interest rates.

  4. SavingEverything says:

    I envy that 1.2% fixed or that 3.6% from 2000. Just wondering, are TIPS better, worse, or the same as i-Bonds? EE bonds now seem so low it’s not worth it.

  5. zapeta says:

    I’m guessing the fixed rate will stay the same…no reason for them to go up and there isn’t much room for them to go down.

  6. Charlie L. says:

    EE paper bond appreciate month by month and double its value in 30 years in spite of the interest. That is 2.4% annually using 72 rule. How do you think about it? How about the new electronic EE bond buying at face value?

    • David C says:

      Some notes:
      1) All I savings bonds and “recent” (May 1997 onward) EE savings bonds pay interest monthly.
      2) Current EE savings bonds are guaranteed to double in 20 years, which is an effective rate of around 3.5%.
      3) You should completely ignore the “double-face” value of EE paper bonds: it’s nothing more than a marketing gimmick. A $5000 electronic EE bond is completely equivalent to a $10000 paper EE bond and if bought at the same time will end up with equal values.
      4) After an EE savings bond has doubled in value at 20 years, the treasury reserves the right to set the ARY for the final 10 years.

      Finally, for deciding between an I and EE savings bond, the book Savings Bond Advisor suggests looking at the difference between the EE bond rate and the fixed rate of the I bond. If you believe inflation will be higher than the difference, you should buy I bonds, else you should buy EE bonds.

      Example 1: April 2010 purchase, will be held for 5 to 19 years
      1.2% [EE rate] – 0.3% [I fixed rate] = 0.9%
      No brainer, since I definitely believe that inflation will be higher than 0.9% the I savings bond is better.

      Example 2: April 2010 purchase, will be held 20 years
      3.5% [EE guaranteed to double rate] – 0.3% [I fixed rate] = 3.2%
      Harder to interpret. Since I expect inflation to be around 3% to 4%, I would still lean toward the I bond just because I could cash it out before 20 years. If you think inflation will be low (2%?), then EE would be better.

  7. patty says:

    So, any idea what the new fixed rate is? I can’t find it anywhere not even at treasury direct site.

    • K.D. says:


      Nor I. I’m thinking that since May first was a Saturday, the rate is not announced until the first BANKING day – tomorrow 5/3.
      Try at midnight!

  8. Allegator says:

    You’ll know tomorrow. I’m predicting a .10% increase because I think that (for whatever reason) they’re trying to slowly move in a more attactive direction. Consider that there was no compelling reason to raise it to .30 last time either.

  9. bill says:


    We’ll see in a few hours (May 3)!

    Eric, I have $11,000 face value worth of I-bonds I bought back in November of 2001. The fixed rate was 3%. But one thing I found out was that your minimum annual interest on any six month period is NOT the fixed rate. It’s 0%. I got 0% for the previous six month period on I-bonds.

    Still, I think I made a smart move this decade by buying two opposing inflation-proof investments: I bonds and precious metals. Precious metals can give much higher returns in inflation, but have negative returns when the economy gets better. But then the I-bonds would protect you from deflation by keeping rates 0.

    My only regret is that I haven’t bought more I-bonds and gold when I could have.

    SavingEverything, TIPS pay out interest every six months. Their fixed rate is higher than Series I bonds. You are taxxed at the federal level on the paid-out interest as a gain when you get the income from TIPS. But Series I bonds are only taxxed when you redeem them. TIPS still grow in value with time, so if you have a $1,000 ten year TIPS, you will have a gain on top of that in addition of the semi annual interest income, when the TIPS matures.

    Since you are limited to $10,000 worth of I bonds (combination of paper and electronic), it’s a great idea to buy TIPS if you have more investment money available.

  10. NateUVM says:

    Just announced…

    Fixed Rate: 0.20%
    Variable Rate: 0.77%
    Composite Rate: 1.74%

    There’s our answer.

    • Jim says:

      Yep, my 0.3% fixed rate “prediction” wasn’t too far off. I’m not at all surprised the rate slipped to 0.2%.

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