2011 May 2 : Savings Bonds Rates - I Bond 4.60%, EE Bond 1.10%

[RRK]

May 2, 2011

The Bureau of the Public Debt today announced earnings rates for Series I Savings Bonds and Series EE Savings Bonds, issued from May 2011 through October 2011. Earnings rates for I bonds and fixed rates for EE bonds are set each May 1 and November 1. Interest accrues monthly and compounds semiannually. Bonds held less than five years are subject to a three-month interest penalty. Both series have an interest-bearing life of 30 years; the EE bond fixed rate applies to a bond?s 20-year original maturity.

I Bond Earnings Rate of 4.60% includes Fixed Rate of 0.00%
The earnings rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the life of the bond, and the semiannual inflation rate. The 4.60% earnings rate for I bonds bought from May 2011 through October 2011 also will apply for the succeeding six months after the issue date. The earnings rate combines a 0.00% fixed rate of return with the 4.60% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 218.439 in September 2010 to 223.467 in March 2011, a six-month increase of 2.30%.

Series EE Bonds Issued May 2005 and After
Series EE bonds issued from May 2011 through October 2011 will earn today?s announced rate of 1.10%. (Series EE bonds issued since May 2005 are earning interest at a fixed rate, depending on the rate set when the bond was issued).

Series EE Bonds Issued from May 1997 through April 2005
Series EE bonds issued from May 1997 through April 2005 continue to earn market-based interest rates set at 90% of the average 5-year Treasury securities yields for the preceding six months. The new interest rate for these bonds, effective as the bonds enter semiannual interest periods from May 2011 through October 2011, is 1.77%. Market-based rates are announced effective each May 1 and November 1.

Series EE Bonds Issued Before May 1997
Series EE bonds issued before May 1997 earn various rates for semiannual earnings periods, depending on dates of issue. Please visit Public Debt?s website www.treasurydirect.gov for more information.

Matured Series EE/E Savings Bonds and Savings Notes
All Series E savings bonds stopped earning interest as of June 2010. Additionally, Series EE bonds issued from January 1980 through May 1981 are no longer earning interest, and those issued from June 1981 through October 1981 will stop earning interest during the next six months.


More Information
To find more information on savings bonds and which ones are still earning interest, visit Public Debt?s website www.treasurydirect.gov. The Savings Bond Calculator and Savings Bond Wizard® tools, which are helpful for calculating redemption values, also can be found on the site. The website provides information and instructions for opening an on-line account to purchase electronic savings bonds and Treasury marketable securities: bills, notes, bonds and TIPS (Treasury Inflation Protected Securities).

[RRK]

Those who have I bonds with 3.0% fixed rate can expect 7.6% return for next 6 months.

[togethervxl]

Hello RRK and other gurus,
Would you recommend buying I-savings bond in light of the May 2011 rates. My objective is to find a better than ~1.6% growth that I'm getting in via FDIC CDs with varying maturities? If the government is suggesting this sort of inflation, my 1.6% CDs are effectively losing value every day. Your thoughts are appreciated.
Thanks!

[casperof1999]

For the cash/inflation protection portion of your assets I bonds should be ok. Remember that there is a lock up period of 1 year.

Hello RRK and other gurus,
Would you recommend buying I-savings bond in light of the May 2011 rates. My objective is to find a better than ~1.6% growth that I'm getting in via FDIC CDs with varying maturities? If the government is suggesting this sort of inflation, my 1.6% CDs are effectively losing value every day. Your thoughts are appreciated.
Thanks!

[RRK]

The important factor in I bonds are fixed rates. This is what is going to give you "real return" ( that is excess return over inflation). In this case, it is zero.

In short term, one need to worry about safety of the principal. In long term, one need to worry about inflation.
If you see this as a short term holding for 1 year, go for it.
If it is for long term, buy TIPS instead of I bonds. ( or VIPSX)

[togethervxl]

The important factor in I bonds are fixed rates. This is what is going to give you "real return" ( that is excess return over inflation). In this case, it is zero.

Thanks much for your insights. The zero "real" is one of the reasons why I am still questioning the purchase, however a 2.3% infaltion adjustment (4.6% composite rate) sounds better than my 1.62% CDs.

In short term, one need to worry about safety of the principal. In long term, one need to worry about inflation. If you see this as a short term holding for 1 year, go for it. If it is for long term, buy TIPS instead of I bonds. ( or VIPSX)

I'm going to use the purchase for intermediate term goals such as a piggy bank (other than the Utah 529s where I contribute to a good diversified mix) that I can use to fund my kids education. My only sort of worry with VIPSX is the correlation with the interest rates, which have no other place to go but up. The secondary market for VIPSX with varying principle vs. I-bonds where my principle (safety) would stay intact and I'll get protected with the inflation - is the underlying confusion.

May be, I'll buy these now and when I see a "real" return added sometime in future, I'll just replace them. Does that sound like a workable plan?

[togethervxl]

For the cash/inflation protection portion of your assets I bonds should be ok. Remember that there is a lock up period of 1 year.

Thanks Casper. I'm then going to think of it as a 1 year CD at ~2.3% rate. I think that should be a good way of looking at it. Would you agree?

[casperof1999]

2.3 = 4.6/2 ? yes, this is the worst case assuming that inflation component of your IBonds goes to zero during next reset on Nov 1. Your principal is guaranteed by IBonds. With TIPS its not.

Thanks Casper. I'm then going to think of it as a 1 year CD at ~2.3% rate. I think that should be a good way of looking at it. Would you agree?