It would be next to impossible for the upcoming I bond to be priced worse than the current bond, which sports a fixed rate of 0.1 percent and a composite earnings rate of zero percent. Thanks to a wee bit of inflation showing up in the Consumer Price Index, or CPI, data, the Nov. 1 bond will probably yield between 3.07 percent and 3.27 percent, says Greg McBride, senior financial analyst at Bankrate.com.
The I bond, the government’s inflation-fighting savings bond, is issued each May and November and is comprised of two rates. One is the inflation component, which is decided by the previous six months of CPI data. The other number is the fixed rate. It’s the fly in the ointment because it stays with the bond for its 30-year life and it’s determined by the Treasury Department.
No reason to raise fixed rate
There doesn’t appear to be much reason for the Treasury to raise the fixed rate from the miserable 10 basis points it’s paying on the current bond. Tom Adams, founder of the Savings Bond Advisor Web site, mentions that the Treasury may spiff up the fixed rate a bit because this will be the first I bond that taxpayers can buy directly with their tax refund.
McBride expects the fixed rate to range anywhere from zero percent to 0.2 percent.
“The five-year TIPS (Treasury Inflation-Protected Security) is paying a real rate of return of 0.9 percent, so I would think that would be the absolute ceiling,” says McBride. “But looking at the track record of I bonds, the fixed return component has fallen well short of TIPS. So, not only is the upper boundary set pretty low due to low interest rates, the track record is such that I bonds haven’t been a competitive investment in recent years.”
That doesn’t bode well for the Nov. 1 I bond to be much of a long-term investment.
You can buy the I bond and TIPS online through TreasuryDirect.gov. If, for some reason, you’re not a fan of buying individual bonds, TIPS are available in mutual funds and in exchange-traded funds, or ETFs.
EE yields likely won’t improve
Series EE bond, the other savings bond that’s issued on the same schedule as the I bond, has only a fixed rate, which is currently pegged at 0.7 percent. It’s not likely that the EE yield will show much improvement.
The bond has no inflation component, but the Treasury guarantees that its value will, at a minimum, double within the first 20 years of maturity. If it doesn’t, the Treasury makes a one-time adjustment to make up the difference.
I bonds and EE bonds are subject to federal income tax but are exempt from state and local income tax.