Treasury Raises I Bond Fixed Rate To 0.1%, Sets Composite Rate At 2.58%

Summary

• Investors waiting to complete their I Bond allocation for 2017 have the green light: Buy in November.
• A fixed rate of 0.1% means these I Bonds should be held longer than I Bonds with a fixed rate of 0.0%.
• Terms on EE Bonds remained the same: A fixed rate of 0.1%, but a doubling in value if held for 20 years.

The U.S. Treasury just announced that it is raising the fixed rate on Series I Savings Bonds to 0.1%, a much-anticipated move for buyers of these inflation-protected investments.

Combined with the inflation-adjusted variable rate of 2.48%, I Bonds purchased from November 1, 2017, to April 30, 2018, will carry a composite interest rate of 2.58% for six months. Here is the Treasury's explanation:

The composite rate for Series I Savings Bonds is a combination of a fixed rate, which applies for the 30-year life of the bond, and the semiannual inflation rate. The 2.58% composite rate for I bonds bought from November 2017 through April 2018 applies for the first six months after the issue date. The composite rate combines a 0.10% fixed rate of return with the 2.48% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U). The CPI-U increased from 243.801 in March 2017 to 246.819 in September 2017, a six-month change of 1.24%.

I had speculated last week that rising real yields for 5- and 10-year Treasury Inflation-Protected Securities justified an increase in the fixed rate, but nothing is ever certain with these Treasury announcements. Here is that updated data, with fixed rates above zero shown in yellow:

What this means for I Bond investors. Good news! Investors waiting to complete their I Bond purchase allocation for 2017 - $10,000 per person per year - should be buying I Bonds in the month of November. It's OK to wait a few weeks; purchases at the end of the month earn interest for the entire month.

As you can see in the chart, I Bond investors have gone through long stretches of time recently with the fixed rate stuck at 0.0%. Today's announcement, combined with a very good variable rate of 2.48%, makes I Bonds an attractive investment in 2017.

The higher fixed rate means that investors in these I Bonds should hold them longer, selling any I Bonds with a 0.0% fixed rate first. Do they still make sense as a one-year investment, giving up three months' interest? Yes. The worst-possible return would be 1.34%, if the next variable rate drops to 0.0% in May 2018. That's the worst case, and it's a reasonable return.

Want to know more about I Bonds? Read my recent article: 'I Bonds: Here's My Late-2017 Buying Guide.'

Terms for EE Bonds remain the same

The Treasury held the fixed rate for EE bonds at 0.1%, even though an increase was probably justified. However, the fixed rate is irrelevant if you hold EE Bonds for 20 years, when they double in value. That works out to a tax-deferred interest rate of 3.5%, better than even the 2.88% current yield of 30-year nominal Treasurys. Here is the Treasury's wording:

Series EE bonds issued from November 2017 through April 2018 earn today's announced rate of 0.10%. All Series EE bonds issued since May 2005 earn a fixed rate in the first 20 years after issue. At 20 years, the bonds will be worth at least two times their purchase price. The bonds will continue to earn interest at their original fixed rate for an additional 10 years unless new terms and conditions are announced before the final 10-year period begins.

So to be clear: EE Bonds are a very safe, reasonable investment for anyone who can hold them for 20 years and then redeem them. Can't hold them 20 years? Don't buy them.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.