How Are Series I Bond Interest Rates Determined?

Interest Rates and Asset Prices
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Understanding the interest rate on a Series I savings bond is a bit complex, as it's made up of two components—a fixed interest rate and an inflation modifier interest rate. The combined value of these two interest rates determines the interest rate that will be paid on your Series I savings bonds.

This means that, unlike other bond types, the I bond interest rate is variable; that is, it changes over time and you won't be able to project the value of your bonds, say, 10 or 20 years from now. That is made up for by the fact that the bonds have built-in inflation protection from the United States Treasury Department.

The Series I Bond Fixed Rate Component

The first part of the I bond interest rate calculation is the fixed rate component. It is announced every May and November for the following six-month period and is determined by the Secretary of the Treasury, or by someone whom the Secretary has designated. The fixed rate is set for the life of the bond. This is important.

Remember, though, that the fixed rate of return on your I bonds is not a guaranteed minimum interest rate.

You have to factor in the inflation rate, which we will get to in a moment. If the United States experienced deflation, it's possible your I bonds could have a return of 0%.

The fixed-rate component of Series I savings bonds was at a much higher level of 3.40% in September 1998, but sunk all the way down to 0% in May of 2017, with a slight rebound up to 0.50% in November 2018. It returned to 0% in May and November 2020.

The I bond inflation rate component is announced each May and November, just like the fixed rate component, and is good for the following six-month period.

The inflation rate component is determined by changes in the Consumer Price Index, or CPI, which has long been used to gauge inflation in the United States. If the United States is in deflation, this interest rate can be negative. Otherwise, it rises to keep pace with changes in inflation so the bondholder doesn't lose purchasing power.

The inflation rate component of Series I savings bonds is more volatile and has varied from a high of 2.85% in November 2005 to a low of -2.78% in May 2009. As of November 2020, it sat at 0.84%.

The inflation rate is combined with the fixed rate component of the Series I savings bond to calculate the composite rate.

Calculating the Interest Rate on Series I Bonds

According to the United States Treasury, the actual formula for calculating the composite interest rate on Series I savings bonds is:

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]

The good news is you'll never have to calculate the composite rate for yourself. Instead, you can visit the United States Treasury Department website, which posts the fixed rates, inflation rates, and composite rates for the current period, as well as past periods, for all savings bonds.

Take this description of how Series I Bonds are calculated:

When one of the inputs to the composite rate is below zero, the Treasury won't pay a negative rate on the bonds. Whenever a negative rate is produced, the Treasury uses a zero rate, something that has happened with increasing frequency in recent years due to the Federal Reserve's monetary policies. 

For example, Series I savings bonds issued between May 1, 2015, and October 31, 2015, earned 0% interest. That is because the inflation rate was -0.80% and the fixed rate was 0%. 

As another example, in November 2009, the fixed rate was set at 0.10% and the inflation rate at -2.78%, resulting in a composite interest rate of zero. There is, quite literally, almost no good reason to select these investments over FDIC-insured certificates of deposit at the moment. 

Historical I Bond Rates

While set at 1.68% through April 2021, the composite rate doesn't currently offer much more than a high-yield savings account. However, things weren't so dire back in early 2010 when the Series I savings bond rate was set as follows:

Fixed rate = 0.30%
Semiannual inflation rate = 1.53%

Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = 0.0030 + (2 x 0.0153) + ( 0.0030 x 0.0153)]
Composite rate = [0.0030 + 0.0306 + 0.0000459]
Composite rate = 0.0336459]
Composite rate = 0.0336
Composite rate = 3.36%

It's a good practice to keep an eye on the reset dates because when the interest rates are attractive, it's hard to beat the Series I savings bond due to its many advantages over traditional corporate bonds or even tax-free municipal bonds.

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