Does the Rate on a Savings Bond Fluctuate With the Market?

by Sue-Lynn Carty

If you own a savings bond, how the market affects it depends on the type of bond you own and when you bought it. The two types of savings bonds The U.S. Department of the Treasury offers are Series EE and Series I bonds. Savings bonds are not the same thing as Treasury bonds.

Series EE Bonds May 2005 and Later

If you own a Series EE bond with an issue date of May 2005 or later, the bond earns a fixed interest rate. The interest rate on your date of purchase is the rate your bond will earn for as long as you own it, regardless of market conditions, hence the term fixed. The market affects the interest rate on the EE bond only at the time of purchase. The Treasury Department sets interest rates for all new issues every six months on May 1 and November 1.

Series EE Bonds May 1997 to April 2005

If you own a Series EE bond with issue dates between May 2007 and April 2005, you will earn a different interest rate during the months of May to October and November to April for every year you own the bond. These bonds earn a market-based interest rate. The Treasury Department sets EE bonds interest rates with issue dates between April 2005 and May 2007 at 90 percent of the average five-year Treasury yield.

Market Affects on EE Bond Interest Rates

The Treasury Department uses a quasi-cubic hermite spline function to determine the yield curve rates for which it bases its interest rates on EE bonds. While few people need to know how to perform that math, it is important to know that EE bonds have an inverse relationship with market interest rates. If the Federal Reserve adjusts interest rates down because the economy is slowing or in a recession, bond interest rates go up. If the Fed increases rates, bond interest rates go down.

Series I Bonds

The rates on I bonds are a combination of a fixed rate and a variable rate based on the semiannual inflation rate. Market conditions affect I bonds because the Treasury Department adjusts these rates for inflation. The fixed rate portion of an I bond is the interest rate it earns over the life of the bond and does not change as market conditions change. The variable rate portion of the bond changes with the inflation rate.

Market Affects on Series I Bonds

The Treasury Department uses a composite rate formula to determine the total interest rate for I bonds. The Secretary of the Treasury determines the fixed rate portion on bonds. If market conditions based on the Consumer Price Index indicates that inflation is rising, the interest rate on I bonds increase. If market conditions indicate inflation is falling, the interest rate on bonds decreases.

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