Why Do Some of My I-Savings Bonds Show a 0% Interest Rate?

The Series I U.S. Savings Bond is an inflation-indexed Treasury security backed by the full faith and credit of the U.S. government. These bonds earn interest monthly and mature in 30 years. Interest on I bonds is reset every six months. The I bond rate is a composite of two components, one of which can make it appear as though your bonds’ official interest rate is zero when you actually are receiving interest.

Zero Interest

One component of the composite I bond interest rate is a fixed interest rate that never changes during the life of the bond. The fixed interest is set every May 1 and Nov. 1 by the Treasury, based on an undisclosed set of economic indicators. It applies to all I bonds sold for the six months after the rate was set. Since Nov. 1, 2010, the Treasury has kept the fixed rate at zero percent. If you are looking at only the fixed interest rate component of your I bonds, you see a zero percent interest rate.

Variable Component

But the zero fixed rate is misleading, because Series I bonds also have a second component in their composite interest rate. This is a variable interest rate. It changes every six months in line with inflation as measured by the consumer price index for urban areas. This rate normally is a positive number, meaning your bond is actually paying interest.

Composite Rate Formula

The composite rate is figured by adding together the fixed rate, plus twice the six-month inflation rate, plus the product of the fixed rate times the six-month inflation rate. Since the fixed rate went to zero in November 2010, I bonds have simply been paying interest equal to twice the increase in the six-month consumer price index for urban areas. As of Nov. 1, 2012, I bonds have paid 1.76 percent interest. This is double the Nov. 1 inflation rate of 0.88 percent in the consumer price index for urban areas.

Gradual Decline

The fixed-rate component of I bonds has varied widely since these securities were first issued in September 1998. The fixed rate reached its peak of 3.6 percent on May 1, 2000, and gradually declined from there to zero percent. Although the fixed rate is zero, your bond will actually pay interest so long as the change in the consumer price index for urban areas is greater than zero. If deflation put this index into negative territory, your I bond would stop paying interest for a time. Interest payments on I bonds actually stopped between May and November 2009, when the index was a negative 2.78 percent while the fixed rate was only 0.1 percent. An I bond will never pay a negative interest rate that reduces the principal.

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