New lower I bond rate comes with ‘a pleasant surprise’

The yield on I bonds is lower for new purchases starting this month, but its higher, fixed rate is a welcome development for savers.

The annualized yield for the Treasury Department’s inflation-protected assets is 4.3% for new purchases made until October 31. While down from the 6.89% annual return of I bonds that had been in effect since November, the new reset rate is a notch above the 3.79% rate that analysts had expected.

That’s because the fixed-rate portion of the 4.3% composite rate increased to 0.9% from 0.4% for the past six months — the highest fixed rate in 16 years — which will buoy the value of the bond for longer as inflation cools.

“The new fixed rate of 0.9% is a pleasant surprise,” Ken Tumin, a senior industry analyst at LendingTree and founder of DepositAccounts.com, told Yahoo Finance. “The new 0.9% fixed rate gives I bonds a boost for those looking to hold them for the long run.”

I bonds: Composite rate, inflation rate, and fixed rate

The I bond rate is made up of the fixed rate, which applies for the 30-year-life of the bond, and a semiannual inflation rate calculated from a formula based on the six-month change in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items.

Over the last 18 months, the I bond’s yield soared as the inflation rate jumped, following the huge spike in consumer price growth. But the fixed rate on the November 2021 and May 2022 — when rates were 7.12% and 9.62%, respectively — had a 0% fixed rate.

The fixed rate was bumped up in November to 0.4% for those who purchased the bonds through April.

The current fixed rate of 0.9% — the highest since it was set at 1.2% in November 2007 — lasts until either the I bond holder redeems the I bond, or until it matures in 30 years.

While not a knock-it-out-of-the-ballpark kind of investment, the safety factor is what makes these bonds appealing for many people who have money to spare. That’s especially true for those rattled by stubbornly painful inflation and stock market volatility in recent months and frankly are frustrated by low savings rates offered at most banks. While interest rates on savings accounts vary, the national average yield is a 0.24% annual percentage yield (APY), according to Bankrate’s April 26 weekly survey of institutions.

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Meanwhile, the new I bond composite rate is not much lower than what today’s certificates of deposit (CDs) offer — with yields at or just above 5% at online banks for terms of around one year. Treasury bills with maturities of three and six months have also been hovering around 5%, while the one-year Treasury bill has been yielding in the high-4% range.

That said, for those who truly are seeking a short-term place to set cash aside, top short-term CDs and T-Bills will likely provide a higher return over the next year than an I bond that’s purchased in May and redeemed in a year, Tumin said.

The ins and outs of I bonds

Here’s why I bonds can have an edge over those other options for you. The number one selling point: I bonds are government-backed and guaranteed to keep pace with inflation because their return is tied to the Consumer Price Index, the government’s measure for consumer price growth.

Plus, the interest is usually free from state and local taxes. If you qualify, you might also be able to exclude some or all of savings bond interest from federal income tax when you use it to pay qualified higher education expenses at an eligible institution or state tuition plan in the same calendar year you redeem eligible I bonds.

The bonds can be purchased in allotments of $25 or more when you buy them electronically from the US Treasury’s website, TreasuryDirect, with no fee. Paper bonds are sold in five denominations: $50, $100, $200, $500, and $1,000.

Generally speaking, you can only purchase up to $10,000 in I bonds each calendar year. There are a few ways to increase that amount. For instance, you can direct your federal tax refund to buy an additional $5,000 in I bonds.

One big consideration. While I bonds earn interest for 30 years or until they’re cashed in — whichever comes first — you can’t cash in until after one year. And if you cash in before five years, you lose three months of interest.

New rates are set every May and November by the Treasury Department. Because of the twice-yearly adjustments, the date you buy your I bonds determines your returns. This year, out of the blue, the date was moved from May 1 to April 28. But any I bond purchases made in TreasuryDirect from April 28 through April 30 will be issued with a date of May 1.

“This is the first time I can remember the Treasury releasing the rates before the start of the month,” Tumin said.

Kerry is a Senior Reporter and Columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.

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