The new rate on the Treasury’s popular inflation-indexed savings bonds has been set at 4.3%, down from 6.89%, according to a notice Friday morning on the Treasury.gov website.
The new rate, which applies to bonds issued from May 1 through Oct. 31, reflects a decline in inflation as measured by the consumer price index from September through March. Buyers of I bonds Friday will get the new rate.
The 4.3% rate will apply for the first six months that investors hold the bonds. The old rate of 6.89% applied to bonds purchased from November 2022 through Thursday.
The Treasury sets the rate on I Bonds every six months around May 1 and Nov 1. The rate includes two components: an inflation adjustment based on CPI in the prior six months and a fixed interest rate that applies for the life of the bonds, which mature in 30 years unless cashed in before then.
The inflation component is 3.4% and the fixed rate is 0.9%. The fixed rate is above the 0.4% that applied on bonds purchased in the past six months and the level of zero for bonds bought from May through November 2022.
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The new fixed rate is an attractive feature for investors because it means that they will receive nearly one percentage above the inflation rate for the life of the bonds. The fixed rate reflects the real, or inflation-adjusted, yields on Treasury Inflation-Protected Bonds or TIPs which now are in the 1.25% to 1.5% range.
The inflation component of 3.4% reflects the change in non-seasonally adjusted CPI from September 2022 through March, multiplied by two.
I bonds need to be bought through the TreasuryDirect website. Individuals are limited to $10,000 in annual purchases, but those with businesses structured as certain partnerships can get around that cap.
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I bonds must be held for 12 months, and holders lose a quarter’s interest if they redeem the bonds within five years. They mature in 30 years but can be redeemed before then.
Semiannual interest is added to the principal value of the bond, compounding over the life of the bond. This differs from Treasury notes and bonds, which make cash interest payments. It is a favorable feature because it eliminates risk on the reinvestment of interest.
One nice feature of I bonds is that holders can defer paying taxes on the interest income until they redeem the bonds. This gives I bonds an IRA-like quality.
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Interest is exempt from state and local income taxes but is subject to federal income tax, which is the same as for Treasury notes and bonds. This makes I bond taxation more favorable than that for bank deposits, whose interest is subject to federal, state, and local income taxes.
Write to Andrew Bary at [email protected]