Like clockwork, as we move closer to November, savers ask the perennial question: Do you buy I Bonds right now or wait until a new rate is announced Nov. 1?
Spoiler alert: You might not need to rush here.
The current rate on an I Bond bought from May through October is 4.3%. That includes a key fixed rate of 0.9% for I Bonds bought through October — and an annualized inflation-adjusted rate of 3.38% that is added on top of the fixed rate.
Based on the latest inflation data announced Oct. 12, the inflation-linked rate for I Bonds is expected to be 3.94%, according to Ken Tumin, who founded DepositAccounts in 2009, which is now part of LendingTree. The site tracks and compares bank rates.
If you add a fixed rate of 0.9% on top of that, Tumin said, you might be looking at a composite rate of 4.86%.
But Tumin and others suggest you might want to wait until November to buy I Bonds for another key reason. Remember, even if you buy I Bonds now, you’d still get that higher inflation adjusted rate down the road. What you wouldn’t get if you buy now is a higher fixed rate.
Experts say the odds are high for a more attractive fixed rate for new I Bonds and that higher fixed rate will stay with that bond for the 30-year life of the Series I U.S. Savings Bond.
Tumin says the fixed rate for I Bonds bought from November through April 2024 could very well be higher than 0.9%.
“If you’re in it for the long term, it makes sense to wait,” Tumin predicted.
The new fixed rate, he estimates, could be in a range of 1% to 1.5%. The actual rate won’t be announced until Nov. 1, or possibly slightly earlier, by the U.S. Treasury Department.
“Although the Treasury doesn’t disclose how it chooses the I Bond fixed rate, it is generally believed that there is some correlation with the real yield of 10-year TIPS,” Tumin told the Detroit Free Press.
David Enna, who has a website called Tipswatch.com, expects that the fixed rate for I Bonds issued from November through April could be as high as something in the 1.4% to 1.7% range.
“That would be a dramatic increase, but seems justified,” Enna said, who has noted that one has to go back to November 2007 to find an I Bond fixed rate at 1% or higher.
He said it’s clear that the fixed rate will go up for I Bonds issued in November, given yield activity. On the lower end, he said, “a fixed rate of at least 1.2% seems highly likely, but you never know.”
Much will depend, Enna said, on the bond market activity and real yields over the next three weeks.
The fixed rate for I Bonds reflects the real yields of Treasury Inflation Protected Securities, or TIPS, which have risen considerably in the last six months.
Enna said rates have been drifting lower this week based on some dovish statements from Fed officials, which hinted that the Fed might not need to raise interest rates any more.
What is the expected inflation-adjustment for I Bonds?
Inflation, while a bit cooler than last year, remains very much part of the economic picture.
Consumer prices rose 3.7% over the last 12 months through September, according to the U.S. Bureau of Labor Statistics. The rising cost of shelter was the largest contributor to the month-over-month increase of 0.4%.
The new variable, inflation-driven rate for I Bonds is expected to be 3.94% at the November reset, according to both Enna and Tumin.
If the new fixed rate is 1.2%, Enna said, those buying I Bonds from November through April might generate a composite rate of 5.2% for I Bonds issued then.
“But that isn’t certain,” Enna noted.
The inflation rate for I Bonds is the percent change in the Consumer Price Index for Urban Consumers over a six-month period ending before May 1 and Nov. 1.
The inflation-linked rate can change, and often does, every six months after your I Bonds were issued.
The inflation adjustment is added onto I Bonds that you bought earlier, say if you bought those bonds a year ago or even when your kids were born in 10 years ago. Series I savings bonds were introduced 25 years ago — and the initial bonds keep earning interest and seeing new inflation adjustments along the way if you held onto them.
The fixed rates on I Bonds vary significantly over time, depending on when the bonds were issued.
I Bonds issued in 2021 and 2022, for example, have a 0% fixed rate. Enna notes that I Bonds with a 0% fixed rate would see an estimated 3.94% composite rate — reflecting recent inflation — over a six month period.
The highest fixed rate on I Bonds was 3.6% for bonds issued from May through October 2000 — making those the last bonds you’d want to cash in. If we saw an inflation adjustment of 3.94%, those bonds would be paying an 7.54% over a six month stretch.
I Bonds won’t turn heads now
I Bonds had three sizzling rates in a row from late 2021 through early 2023, following sky high inflation.
Savers who bought I Bonds issued from November 2021 through April 2022 grabbed a composite 7.12% rate that applied to the first six months after the bonds were issued. The fixed rate on I Bonds issued then was 0%.
And then that eye-popping rate was eclipsed by 9.62% for six months after the bond was issued for savers who bought I Bonds from May 2022 through October 2022. The fixed rate for bonds issued then was 0%.
Those who bought I Bonds issued from November 2022 through April snagged an attractive 6.89% that applied for six months after the issue date for those bonds. The fixed rate was 0.4%. The annualized rate of inflation was 6.48%.
Savers who held onto their old I Bonds issued years ago also benefited from the higher inflation-adjustments. The inflation rate that the Treasury Department sets each May and November for I Bonds applies for a six month period for all I Bonds that were ever issued and were not yet cashed in by savers.
You can find the current value of an electronic I Bond at TreasuryDirect.gov when you look in your account information there. If the bond is paper, you can use the Savings Bond Calculator at TreasuryDirect.gov.
For bonds less than 5 years old, the values shown in TreasuryDirect and through the savings bond calculator don’t include the last three months of interest. That’s because, the TreasuryDirect site notes, if you cash a bond before five years, you wouldn’t receive the final three months of interest.
Can you find a better deal?
Seeing I Bonds near 4% or 5% isn’t going to trigger much buzz at all — especially for savers who want a short-term fix. If you shop around, some CDs are offering very attractive rates.
Rates on competing certificates of deposit issued at a bank or credit union — which remained low when inflation kicked off — have risen significantly.
Online banks are offering one year certificates of deposit with an average annual percentage yield of 5.18% currently, Tumin said. Some of these better-yielding CDs only require a minimum $1,000 deposit.
I’ve seen some local credit unions with CD or certificate specials in the 4.25% to 5.2% on short-term CDs. Again, though, you need to shop around for the best rates on CDs, as they can range quite a bit.
“CDs are currently a better deal for a one year period than I Bonds,” Tumin said.
Tumin gave this example: If someone planned to redeem the I Bond shortly after 13 months, the annualized yield would be 3.51% after you take into account a three-month penalty for not holding the bond at least five years. This specific example is based on an I Bond that was bought in October and redeemed a bit more than a year later in November 2024.
Tumin explained further that the 3.51% example would apply if someone bought an I Bond on Oct. 21, 2023, and then redeemed it on Nov. 21, 2024. It’s possible, he noted, to slightly boost returns by buying the I bond later in the month and redeeming earlier in the month.
Savers who live in states like California or New York that have high state income tax rates could still want to turn to I Bonds instead of CDs, Tumin said, because interest on U.S. savings bonds is tax exempt at the state level.
But, he added, that the current I Bond rates aren’t even high enough for the state exemption to matter much in many places. The state income tax rate in Michigan is 4.05% in 2023.
Longer term savers, though, might want I Bonds as part of their savings to hedge against inflation, set aside some emergency savings and see returns that pay more than a typical savings account.
Key points to remember about I Bonds: You cannot cash an I Bond until after you’ve held it for one year. And if you cash them before five years, you’d lose the previous three months of interest.
Interest is added monthly and compounded semiannually.
Each calendar year, an individual can buy up to $10,000 in electronic I Bonds in the TreasuryDirect system at TreasuryDirect.gov. You can invest as little as $25 or any amount above that to the penny. Each year, savers can also buy up to $5,000 in paper I Bonds using your federal income tax refund but you must file Form 8888 when you file the tax return.
Contact personal finance columnist Susan Tompor: [email protected]. Follow her on Twitter @tompor.