As inflation continues to chill, the yield on Series I Savings Bonds, aka I bonds, is falling in tandem.
On Friday, the U.S. Treasury Department set the brand new rate to three.11%, which is in effect for I bonds purchased this month through the top of April 2025.
This latest rate is a far cry from the record-setting 9.62% reached in 2022 at the peak of the pandemic-induced cost-of-living crisis. Searching for a hedge against inflation, investors and on a regular basis savers then snapped up billions of dollars value of I bonds.
But whilst consumer prices moderate, the low-risk government bond stays a sexy alternative for long-term savers and investors. That’s because today’s I bonds have a perk that the bonds purchased back in 2022 didn’t have: a 30-year fixed rate of 1.2%.
What to know in regards to the latest I bonds rate
The newly announced headline rate of three.11% is generally known as the composite rate. It’s an annualized version of two separate rates which are announced every six months.
One is the inflation rate. This inflation rate changes every six months based on the preceding six-month fluctuations in the buyer price index, which is probably the most commonly used measure of inflation. This six-month rate is currently 0.95%, which is the speed of inflation from April to September.
The opposite is the aforementioned fixed rate. As its name suggests, this rate is ready in stone on the time of purchase and lasts for as much as 30 years or until you sell your bond(s). At once, the Treasury Department has set the fixed rate at 1.2%.
While the inflation rate is predictable, the fixed rate is a little bit of a wild card. The Treasury Department doesn’t publicly reveal exactly the way it comes up with it.
Since I bonds were created in 1998, the fixed rate has ranged as high as 3.6% and as little as 0%. And for the reason that Great Recession, the fixed rate has mostly stayed under 1%, meaning that the inflation rate of I bonds did many of the heavy lifting in recent times.
The truth is, once I bonds went mainstream in 2022 with that blockbuster 9.62% annualized rate, the fixed rate was 0%. All the composite rate was resulting from sky-high inflation. Now as inflation falls, folks who bought I bonds on the time still have that 0% fixed rate locked in. So their yield is definitely lower than the newly announced 3.11% — it’s 1.9%.
For this reason caveat, some investors are cashing of their 2022 I bonds with a 0% fixed rate to re-purchase ones with a 1.2% fixed rate. When considering whether to money in I bonds, it’s essential to bear in mind that they’ll’t be redeemed inside one yr of purchase, and I bonds redeemed inside five years have a three-month interest penalty, much like that of certificates of deposit (CDs).
Alternatives to I bonds
When comparing annual percentage yields, or APYs, there are many alternatives which are currently beating the I bond’s 3.11%.
For example, some CDs and high-yield savings accounts still boast rates above 5%. Though with more benchmark rate of interest cuts from the Federal Reserve coming as soon as Thursday, the times of 5% APY are numbered.
The national average rates on a majority of these deposit accounts are far lower. In response to the Federal Deposit Insurance Corporation, the typical APY is 0.45% for savings accounts and 1.81% for 12-month CDs.
Savers and investors sizing up I bond’s latest rate should consider the caveats and perks: namely, the interest penalty, inflation protection and the $10,000 annual purchase limit. (The Treasury Department previously allowed you to make use of as much as $5,000 of your tax refund money to buy paper I bonds, though it’s now discontinuing paper versions entirely.)
Within the short term, CDs and high-yield savings accounts offer more attractive APYs.
For long-term savers: Though I bonds’ rates have fallen considerably since 2022, the present fixed rate ensures that bonds purchased today outperform inflation by at the very least 2.4% annually for as much as 30 years.
