The Next I Bond Rate Looks Set to Top 5% Following Higher Inflation Data

Investors may be bracing for a new I bonds rate. (Daniel Heuer/Bloomberg)

Key Points

• The Treasury Department’s inflation-linked savings bonds are likely to have a new rate of 5% or higher starting Nov. 1.
• Barron’s estimated the new rate based on the September consumer price index reading and an expected upward adjustment to the fixed rate.
• Individuals are limited to $10,000 in annual purchases of I bonds, which are available through the TreasuryDirect website.

The new interest rate on the Treasury Department’s inflation-linked savings bonds is likely to be set at 5% or higher starting in November, thanks to higher inflation over the past six months.

The new rate on Treasury I bonds has been 4.26% over the past six months.

The Treasury sets new rates on inflation-linked savings bonds, or I bonds, every six months based on the change in the consumer price index.

The new rate for the six-month period starting Nov. 1 is likely to be announced by the Treasury in about two weeks. Information is available on the Treasury’s website.

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Barron’s is estimating the new rate based on the September CPI reading, which was released Wednesday morning. The new I bond rate formula is based on the six-month change in the non-seasonally adjusted CPI ending in September. Prices rose at a 4.1% annual rate in the period, we calculate.

To arrive at our 5%-plus estimate, Barron’s added a fixed rate of about one percentage point to the annualized CPI gain for the March-September period. The Treasury uses the non-seasonally adjusted CPI figures.

I bond rates are based on consumer prices, plus a fixed interest rate that remains in place over the life of the bonds. The fixed rate on I bonds now stands at 0.9%.

It’s a good bet that the fixed-rate will be adjusted upward with the new I-bond rate because of higher yields on Treasury inflation-protected securities, or TIPS. That would mean an I-bond yield above 5%, Barron’s projects.

The inflation-linked portion of the interest rate on newly-issued I bonds will apply for the first six months that an investor holds them. The rate then resets every six months based on the CPI. The fixed rate, however, will prevail over the life of the bonds, which can be held for 30 years.

I bonds can be redeemed after 12 months, but investors lose three months of interest if the bonds are cashed in before five years. I bonds were very popular in 2022, when inflation was running hot. The I bond rate was 9.6% from May through October that year.

I bonds are available through the TreasuryDirect website. Individuals are limited to $10,000 in annual purchases.

Semiannual interest is added to the principal value of the bond, compounding over the life of the bond. This is a favorable feature because it eliminates risk on the reinvestment of interest. In comparison, Treasury notes and bonds make cash interest payments.

Another appealing feature of I bonds is that holders can defer paying taxes on the interest income until they redeem the bonds. This gives I bonds a quality similar to that of an individual retirement account.

Interest is exempt from state and local income taxes, but 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 andrew.bary@barrons.com

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