The Treasury set a 5.27% interest rate on Series I savings bonds that will apply to purchases starting Wednesday, up from 4.3% in the six months ending Tuesday.
The new rate on I bonds, posted on the Treasury Direct website Tuesday morning, reflects an inflation component of 3.97% and a fixed, or real, rate of 1.3%. The 5.27% rate will apply to bonds purchased in the six months starting Wednesday.
The rising rate on I bonds reflects both an increased fixed rate and higher inflation as measured by the consumer price index in the six months ended September than in the prior six-month period. The fixed rate on bonds purchased through Tuesday is 0.9%.
The higher fixed rate reflects increasing market interest rates, particularly on Treasury Inflation Protected Securities, or TIPS, which now pay a real rate of about 2.5%.
Barron’s projected after the September CPI report was reported in early October that the new I bond rate would top 5%.
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The new rate will apply for the first six months that an investor holds the bonds and then reset every six months based on the CPI. I bonds mature in 30 years but can be redeemed after 12 months. Investors lose a quarter’s interest if the bonds are cashed in before five years.
I Bonds were very popular in 2022, when inflation was running hot, because the I Bond rate was 9.6% from May through October of that year. But demand has waned, partly because of the drop in inflation since then, but also as a result of the sharp rise in short-term rates to 5%, which has increased the popularity of money-market funds and Treasury bills.
I bonds are only available 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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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. This is a favorable feature because it eliminates risk on the reinvestment of interest.
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 an IRA-like quality.
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]