I Bond Rates Soar: Inflation Pushes Returns Back Above 4%

Interest Rates on I Bonds Increase for First Time in Two Years

For the first time in two years, interest rates on Series I Savings bonds, known as I bonds, are going up.

New Interest Rate Revealed

On Friday, the Department of the Treasury changed the rate for I bonds purchased within the next six months to 4.03%, up slightly from 3.98%. The increase is due to unruly inflation between April and September, which are the months the Treasury Department uses for its November rate calculations.

Expert Opinion

“I remain a fan of I bonds as a medium- to long-term investment,” says David Enna, the founder of the financial site TIPS Watch, that closely tracks I bonds. He adds that at 4.03%, short-term investors will get a decent return, too.

What are I Bonds?

I bonds are available for purchase on TreasuryDirect.gov and are uniquely designed to protect savings from rising prices. They became incredibly popular in 2022 when the rate topped 9% for the first time ever due to soaring pandemic-era inflation. While rates have fallen since then, experts say the government savings bonds are still one of the only reliable hedges against inflation.

How I Bonds Work to Fight Inflation

Every six months, part of I bonds’ overall interest rate is recalculated to factor in changes to inflation. This is called the variable rate and is currently 3.12% annualized. The other rate is called the fixed rate, which stays the same over the life of the I bond, up to 30 years.

Caveats and Pros

In addition to their inflation-fighting design, I bonds have other key pros and cons investors should consider before buying. Unlike other investment and savings accounts, earnings on I bonds are not subject to state and local taxes, and federal taxes are due only once the bonds have been cashed out. The bonds have some caveats, as well. They must be bought digitally through TreasuryDirect.gov and have a $10,000 annual purchase limit. They must be held for at least one year, and bonds cashed out within five years of purchase incur a three-month interest penalty.

Alternatives

Everyday savers have money-market accounts, high-yield savings accounts and certificates of deposit (CDs) to consider as alternatives. Currently, the best money-market accounts and CDs are offering rates up to 4.25%. Meanwhile, rates for high-yield savings accounts are topping out around 4.35%.

Money’s Take

By contrast, the overall rate for I bonds (4.03%) is guaranteed for six months, and the fixed rate (0.9%) is guaranteed for up to 30 years. “I bonds are a good choice for savings that you will likely not need for a few years down the road,” says Ken Tumin, a savings rate analyst at Deposit Quest. “Unlike CDs and HYSAs, the I bond will ensure your savings stay ahead of inflation.”

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