Even as Rates Fall, I Bonds Still Offer Savers a Way to Beat Inflation
As inflation continues to cool, the yield on Series I Savings Bonds, aka I bonds, is falling in tandem.
On Friday, the U.S. Treasury Department set the new rate to 3.11%, which is in effect for I bonds purchased this month through the end of April 2025.
This new rate is a far cry from the record-setting 9.62% reached in 2022 at the height of the pandemic-induced cost-of-living crisis. Looking for a hedge against inflation, investors and everyday savers then snapped up billions of dollars worth of I bonds.
But even as consumer prices moderate, the low-risk government bond remains an attractive choice for long-term savers and investors. That’s because today’s I bonds have a perk that the bonds purchased back in 2022 did not have: a 30-year fixed rate of 1.2%.
What to know about the new I bonds rate
The newly announced headline rate of 3.11% is known as the composite rate. It is an annualized version of two separate rates that 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 consumer price index, which is the most commonly used measure of inflation. This six-month rate is currently 0.95%, which is the rate of inflation from April to September.
The other is the aforementioned fixed rate. As its name suggests, this rate is set in stone at the time of purchase and lasts for up to 30 years or until you sell your bond(s). Right now, the Treasury Department has set the fixed rate at 1.2%.
While the inflation rate is predictable, the fixed rate is a bit of a wild card. The Treasury Department does not publicly reveal exactly how it comes up with it.
Since I bonds were created in 1998, the fixed rate has ranged as high as 3.6% and as low as 0%. And since the Great Recession, the fixed rate has mostly stayed under 1%, meaning that the inflation rate of I bonds did most of the heavy lifting in recent years.
In fact, when I bonds went mainstream in 2022 with that blockbuster 9.62% annualized rate, the fixed rate was 0%. The entire composite rate was due to sky-high inflation. Now as inflation falls, folks who bought I bonds at the time still have that 0% fixed rate locked in. So their yield is actually less than the newly announced 3.11% — it's 1.9%.
Because of this caveat, some investors are cashing in their 2022 I bonds with a 0% fixed rate to re-purchase ones with a 1.2% fixed rate. When considering whether to cash in I bonds, it’s important to keep in mind that they can’t be redeemed within one year of purchase, and I bonds redeemed within five years have a three-month interest penalty, similar to that of certificates of deposit (CDs).
Alternatives to I bonds
When comparing annual percentage yields, or APYs, there are plenty of alternatives that are currently beating the I bond’s 3.11%.
For instance, some CDs and high-yield savings accounts still boast rates above 5%. Though with more benchmark interest rate cuts from the Federal Reserve coming as soon as Thursday, the days of 5% APY are numbered.
The national average rates on these types of deposit accounts are far lower. According to the Federal Deposit Insurance Corporation, the average APY is 0.45% for savings accounts and 1.81% for 12-month CDs.
Savers and investors sizing up I bond’s new rate should factor in the caveats and perks: namely, the interest penalty, inflation protection and the $10,000 annual purchase limit. (The Treasury Department previously allowed you to use up to $5,000 of your tax refund money to purchase paper I bonds, though it is now discontinuing paper versions entirely.)
In the short term, CDs and high-yield savings accounts offer more attractive APYs.
For long-term savers: Even though I bonds’ rates have fallen considerably since 2022, the current fixed rate ensures that bonds purchased today outperform inflation by at least 2.4% annually for up to 30 years.