The Treasury Series I inflation-linked savings bonds are expected to have a new rate of more than 5%, based on the September consumer price index. This rate is set by the Treasury every six months, and the announcement for the next rate is due around November 1st. Until the end of October, the current rate of 4.3% will remain in effect for I bonds purchased.
The new rate will be determined by the six-month change in the CPI, ending in September, without seasonal adjustment. In addition, a fixed rate that has not yet been determined will be factored in.
According to calculations, the six-month change in the CPI was 1.97%. To account for inflation, this amount is doubled to 3.9%. It is projected that the fixed-rate component of the new I bond rate, which remains unchanged throughout the life of the bonds, could exceed 1.5%.
Currently, the fixed-rate component of issued I bonds is 0.9%. However, since May, real yields on Treasury inflation-protected securities (TIPS) have risen by approximately one percentage point to reach near 2.3% for the 10-year maturity.
The new rate on I bonds will apply for the first six months of an investor’s holding period and will reset every six months based on the CPI. Although I bonds mature in 30 years, they can be redeemed after 12 months. It’s important to note that if these bonds are redeemed before five years, investors will lose a quarter’s interest.
Overall, the new rate on Treasury Series I inflation-linked savings bonds is expected to provide an attractive investment opportunity with a potential rate of over 5%.
The Popularity of I Bonds in 2022
In 2022, I Bonds saw a surge in popularity due to high inflation rates. During the period from May to October that year, the I Bond rate stood at an impressive 9.6%. However, as time went on, demand for I Bonds started to diminish. This decline can be attributed to both the decrease in inflation and the significant rise in short-term rates, reaching 5%. Consequently, individuals began favoring money-market funds and Treasury bills instead.
The Exclusivity of I Bonds
One notable aspect of I Bonds is that they are exclusively available through the TreasuryDirect website. Although there is a purchase limit of $10,000 annually for individuals, certain partnerships structured as businesses can circumvent this cap.
Compound Interest for Bond Holders
Unlike Treasury notes and bonds, which provide cash interest payments, I Bonds offer a different approach. Semiannual interest is added to the principal value of the bond, allowing for compounding over its lifespan. This unique feature eliminates the risk associated with reinvesting interest.
Deferral of Tax Payment and Other Tax Advantages
One of the most appealing features of I Bonds is the ability for holders to defer tax payment on the interest income until they redeem their bonds. This characteristic grants I Bonds an IRA-like quality, providing individuals with more flexibility in managing their tax liabilities.
It is worth noting that while the interest generated from I Bonds is exempt from state and local income taxes, it is still subject to federal income tax, similar to Treasury notes and bonds. Nonetheless, this taxation structure is more favorable than that imposed on bank deposits. Bank deposit interest is subject to federal, state, and local income taxes.
Overall, despite the decrease in demand for I Bonds due to changing economic conditions, these bonds continue to offer unique advantages that differentiate them from other investment options.
