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I Bond Rates Drop to 4.3 Percent

Yield on inflation-pegged savings bonds still offers protection from rising prices

spinner image Upper corner of a US Series I savings bond
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The U.S. I bond, which yielded 6.89 percent from November through April, saw its yield fall to 4.30 percent on May 1. Although that’s still less than half its record high of 9.6 percent from May through October 2022, the I bond can still be a good choice for risk-conscious investors.

The Treasury Department adjusts the I bond’s yield semiannually according to changes in the consumer price index (CPI), the government’s main gauge of inflation, over the previous six months. The government announces the yield change on Nov. 1 and May 1 each year. The current yield is available through October.

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A safe, inflation-adjusted rate

Like other Treasury securities, I bonds are backed by the full faith and credit of the United States, which means they are backed by the full borrowing power of the United States — the country’s strongest credit backing.

I bonds, which are U.S. savings bonds, also carry a 30-year fixed rate in addition to the variable, inflation-adjusted rate. From May 2020 through October 2022, that rate was zero. The newly issued I bond, however, has a fixed rate of 0.9 percent, up from 0.4 from Nov. 1, 2022 through April 30, 2023. It’s the highest fixed rate since 2007. I bond holders will get the fixed rate plus the inflation adjustment, for an annualized total of 4.30 percent.

Older I bonds have fixed rates as high as 3.40 percent, which makes the inflation-rate boost particularly sweet for their holders. Those investors will get their original fixed rate as well as the inflation adjustment for the next six months. I bond yields can never be negative.

Nuts and bolts

You can buy up to $10,000 of I bonds per calendar year through the government’s Treasury Direct program. To create an account, you’ll need to provide a Social Security number, an email address, and bank account and routing numbers. You’ll also need to create a password and several security checks (such as a password reminder).

If you like, you can buy another $5,000 of I bonds with an income tax refund. Use IRS Form 8888 on your federal income tax return to buy I bonds with your refund. The minimum purchase is $25; you can specify any amount to the penny. For example, you could buy an I bond for $143.93, if you wanted to.

If you buy your bonds through Treasury Direct, they will be in electronic form. Only bonds purchased through an income tax refund come in the old paper form.

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I bonds mature in 30 years, but you don’t have to hold them that long. You can redeem them in as little as 12 months — but if you do so before the end of five years, you forfeit your last three months of interest. You don’t need to pay taxes on the interest until you withdraw it — and interest is free from state taxes. It’s also free from federal taxes if you use the proceeds for higher education.

Higher yields are here

The Federal Reserve hiked its short-term fed funds rate to a range of 4.75 percent to 5 percent on March 23, its ninth consecutive rate hike since March 17, 2022. Higher interest rates tend to slow the economy and reduce inflation.

Although anyone buying a home will lament higher mortgage rates, savers have reason to celebrate — and not just for I bonds. For example, a three-month Treasury bill (which you can also buy through Treasury Direct) yielded 5.09 percent on April 28; a 17-week T-bill yielded 5.18 percent. As with I bonds, interest on T-bills is free from state and local taxes.

Short-term savings accounts are catching up with the Treasury market. The 100 largest money market mutual funds yield an average 4.64 percent, according to Crane Data, which tracks the funds. The average one-year bank CD yields just 1.68 percent, although a few banks are offering 5 percent or more.

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