Starting in May 2023, Series I bonds will earn a minimum interest rate of 3.38% according to newly released U.S. inflation data. While this is good compared to historical bond performances, some investors may find it underwhelming compared to more recent issues. Of course, the announced final rate could be somewhat higher, offering investment support.
I bonds are U.S. government-issued savings bonds that offer returns based on a fixed interest rate that remains constant for the life of the bond, along with a variable rate that adjusts semi-annually to keep up with inflation.
Currently, newly purchased I bonds have combined or composite rate of 6.89%, which consists of an inflation-adjusted variable rate of 6.49% and a fixed rate of 0.4%. The question now is whether the fixed rate for I bond purchases during the six-month period starting in May will be enough to somewhat offset the decrease in the annualized variable rate of 3.38% and generate sufficient investment interest.
Demand for I bonds has been high over the past year and a half due to exceptional interest rates that have reached record levels:
- 7.12% through April 2022,
- 9.62% through October 2022, and
- 6.89% through April 2023.
I bonds at 3.38% are less attractive compared to these rates, for sure.
However, the fixed rate component should also be considered. If the fixed rate is sufficiently high, bonds purchased after April could be more appealing to investors with a long-term perspective. Unlike the variable rate portion that changes semiannually, the fixed rate component remains the same for the bond’s entire life.
I bonds issued today earn the mentioned 6.89% for six months, which includes a fixed rate of 0.4% that lasts throughout the bond’s life. In the past five six-month bond rate setting periods, the fixed component was 0%. Now, the question remains: what will the next fixed rate setting be? Will it be 0%, fall below or remain at 0.4%, or increase?
Unfortunately, the Treasury Department does not disclose this rate in advance, making it more difficult for investors to plan ahead.
Calculating the Overall Combined Rate
When making a purchasing decision — whether to buy now, wait until May 1, or buy now and later (up to the annual limit) — it can be helpful to understand how the Treasury calculates an I bond’s overall composite rate. The formula for this calculation is:
I bond composite rate formula: [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
The current semiannual inflation rate is 3.24%, which was determined by the increase in CPI-U from 287.504 in March 2022 to 296.808 in September 2022. The upcoming semiannual inflation rate is 1.69%, which was determined by the increase in CPI-U from 296.808 in September 2022 to 301.836 in March 2023. For reference, the CPI-U, or Consumer Price Index for Urban Consumers, is a closely watched inflation gauge that measures what urban consumers paid over time for a variety of goods and services.
How to Purchase Series I Bonds
Buyers can lock in the current 6.89% annual return for six months by purchasing I bonds before May 1. As the 1st falls on a Monday, those planning to buy should do so before April 27.
To purchase an electronic I bond, establish an account at treasurydirect.gov. They are available in amounts from $25 to $10,000. Calendar year limits include $10,000 in electronic I bounds per Social Security Number or Employer Identification Number and up to $5,000 in paper I bounds with a tax refund.
Investors cannot redeem their I bonds within the first 12 months, and they must sacrifice 3 months’ worth of interest if cashed before five years.