On Friday, April 28, the U.S. Treasury Department surprised many by announcing that I bonds issued from May 2023 through October 2023 will earn an interest rate of 4.3%, compared to the previous rate of 6.89%. This announcement came three days earlier than expected, as the formal announcement was set for May 1.
What also grabbed the attention of many investors was the disclosure that the fixed rate component will be 0.9%, the highest it has been in 16 years.
"Expectations had it closer to 0.6%," MarketWatch quoted Ken Tumin, founder of depositaccounts.com. "Even though the I-bond inflation rate is much lower than the last three six-month periods, this new fixed rate makes it more attractive for those who plan to hold on to the I-bond for the long term."
I bonds, which are a type of savings bond issued and backed by the U.S. government, offer not only a low-risk investment option but also protection from inflation.
Twice a year, on May 1 and November 1, the Treasury resets the rates for I bonds. These rates are composed of both a fixed rate and a variable, inflation-adjusted rate, resulting in an overall composite rate. The inflation component changes every six months, whereas the fixed rate remains constant throughout the bond’s 30-year lifespan.
For the most recent composite rate, the Treasury announced the fixed rate of 0.9%, which is the highest since it was 1.2% in November 2007, and an inflation-adjusted rate of 3.38% annualized, which is determined by the Consumer Price Index for all Urban Consumers (CPI-U). The inflation rate component is always publicly available ahead of time and changes every six months. However, the Treasury does not disclose its methodology for determining the fixed rate component of an I bond.
The latest inflation-adjusted rate of 3.38% annualized was determined based on the increase in the CPI-U from 296.808 in September 2022 to 301.836 in March 2023, resulting in a six-month change of 1.69%.
The Treasury’s formula to calculate an I bond’s overall composite rate for any six-month period is:
I bond composite rate formula: [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
Plugging in the numbers for the latest period, [0.0090 + (2 x 0.0169) + (0.0090 x 0.0169)], calculates to 0.043 and the composite rate of 4.3%.
Buying I Bonds
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.