Well, well, well! If it isn’t our trusty friend, the Series I Savings Bonds – or as we finance folks typically call them, I bonds – back in the limelight after the recent dip. What’s the good word, you ask? Yields are climbing again, friends. Ain’t that something?
Here’s the lowdown: the U.S. Department of the Treasury has cranked up the I bond rate to a saucy 3.98% (annualized) [TreasuryDirect Source] for bonds bought between now and Halloween. That’s a neat little jump from the previous 3.11%, marking the first significant increase since November 2023.
Why should you care?
Simple: inflation! Your everyday saver or investor (yes, that’s you) can use these government-backed bonds to protect their hard-earned moolah from inflation. And let’s face it, with the way consumer prices are shooting up, that’s no small feat.
Back in the day of the recent cost-of-living hike, these champion bonds were sporting a mind-boggling 9.62% yield [more here]. And I tell ya, while today’s rate may seem punier in comparison, it comes with a trump card. You can lock in a 30-year fixed rate at 1.1%. And believe me, that was something the 2022 bonds sadly missed out on.
Breaking down the I bond rates
Before we get into this, remember the basics: the total yield for I bonds consists of a fixed rate (that sticks with you throughout your bond’s life) and a variable rate that’s tied to the inflation figures of the past six months. The result? Today’s sexy 3.98% annualized rate.
Once you’ve committed to an I bond, the rate at which your investment thrives is sealed for the first six months. The fixed rate you latch onto doesn’t fluctuate beyond that, not for up to 30 years. The variable potion, on the other hand, is adjusted every semiannual cycle based on the latest inflation data. Now isn’t that nifty?
What this means for you, dear investor, is your investment keeps up with inflation and can even earn you a little extra if the fixed rate is good. Also, how can we forget the tax perks? Your state won’t tax your interest, and you can defer federal taxes until you decide to cash out.
The caveat? I bonds have rules. You can only buy them digitally via TreasuryDirect.gov, and you can’t spend more than $10,000 on them annually. Also, wave goodbye to your bonds for at least a year. In case you’re wondering, cashing out within five years means giving up the last three months’ interest. A few parting notes: the era of paper I bonds has sadly ended.
As David Enna, I bond expert and founder of TIPS Watch [Source], puts it, “I bonds are a distinctive investment—among the safest available—because the U.S. government backs them and they shield your savings from official U.S. inflation. No matter how high inflation soars.”
Speaking of Enna, the man should add fortune-teller to his impressive resume. He predicted the current rate of 3.98% days before the Treasury gave its official nod [Prediction].
While the variable rate is a straightforward equation of six months’ CPI inflation, the fixed component is more like the Da Vinci code. Enna and a handful of other gurus believe it’s closely related to the average five-year TIPS real yield from the latest half-year, multiplied by 0.65.
Since this method isn’t exactly carved in stone, everyone was on the edge of their seats to see if Trump would mix things up. Spoiler alert: nothing changed…for now.
How do I Bonds fare?
For a laid-back, long-term investment strategy armed with tax benefits, I bonds are your go-to guy. But if you’re hunting for the highest possible yield, there are other secure options worth investigating, although each comes with its own set of rules.
A handful of banks and credit unions are currently dishing out certificates of deposit (CDs) with annual percentage yields (APY) of 4% or more:
- Barclays: 12-month CD with a 4% APY
- Discover Bank: Same deal with the 12-month CD, 4% APY
- BCU Credit Union: Special 5-month CD rocking a 4.35% APY
- Marcus by Goldman Sachs:14-month CD special at a whopping 4.4% APY
Given reports of another possible hike in costs [NYFed Report], mainly thanks to fresh tariffs, I bonds and their potential to tackle inflation might just steal the limelight again. Only time will tell.
Until then, put your finance cap on and continue exploring these intriguing investment avenues. Remember, a penny saved is a penny earned!