I Bonds’ New Rate Is Coming Soon. Here’s Where It Could be Set.

(Dreamstime)

Key Points

• The new interest rate for Treasury’s inflation-linked savings bonds, or I bonds, is projected to be just over 4% starting November.
• The I bond rate is determined every six months based on the Consumer Price Index and includes a fixed rate of approximately one percentage point.
• I bonds offer tax deferral on interest income until redemption and are exempt from state and local income taxes.

The new rate on the Treasury’s inflation-linked savings bonds is likely to be set at just over 4% for purchases starting in November.

That rate would be little changed from the 3.98% interest rate that has prevailed since May 1.

The Treasury sets new rates on inflation-linked savings bonds, or I bonds, every six months based on the change in the consumer price index. The new rate for the six-month period starting Nov. 1 is likely to be announced by the Treasury in the coming week. Information is available on the Treasury’s website.

Barron’s estimated the new rate based on the September CPI report released this morning. The new I bond rate formula is based on the six-month change in the non-seasonally adjusted CPI ending in September. Prices rose at a 3.1% annual rate in the period.

To arrive at our 4% estimate, Barron’s added a fixed rate of about one percentage point to the annualized CPI gain in the March-September period. I bond rates are based on consumer prices plus a fixed interest rate that remains in place over the life of the bonds.

The fixed rate stood at 1.1% for savings bonds purchased in the current May-October period. That fixed rate in turn tends to follow the real rate on Treasury inflation-protected securities, or TIPS, that trade in the bond market. The current I bond rate of 3.98% is based on the CPI gain over the period from September 2024 to March of this year.

The inflation-linked portion of the interest rate on newly issued bonds will apply for the first six months that an investor holds them. The rate then resets every six months based on the CPI. The fixed rate, however, will prevail over the life of the bonds, which can be held for 30 years.

I bonds can be redeemed after 12 months, but investors lose three months of interest if the bonds are cashed in before five years. I bonds were very popular in 2022, when inflation was running hot. The I bond rate was 9.6% from May through October that year.

I bonds are available through the TreasuryDirect website. Individuals are limited to $10,000 in annual purchases.

Semiannual interest is added to the principal value of the bond, compounding over the life of the bond. This is a favorable feature because it eliminates risk on the reinvestment of interest. In comparison, Treasury notes and bonds make cash interest payments.

Another appealing feature of I bonds is that holders can defer paying taxes on the interest income until they redeem the bonds. This gives I bonds a quality like an individual retirement account.

Interest is exempt from state and local income taxes but subject to federal income tax, which is the same as for Treasury notes and bonds. This makes I bond taxation more favorable than that for bank deposits, whose interest is subject to federal, state, and local income taxes.

Write to Andrew Bary at andrew.bary@barrons.com