Treasury Sets New Rate on I Savings Bond at 4.03%

(Charly Triballeau / AFP / Getty Images)

Key Points

• The new interest rate for Treasury I bonds is 4.03% for purchases starting Saturday.
• The new rate, a slight increase from the previous 3.98%, will be in effect for six months.
• I bonds offer tax advantages, including deferred federal tax on interest and exemption from state and local income taxes.

The new interest rate on the Treasury’s inflation-linked savings bonds, or I bonds, has been set at 4.03% for purchases starting on Saturday, based on information posted Friday on the TreasuryDirect website.

The rate, which will be in effect for six months, is little changed from the 3.98% rate that has prevailed for the past six months. Barron’s wrote recently that the new rate likely would be set at just over 4%.

The new rate is based on the inflation rate, as measured by the consumer price index from March through September, plus a fixed rate of 0.90% that remains in place for the life of the bonds, which can run as long as 30 years.

The fixed rate is down from 1.1% for bonds issued over the past six months, reflecting a decline in market yields on Treasury inflation-protected securities.

The 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 annualized CPI rate plus the 0.9% fixed rate.

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