Series I savings bonds have been around for a quarter-century now, but they largely flew under investors' radar until recently. That's largely because for the past 25 years, consumers have generally seen an incredibly benign environment, with minimal pressures on prices.
When inflation spiked, however, everyone suddenly took a look at the jaw-dropping rates that I Bonds paid. With these bonds' interest rates approaching 10% for a brief six-month period, plenty of investors put their money into these inflation-adjusted savings bonds.
As price pressures ease, though, rates on I Bonds have come down. That's less appealing for those seeking a quick windfall, but the latest new I Bonds have a bonus that will pay buyers more for years to come.
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The latest I Bond rates
Those buying new I Bonds as of May 1 will get an initial interest rate of 4.30%. That is down from the 6.89% initial rate for bonds purchased between November 2022 and April 2023, and it reflects the fact that inflation rates have fallen dramatically over the past six months.
The rates that I Bonds pay are determined by two factors. First, each I Bond has a fixed rate that's established at purchase and stays the same throughout the 30-year life span of the savings bond. Then, the Treasury Department looks at changes in the Consumer Price Index over a six-month period to determine the initial variable rate. The combined rate integrates the fixed and variable rates to set the return that bondholders will earn.
Inflation for the six months that the Treasury Department used to determine the latest I Bond rate was 1.69%. That was down nearly by half compared to the 3.24% rise in the preceding six months, and it was the lowest reading in two and a half years.
With the decline, I Bonds no longer have a return that's above what investors can get from short-term Treasury bills and bank CDs. That will inevitably cause demand for inflation-adjusted savings bonds to fall.
Why long-term investors should be happier with new I Bonds
However, the newest I Bond release also included good news for longer-term investors. Going forward, I Bonds purchased in May and later will have a fixed rate of 0.9%, up from 0.4% for bonds issued between November 2022 and April 2023.
What that means is that new bond purchasers will consistently get a rate that's half a percentage point higher than what previous buyers will get. For instance, after the initial six-month period of 6.89% ends for those who bought bonds immediately prior to the May 1 change, the rate for the next six months will drop to 3.79% -- about half a percentage point lower than the 4.30% new buyers get.
For those who purchased I Bonds just looking for a quick, above-market return, the bump to the fixed rate won't matter that much. As inflation eases, I Bonds are likely to look unattractive. However, those who want the long-term inflation protection that I Bonds provide will like the extra bump in the fixed rate.
The era of I Bond popularity is ending
That said, there are other ways to get the inflation protection that I Bonds offer, most notably through Treasury Inflation-Protected Securities that currently have real yields of between 1.2% and 1.6% -- well above the I Bond fixed rate. Between that and the decline in the headline interest rate, I Bonds are likely to fall back out of the spotlight unless inflation rears up once again in the months to come.
