Yields on popular Series I savings bonds — intended to protect consumers against price increases — are likely heading down even as inflation continues to surge.
The new yield for I bonds purchased after the end of October is now estimated to be 6.47%, down from a record 9.62%. The rate is linked to the change in inflation over the six-month period from March to September which, while elevated, slowed from the previous half-year stretch.
Americans have purchased billions of dollars worth of I bonds this year. At a time of extreme market volatility, they’ve outperformed major stock indexes and bond markets and are likely to continue to do so even at the lower rate.
“It doesn’t mean inflation’s going down. It means it’s not, comparatively speaking, rising as quickly as it did six months ago,” said Elliot Pepper, financial planner and director of tax at Northbrook Financial.
The government began selling I bonds in 1998 to help households protect their savings from rising prices. That’s made the low-risk investment particularly appealing this year as inflation surged to its highest level in four decades.
The bonds’ interest rate is made up of two components: a fixed rate that has stayed at 0% since 2020 and a variable rate set twice a year that rises and falls with the consumer price index. The Treasury Department sets I bonds’ variable rate on the first day of May and November each year, and the upcoming reset will be based on the CPI data for September that was released Thursday.
Because of the twice-yearly resets, the date you purchase your I bonds can make a big difference to their returns. The rate changes every six months from the bond’s purchase date, based on the prevailing rate. That rate is good for six months, when the bonds take on the new rate.
As an example, I bonds purchased in October would assume the current rate — 9.62% — for six months, until the end of March. From next April, they would assume the new, lower rate — 6.47% — that will likely take effect Nov. 1.
“I would say buy before Oct. 31, because you still have the opportunity to buy for the next two weeks and lock in six months at 9.62%,” Pepper said.
These idiosyncrasies have created winners and losers this year. Investors who turned up their noses at the 7.12% rate in April and decided to wait until May for the 9.62% will, perhaps counterintuitively, have ended up missing out. That’s because the April buyers would have enjoyed six months at 7.12% and then six more at 9.62%, while the May buyers got six months of 9.62% but then will likely face six months of 6.47%.