The annual rate for newly purchased Series I bonds could rise above 5% in November based on inflation and other factors, financial experts say. This would be an increase from the current 4.3% interest on I bond purchases made through Oct. 31. However, it’s still less than the 6.89% rate offered on I bonds bought between November 2022 through April 2023.
The demand for I bonds has exploded over the past couple of years amid high inflation. Backed by the U.S. government, these bonds have become popular investment options for individuals looking to protect their savings from the eroding effects of inflation. The November rate could be the fourth-highest yield since I bonds were introduced in 1998.
The U.S. Department of the Treasury adjusts I bond rates every May and November. I bond yields consist of two parts: a variable and fixed portion. The variable rate is adjusted every six months based on inflation, while the fixed rate is typically left unchanged. Currently, the variable rate is 3.38% and the fixed rate is 0.9%, resulting in a rounded combined yield of 4.30% on I bonds purchased between May 1 and Oct. 31.
Based on six months of consumer price index data, experts predict that the variable component of the I bond rate is likely to rise to 3.94% in November, up from the current variable rate of 3.38%. The variable rate will change again in May 2024.
While the variable I bond rate can be calculated based on inflation changes, the fixed rate portion is harder to predict. The Treasury doesn’t disclose exactly how it decides on the fixed rate for I bonds. However, experts expect the fixed rate to increase in November based on higher yields from 10-year Treasury inflation-protected securities (TIPS), another government-based, inflation-linked asset. The fixed rate component will be particularly impactful for long-term I bond investors.
There are various theories about how the Treasury decides on the fixed rate, including market yields on TIPS and other factors. Depending on the spread between the current 0.9% fixed rate and the real yield of 10-year TIPS, experts believe the fixed I bond rate could rise to 1.4% or 1.5% if real yields for TIPS stay in the 2.3% to 2.4% range for the next six months.
Overall, the potential increase in I bond rates presents an attractive investment opportunity for individuals looking to safeguard their savings and earn a reasonable return in a high-inflation environment. The combination of a variable rate based on inflation and a potentially higher fixed rate would make I bonds a desirable option for investors seeking protection against the eroding effects of inflation.