I Bonds: Let’s handicap the May fixed-rate reset

Everything you are about to read is based on facts … and plain old guesswork.

By David Enna, Tipswatch.com

Update, April 28, 2023: Treasury raises I Bond’s fixed rate to 0.9%; new composite rate is 4.30%

Note, March 13: It has been 5 days since I wrote this article, and while I think it presents a reasonable theoretical way to look at the I Bond’s fixed rate, these predictions are totally shot, at least for now. The 10-year real yield is currently trading around 1.22%, down about 44 basis points in the last 5 days. So … in this troubling environment of bank bailouts, the Fed and markets are likely to change course. Yields leading up to the May 1 decision are likely to be very volatile. (But I think this all still makes a strong case for investing in inflation protection.)

Read this article knowing that it is almost impossible to predict what the I Bond’s fixed rate reset will be on May 1. There are simply too many unpredictable factors.

And now, the original article:

I’ve been getting a lot of questions from readers asking: “Do you think the Treasury will raise the I Bond’s fixed rate on May 1? And what should we do about it?”

It’s still too early to speculate (a lot happens in the bond market every week), but I do think the fixed rate is probably going up on May 1. But by how much? No one can say. The Treasury has no announced formula for setting the I Bond’s rate. It seems to be set based on “whim.” But maybe not totally whim.

First, here are some details about the U.S. Series I Savings Bond, a security that earns interest based on combining a fixed rate and an inflation rate.

  • The fixed rate will never change. Purchases through April 30, 2023, will have a fixed rate of 0.4%. The fixed rate is essentially the “real yield” of an I Bond, the amount its return will exceed future inflation.
  • The inflation-adjusted rate (often called the variable rate) changes each six months to reflect the running rate of inflation. That rate is currently set at 6.48% annualized. It will adjust again on May 1, 2023, for all I Bonds, no matter when they were purchased. The starting month of the new rate depends on the month you purchased an I Bond.
  • The combination of these two rates creates the I Bond’s six-month composite rate, which is currently 6.89% annualized for I Bonds purchased through April 30.

The fixed rate is extremely important for an I Bond investor, especially a long-term investor, because it stays with the I Bond for 30 years, or until the I Bond is redeemed. A higher fixed rate is very desirable.

But even if the fixed rate rises on May 1, if the increase is small — say from 0.4% to 0.6% — an investor still might want to buy in April to lock in the 6.89% interest rate for a full six months. On a $10,000 investment, that equals $344.50 in interest. A 0.2% increase in the fixed rate only adds $20 a year.

It looks likely that the I Bond’s variable rate will fall on May 1. This is uncertain, with two months of inflation unreported, but the variable rate could fall to something like 3.50%. If the fixed rate rises to 0.6%, the new composite rate would be around 4.12%.

So the investment equation is: 6.89% before May 1 and something like 4.12% after May 1. For a short-term investor, buying before May 1 will make more sense. For the long-term holder of I Bonds, buying after May 1 may be wiser. But of course if you wait, you won’t know if the fixed rate is actually going higher. It’s a risk. Or … it could rise somewhere much higher, like 0.8% or 1.0% and you’d be very happy.

Alternatives. Buy half your $10,000 I Bond allocation in April and the other half in May. Or, some investors — those with spouses and two separate TreasuryDirect accounts — could use the “gift box” strategy. Buy your full allocation in April and then, if the fixed rate rises dramatically, use the gift box in May to invest another $10,000 each.

Handicapping the fixed rate

Although the Treasury has no public formula for setting the I Bond’s fixed rate, I have long speculated that the fixed rate will tend to track (although lower) with the real yield of a 10-year Treasury Inflation-Protected Security. Last October, I suggested that the fixed rate was likely to rise to a range of 0.3% to 0.5%, even though a higher fixed rate was justified. The Treasury settled on 0.4%. I got lucky on that prediction.

On October 31, 2022, the 10-year TIPS was yielding 1.58%. The I Bond’s fixed rate generally lags 50 to 75 basis points lower than the 10-year real yield, so a higher fixed rate was justified, in my opinion. But real yields at that point had just recently surged higher. It was hard to forecast a longer-term trend.

Several readers have suggested that the Treasury may take an average of the 10-year real yield over the previous six months and then apply a ratio to that yield to set the I Bond’s fixed rate. I liked that idea, at least in theory. So I took a look at recent rate-setting periods where the fixed rate was set higher than 0.0% to compare the six-month-average theory against the most-recent-yield theory:

OK, to be honest, neither theory works well enough to be relied on as a predictor and that puts us back to the “whim of the Treasury” theory for setting the I Bond’s fixed rate. It says so right in the Federal Register:

The Secretary of the Treasury determines the fixed rate of return. The fixed rate is established for the life of the bond. This amendment clarifies that the fixed rate of return will always be greater than or equal to 0%.

Still, I think market real yields do play a role in this rate-setting exercise.

Half-year average theory. To apply this theory, I determined the average 10-year real yield over the rate-setting periods — May to October and November to April for each period the fixed rate was set above 0.0%. Then I calculated the ratio of the new fixed rate to the six-month average.

In the most recent rate reset in November 2022, the fixed rate of 0.40% was 56% of the 0.72% six-month average for the 10-year real yield. If you applied that ratio to current 10-year real yield average of 1.41%, you get a fixed rate of 0.80%, rounded to the tenth decimal point. (Fixed rates are always set to the tenth decimal point, such as 0.40% currently.)

But … this history of rate resets is highly inconsistent, with the ratio averaging just 34%. If you apply that to the current average of 1.41%, you get a fixed rate of 0.50% (rounded), still higher than the current 0.40%.

The more-recent ratios have tended to fall around 60%, which would give you a fixed rate of 0.80%.

Most recent real yield theory. This theory — which looks at the yield spread between the I Bond’s new fixed rate and the most recent 10-year TIPS yield — is also hugely inconsistent, but it generally does a good job of predicting when the fixed rate is likely to rise or fall.

The fixed rate of 0.4% in November resulted in a yield spread of 118 basis points, the highest margin going back 13 years. It’s possible the Treasury saw the then-recent surge in real yields as temporary, so it held the fixed rate lower than it might have otherwise.

If you apply a spread of 50 to 75 basis points (the average is 67 bps) you get a fixed rate of 0.90% to 1.20%, based on the current real yield of 1.66%.


I think the fixed rate is heading higher, possibly to around 0.6% on the low end and 1.0% on the high end. Let’s just say –er, guess — 0.8%. Feel free to crowdsource your own ideas and theories in the comments sections below.

Plus, remember that a lot can change before May 1, and the Treasury can do anything on a “whim.”

I’ll be taking another look at this issue — and potential I Bond investing strategies — after we learn the new variable rate, which will be set by the March inflation report released on April 12, 2023.

I Bonds: A not-so-simple buying guide for 2023

Confused by I Bonds? Read my Q&A on I Bonds

Let’s ‘try’ to clarify how an I Bond’s interest is calculated

Inflation and I Bonds: Track the variable rate changes

I Bonds: Here’s a simple way to track current value

I Bond Manifesto: How this investment can work as an emergency fund

* * *

Feel free to post comments or questions below. If it is your first-ever comment, it will have to wait for moderation. After that, your comments will automatically appear.Please stay on topic and avoid political tirades.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.


About Tipswatch

Author of Tipswatch.com blog, David Enna is a long-time journalist based in Charlotte, N.C. A past winner of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website.
This entry was posted in I Bond, Inflation, Savings Bond, TreasuryDirect. Bookmark the permalink.

42 Responses to I Bonds: Let’s handicap the May fixed-rate reset

  1. Pichan Jeter says:

    Thanks for your hard work!
    Just to double-check, but the Treasury does appear to have an actual formula for I-Bond inflation rate component:
    What do you think about just buying some fixed treasury bonds (or bills) as opposed to the variable I-Bond that can change so much, in today’s volatile environment?

    • Tipswatch says:

      Nominal Treasurys are fine; it just depends on your view of future inflation. If you fear inflation surprises, buy i Bonds and TIPS. If not, look at nominals.

  2. Jon says:

    Has your opinion changed with the changes in rates in the last 10 days?

  3. Marc says:

    I’m not saying I agree with Goldman Sachs on this prediction, but it raises an interesting point. Treasury yields have declined quickly since the SVB collapse, and they could decline further in future auctions if the Fed pauses its rate hikes in response. Meanwhile, you could have a situation where inflation rises the next two months and interest rates don’t, which could make I Bonds comparatively more attractive than they have been the last few months. Thoughts?


    • Tipswatch says:

      It might take another round of quantitative easing to make I Bonds super attractive. But I could see the gap narrowing. In your scenario, TIPS funds would do well, with yields falling and inflation rising.

  4. Misty says:


    When you say a short-term investor might want to buy I bonds before May 1, vs a long-term investor who might want to buy after May 1–how do you define short vs long?

    Do you consider long to be holding til maturity, or just for 5 years, or somewhere between? I’m not sure which I am!

    • Tipswatch says:

      If you are looking to exit within 2 years, I’d say you are a short-term investor in I Bonds. If you want to hold 5 years or more, you are a long-term investor. Short-term investors aren’t looking for inflation protection; they are looking to maximize their interest-rate return, taking advantage of the current 6.89% yield for six months.

  5. Steve Parker says:

    I respectfully tweeted @secyellen that I would appreciate transparency in the fixed rate calculation decision. Twitter users, it can’t hurt to ask.

  6. Steve Parker says:

    Thanks for the article, I really appreciate your insight, and am looking forward to your April I Bond articles. May I suggest a post on the math or decision tree on redeeming I bonds that are 0% fixed rate. Just not sure how to think about that.


  7. Patrick says:

    If you are right about the 4.12% or so as the new composite rate, then the short term investors will likely not be playing this round. One can get 5.2% (today) on a six month t-bill, without I-bond’s restrictions on short-term redemptions.

    I wonder how much projected demand plays into the decision making process of the fixed rate. When I-bonds were introduced, we were getting like a 3.0% fixed rate for a time, never to be seen again. Maybe it was an “introductory rate” to get things going. Granted the fixed rate went up to .4% last time in the face of massive demand and crazy inflation levels. But maybe they were thinking of making it higher. In any case, a .4% fixed rate is still really low compared to 3.0%.

    If your data is in Excel, it is easy enough to run a regression to see if the predictor variable is statistically significant. If not then you reject the model. Probably it is not significant in any of the models you have presented now or in the past. But you can only tell if you run the regressions.

    • Tipswatch says:

      I don’t think the Treasury is moved (too much) by expected demand. Back in 1998, when I Bonds were launched, the fixed rate was 3.4%. But at the same time the 10-year TIPS real yield was probably around 3.6%, maybe even close to 4%. So the I Bond’s original fixed rate matched the market.

      • Patrick says:

        Sure, I think they don’t care too much about demand either. But since we don’t know we can only guess. You have done a good job trying to guess the determinant(s) of the fixed rate. I was suggesting with the regressions you could actually test the statistical significance of your models. IMHO, as a matter of policy I do not think Treasury should keep us in the dark about how the fixed rate is determined. It is a clear “lack of transparency” by an agency of our government. If I could talk to Yellen I would say “Hey, what’s the big mystery?”

        • Marc says:

          Patrick, I, and probably everyone else, agree the fixed rate shouldn’t be a mystery, but that mystery has been around as long as the I Bond has existed, so Yellen didn’t create it. Perhaps she could change it now that she is the one in charge, but the argument against would be there’s historical precedent for TD to announce the rate when they make it available, just like a treasury auction (without the auction part). And if she has this power and decided to eliminate the mystery, when would that occur? It can’t be too far in advance of the rate change dates because circumstances could change. I suppose one could make the argument that sometime in the window after April 12 and before May 1, and sometime after October 12 and before November 1, would be the appropriate target timeframes. The only downside in doing so that I see is that it could influence surges in demand one way or the other which could overload the system like we saw back when the 9.62% rate was going away, and maintaining the mystery prevents that from happening to some degree.

          • Patrick says:

            Marc, Treasury could simply tell us what variables and method they use to calculate the fixed rate. Same as they already tell us what variable and method they use to calculate the variable rate (previous six month change in CPI). My guess is they do not want to tell us because the variables and method they use change over time, possibly for no good reasons, and they might look stupid revealing what has been going on. It is not a huge deal since the fixed rate nowadays is such a small number, but I believe in transparency where possible in the government. Back when I was buying a lot of I-bonds, the fixed rate was around 3.0% and it was a big deal, and as David said, it seemed correlated with TIPS real yield. But not anymore, unless I am missing something.

            I like to think the fixed rate is determined by four or five guys who have been around for a while. They get together in a smoke-filled room and ask each other what they think the fixed rate should be and then come to a quick consensus. The meeting would last no longer than 15 minutes.

  8. DC says:

    I do not know the literary term for this type of ?errand? but I wanted to point it out because I am under the impression that you enjoy word puzzles. The sentence, “But of course if you wait, you won’t know…” creates a sense of not knowing what occurs in the future although one is in the future.

    Tipswach.com is the best! Thank you!

  9. josh says:

    Can you elaborate on the gift box strategy and why it would be advantageous please?

    • Tipswatch says:

      Harry Sit at TheFinanceBuff.com wrote the definitive piece on this topic in December 2021: https://thefinancebuff.com/buy-i-bonds-as-gift.html

    • Marc says:

      Dave gave you the right link. I attribute my use of the gift box strategy to Harry as well. Essentially, in addition to, or instead of, buying I Bonds for yourself, you and your spouse buy iBonds for each other as gifts instead. You hold the gifts in your TD “gift box” until you are ready to deliver them to each other. There is no $10,000 annual limit for purchasing I Bond Gifts for a spouse (and no gift tax implications), but there is a $10,000 annual limit for delivering I Bond gifts to each other just as there is for purchasing them for yourself. If you want to load up on I Bonds because you like current rates, the advantage of doing this is that you can purchase $10,000 of I Bonds now if you like the 6.89% composite rate (with 0.4% fixed rate) and you can purchase another $10,000 of I Bonds now or after May 1 as a gift for your spouse to get the new rate at that time and split the difference (straddle the two rates). Your spouse can do the same thing, so essentially you have just purchased $40,000 worth of iBonds as a couple, $20,000 owned and $20,000 as gifts. The clock starts ticking on interest earned and time owned right away. You then have to wait until 2024 to deliver the gift I Bonds to each other which maxes out your limit in 2024. You can do the same thing with $30,000 each ($20,000 owned and $40,000 as gifts or $60,000 total) and deliver the third tranche of $20,000 gifts to each other in 2025, and so on. Gifting I Bonds is a way to build an I Bond ladder and stagger deliveries in future years. You can still decide to redeem them at your own discretion but only after deliveries.

      • Tipswatch says:

        This is a good summary. I haven’t used the gift box strategy, but I would do it ($10,000 for each of us) if the fixed rate rises dramatically in May. It’s good to keep in mind that TIPS offer higher real yields right now, so that is another option to consider. I have been focusing on building my TIPS ladder so far in 2023, especially for 10+ year maturities.

      • David says:

        Marc -thanks for taking the time to write up the great explanation.

  10. cozmot says:

    Great article. Out of curiosity, what do you consider a long-term and short-term investor with I Bonds?

    • Tipswatch says:

      I’d say a short-term investor is looking to get out within 2 years and a long-term investor will wait at least 5 years. The short-termers have lots of other options now, with 1-year Treasurys paying 5%+.

  11. Elmo Fafoon says:

    OK. Here’s my calculation. If the fixed rate comes in at the low end (0.6%) I give up $345 for $20/year or a 17 year break even — not good. If it comes at the high end (1.0% or $60/yr) I have a 5.75 year break even (345/60) and would only gain $255 in ten years. Since I am 74, I think the bird in hand looks better to me. Of course these calculations are rough and do not take into account compounding.

    • Tipswatch says:

      The actual breakeven is more complicated. If you invest in April you get the $344 in six months. If you wait one month longer you get$206 in six months (or possibly more). So the difference is $138. And you have to calculate the fact that the $20 extra (or more) will grow with inflation, constantly compounding. So the breakeven is probably more around 5 years.

      • elmo fafoon says:

        Yes, i was thinking that but i will still get the $206 but just later because my April bond will also get the May rate, just 5 months later. Buying in May will loose the 6.89 for 6 months. No?

    • Tipswatch says:

      Elmo, if you buy in May you won’t get 6.89% for six months, but you might get 4.something% or more instead for six months, and then potentially also have a higher fixed rate forever. I have been saying all along that I will probably buy in April, but I will wait until April to decide.

  12. mholkesvik says:

    Nice summary! I used it to initialize a prediction market on Manifold Markets. It’s fake internet money (you get some on account creation), but wisdom of crowds trying to win fake internet money can be a powerful tool.


    I’ll be doing another one for the semi-annual inflation rate announcement as well.

  13. Mike says:

    I enjoy and appreciate your insight. Thank you.

  14. Laurie says:

    I look forward to these articles; very informative. Thank you. I’m considering trading out some of my older 0% I Bonds; using that cash to purchase this year, with the higher fixed rate. Thoughts? And how would I go about doing that? Is it a smooth process on Treasury Direct?

    • Ralph A. says:

      1)You’d be creating a taxable event; 2) If held less than 5 years you will lose 3 month’s interest; 3) You’ll reset the 5 year clock for the 3-month interest penalty.

      • Laurie says:

        Thank you, Ralph. Ours are more than 5 yrs old & we’re okay with resetting the 5 year clock. As far as taxes, would that be just on the gains earned? We’ll be using the $10k that we originally used to buy the bond to purchase the new one, in 2023.

    • Tipswatch says:

      This transaction would not be difficult at TreasuryDirect; just redeem, collect the money and then repurchase up to the $10,000 limit. One factor to consider is that you don’t want to redeem while the 6.48% rate is still in effect. That is determined by the month you originally bought the I Bond.

    • Henry Fung says:

      Based on current short term T Bill rates you might consider redeeming, purchasing a 17 week T-Bill, and reconsidering in 17 weeks, well within the 6 month period. With current rates you might get 1% more APR using this strategy, assuming the 17 week holds around 5%. Easy to do on Treasury Direct, although you will probably need to set a reminder when the 17 weeks are up.

  15. Larry says:

    Thanks for your work.

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