Q&A on I Bonds

Tipswatch.com, updated May 2, 2022

The way I Bonds work

An I Bond is a security that earns interest based on combining a fixed rate and an inflation rate.

  • The fixed rate will never change. So if you bought an I Bond in 2014 with a fixed rate of 0.2%, it will continue to have a 0.2% fixed rate for the life of the bond. Purchases through October 31, 2022, will have a fixed rate of 0.0%. I Bonds I bought back in 2000 still carry a fixed rate of 3.4% and will continue to do so through 2030.
  • 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 9.62% annualized. It will adjust again on November 1, 2022, for all I Bonds, no matter when they were purchased. (However, the effective start date of the new interest rate can vary depending on the month you bought the I Bond, a Treasury oddity.)

Here is a chart from Treasury Direct showing how the timing of the rate change depends on when you purchased the I Bond:

Issue month of your bondNew rates take effect
JanuaryJanuary 1 / July 1
FebruaryFebruary 1 / August 1
MarchMarch 1 / September 1
AprilApril 1 / October 1
MayMay 1 / November 1
JuneJune 1 / December 1
JulyJuly 1 / January 1
AugustAugust 1 / February 1
SeptemberSeptember 1 / March 1
OctoberOctober 1 / April 1
NovemberNovember 1 / May 1
DecemberDecember 1 / June 1

How is the interest rate determined?

To get the actual rate of interest (the composite rate) the Treasury combines the fixed rate and the inflation rate. The combined rate will never be less than 0.0%. However, the combined rate can be lower than the fixed rate. If the inflation rate is negative, it can offset some of the fixed rate.

If the inflation rate is so negative that it would take away more than the fixed rate, the I Bond pays zero interest. But it cannot go below zero. This means that I Bonds are protected against deflation. TIPS, on the other hand, will see their principal balance decline in times of deflation, and therefore are less protected.

Here is an example from Treasury Direct on how the interest rate is determined:

The composite rate for I bonds issued from May 2022 through October 2022 is 9.62%
Here’s how the Treasury set that composite rate:
Fixed rate0.00%
Semiannual inflation rate4.81%
Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)][0.0000 + (2 x 0.0481) + (0.0000 x 0.0481)]
Composite rate  [0.0000 + 0.0962 + 0.0000000]
Composite rate0.0962000
Composite rate0.09620
Composite rate  9.62%

How do I Bonds earn interest?

An I Bond earns interest monthly from the first day of the month of the issue date. The interest accrues until the bond reaches 30 years or you cash the bond. Interest is compounded semiannually. Every six months from the bond’s issue date, all interest the bond has earned in previous months is added to the bond’s new principal value. Interest is earned on the new principal for the next six months.

However, when you are tracking your total value on TreasuryDirect or with the Savings Bond Calculator, keep in mind that the values displayed for bonds that are less than five years old do not contain the latest three months of interest.

You can redeem the bond after 12 months. However, if you redeem the bond before it is five years old, you lose the last three months of interest.

Why are they a great investment?

  • First, I Bonds are the most conservative and most safe of all investments. Your principal is 99.9999999% safe and it will never decline, ever. If inflation falls to below zero, the inflation-adjusted rate will fall to zero, but not below zero.
  • I Bonds allow you fantastic flexibility. You can redeem them after one year, costing you three months of interest. Or redeem them after five years and pay no penalty, or just hold them for 30 years and cash out.
  • I Bonds protect you against unexpected inflation. If inflation in the next 30 years suddenly soars to 7%, 10%, 15%, your principal will increase by that amount because of the inflation-adjusted interest rate.
  • I Bonds allow you to defer federal income taxes until you redeem them, so you pay zero in taxes until they are sold. This is a big advantage over TIPS, which carry current-year income taxes for both the coupon rate and the inflation adjustment to principal. (Both TIPS and I Bonds are free of state income taxes, an advantage over bank CDs.)
  • I Bonds are simple to track as an investment. Use the web-based Savings Bond Calculator, update your information, and check it a couple times a year. (The Treasury contends that this calculator is for paper I Bonds only, but it works fine for electronic versions.) This is another huge advantage over TIPS held at TreasuryDirect, which is a do-it-yourself proposition, even for downloading yearly tax forms. Want to track current value of your TIPS? Open up Excel and get to work. Treasury Direct is not going to tell you.

Is it difficult to purchase and manage I Bonds at TreasuryDirect?

A lot of readers don’t like TreasuryDirect, which can be a bit clunky. But the process of buying and redeeming I Bonds at TreasuryDirect works well. First you need to open an account, and I wrote a guide to walk you through the basics: Ready to open a TreasuryDirect account? Here are some tips.

When you set up the account, you will be linking a bank or brokerage account to TreasuryDirect. Then to buy I Bonds, you simply log into TreasuryDirect, set the purchase amount and date, and the purchase will be made. You can purchase I Bonds near the end of a month and get credit for a full month of interest. TreasuryDirect makes timing the purchase easy.

How do I use I Bonds for higher education?

If you use interest from a Series I bond to pay for higher education, you may not have to pay federal tax on the interest. However:

  • If you want to use the bond for your education, you must be the owner of the bond.
  • If you want to use the bond for your child’s education, then you or your spouse, or both, must own the bond. Your child may be a beneficiary but not a co-owner.
  • Your modified adjusted gross income has to be less than the cut-off amount set by the Internal Revenue Service. This amount typically changes every year. I believe the current caps are $84,950 for single taxpayers and $134,900 for married filing jointly, but a gradual phaseout of the benefit begins at lower income levels. See IRS Publication 970 “Tax Benefits for Education.”

What are the downsides to investing in I Bonds?

  1. Investments are limited to $10,000 per person per calendar year for electronic I Bonds held at TreasuryDirect. There is also the option to get $5,000 a year in paper I Bonds in lieu of a federal tax refund. Some investors find this amount too small to make a difference in their asset allocation. However, an investor using multi-year purchases can build a substantial stake in I Bonds.
  2. I Bonds cannot be redeemed in the first year of ownership and redemptions before 5 years will incur a penalty of the last three months of interest.
  3. You cannot create a joint account at TreasuryDirect, so a couple would need to set up two accounts, one with I Bonds registered as Spouse 1 with Spouse 2, and the other, Spouse 2 with Spouse 1.
  4. You cannot own I Bonds in a tax-deferred account. Even though I Bonds earn tax-deferred interest, the fact that they cannot be purchased in an IRA can be cumbersome for investors looking to move money in tax-deferred accounts, without tax consequences.

Fixed rate history

The fixed rate set each May and November applies to all bonds the Treasury issues in the six months following the date when it sets the rate. The fixed rate applies for the life of the bond.

Date the fixed rate was setFixed rate for bonds issued in the six months after that date
May 1, 20220.00%
November 1, 20210.00%
May 1, 20210.00%
November 1, 20200.00%
May 1, 20200.00%
November 1, 20190.20%
May 1, 20190.50%
November 1, 20180.50%
May 1, 20180.30%
November 1, 20170.10%
May 1, 20170.00%
November 1, 20160.00%
May 1, 20160.10%
November 1, 20150.10%
May 1, 20150.00%
November 1, 20140.00%
May 1, 20140.10%
November 1, 20130.20%
May 1, 20130.00%
November 1, 20120.00%
May 1, 20120.00%
November 1, 20110.00%
May 1, 20110.00%
November 1, 20100.00%
May 1, 20100.20%
November 1, 20090.30%
May 1, 20090.10%
November 1, 20080.70%
May 1, 20080.00%
November 1, 20071.20%
May 1, 20071.30%
November 1, 20061.40%
May 1, 20061.40%
November 1, 20051.00%
May 1, 20051.20%
November 1, 20041.00%
May 1, 20041.00%
November 1, 20031.10%
May 1, 20031.10%
November 1, 20021.60%
May 1, 20022.00%
November 1, 20012.00%
May 1, 20013.00%
November 1, 20003.40%
May 1, 20003.60%
November 1, 19993.40%
May 1, 19993.30%
November 1, 19983.30%
September 1, 19983.40%

Inflation rates

The inflation rate set each May and November applies for six months to all I bonds ever issued. The rate you see here is doubled to create what I call the “inflation-adjusted variable rate” and becomes the variable portion of the composite rate for six months.

Date the inflation rate was setInflation rate for six months
(The I Bond’s variable rate is 2x the inflation rate)
May 1, 20224.81%
November 1, 20213.56%
May 1, 20211.77%
November 1, 20200.84%
May 1, 20200.53%
November 1, 20191.01%
May 1, 20190.70%
November 1, 20181.16%
May 1, 20181.11%
November 1, 20171.24%
May 1, 20170.98%
November 1, 20161.38%
May 1, 20160.08%
November 1, 20150.77%
May 1, 2015-0.80%
November 1, 20140.74%
May 1, 20140.92%
November 1, 20130.59%
May 1, 20130.59%
November 1, 20120.88%
May 1, 20121.10%
November 1, 20111.53%
May 1, 20112.30%
November 1, 20100.37%
May 1, 20100.77%
November 1, 20091.53%
May 1, 2009-2.78%
November 1, 20082.46%
May 1, 20082.42%
November 1, 20071.53%
May 1, 20071.21%
November 1, 20061.55%
May 1, 20060.50%
November 1, 20052.85%
May 1, 20051.79%
November 1, 20041.33%
May 1, 20041.19%
November 1, 20030.54%
May 1, 20031.77%
November 1, 20021.23%
May 1, 20020.28%
November 1, 20011.19%
May 1, 20011.44%
November 1, 20001.52%
May 1, 20001.91%
November 1, 19991.76%
May 1, 19990.86%
November 1, 19980.86%
September 1, 19980.62%

Current composite rates

The table below shows the current composite rate for all I Bonds . Each composite rate applies for six months. (However, the effective start date of the composite rate will vary depending on the month you bought the I Bond.)

Period when you bought
your I bond
Composite rate for six-month earning period starting during May – October 2022 … The actual start date will depend on the month you purchased the I Bond.
FromThrough
May 2022Oct. 20229.62%
Nov. 2021Apr. 20229.62%
May 2021Oct. 20219.62%
Nov. 2020Apr. 20219.62%
May 2020Oct. 20209.62%
Nov. 2019Apr. 20209.83%
May 2019Oct. 201910.14%
Nov. 2018Apr. 201910.14%
May 2018Oct. 20189.93%
Nov. 2017Apr. 20189.72%
May 2017Oct. 20179.62%
Nov. 2016Apr. 20179.62%
May 2016Oct. 20169.72%
Nov. 2015Apr. 20169.72%
May 2015Oct. 20159.62%
Nov. 2014Apr. 20159.62%
May 2014Oct. 20149.72%
Nov. 2013Apr. 20149.83%
May 2013Oct. 20139.62%
Nov. 2012Apr. 20139.62%
May 2012Oct. 20129.62%
Nov. 2011Apr. 20129.62%
May 2011Oct. 20119.62%
Nov. 2010Apr. 20119.62%
May 2010Oct. 20109.83%
Nov. 2009Apr. 20109.93%
May 2009Oct. 20099.72%
Nov. 2008Apr. 200910.35%
May 2008Oct. 20089.62%
Nov. 2007Apr. 200810.88%
May 2007Oct. 200710.98%
Nov. 2006Apr. 200711.09%
May 2006Oct. 200611.09%
Nov. 2005Apr. 200610.67%
May 2005Oct. 200510.88%
Nov. 2004Apr. 200510.67%
May 2004Oct. 200410.67%
Nov. 2003Apr. 200410.77%
May 2003Oct. 200310.77%
Nov. 2002Apr. 200311.30%
May 2002Oct. 200211.72%
Nov. 2001Apr. 200211.72%
May 2001Oct. 200112.76%
Nov. 2000Apr. 200113.18%
May 2000Oct. 200013.39%
Nov. 1999Apr. 200013.18%
May 1999Oct. 199913.08%
Nov. 1998Apr. 199913.08%
Sept. 1998Oct. 199813.18%

59 Responses to Q&A on I Bonds

  1. Mark Dionne says:

    I have a $20,000 Ibond dated 4/1/2007, which I bought before the purchase limits increased. The TD site says that my specific bond currently pays 8.57% while elsewhere on the site it says the bond should pay 11.09%, as does your chart in this posting. What gives? Are different rules in place for bonds over $10,000?

  2. pabis2000 says:

    if I buy $10,000 I Bonds right now, when will it be smart to buy a second set of $10,000?

    • Tipswatch says:

      If you buy $10,000 in electronic form today, you won’t be able to buy any more for your personal account at TreasuryDirect until January 2023. The key factor looking ahead into 2023 is that the I Bond’s fixed rate could rise above 0.0%, possibly in November 2022 or May 2023. So waiting until closer to May 2023 for the second set might make sense.

  3. Nancy Ketchum says:

    I am purchasing bonds for my elderly father. How do I document my sister and I as the beneficiary so we don’t have to go through probate. We have all his other accounts set up with all our names on this but that doesn’t seem possible with I Bonds.

    • Tipswatch says:

      I am assuming your elderly father already has a TreasuryDirect account? If so you will want to register each purchase with 1) him as the primary owner and one of you as beneficiary which uses the payment on death registration, for example, JOHN DOE POD TO JANE DOE. Or, 2) you could use the two owners registration, with him as the primary owner and one of you as the secondary owner. That uses the WITH registration, for example, JOHN DOE SSN 987-65-4321 WITH JANE DOE SSN 123-45-6789.

      I am not an estate lawyer or even any kind of expert, but I think either form of ownership would pass the I Bond to the second named person as the sole owner after the primary person’s death.

      To divide these equally, just register half your purchases with Sibling1 as the secondary owner and the other half with Sibling2 as the secondary owner. You will all need separate accounts at TreasuryDirect, I believe, as least at redemption.

  4. I-bond purchaser says:

    If I buy I-bond as a gift for someone else this year, can I change my mind and change the gift to my own purchase next year or change the gift for a different person? Thank you for your answer.

    • Tipswatch says:

      No, I don’t think you can give it to yourself. The I Bond is no longer “yours” after you designate it as a gift. You can name yourself or another person as beneficiary, however, in case the person dies.

  5. Dan Weber says:

    Thank you so much for great information about I-Bonds, it is especially helpful for newbies! After reading this post along with replies to questions, I think I understand that if I were to use the TD Gift Box to purchase a gift this year (2022) for my spouse to deliver next year (2023), that gift purchase would start earning interest right away, I think at the current rate May rate of 9.62%, is that correct? I wanted to be sure a Gift Box would start earning interest before it’s delivered and I didn’t see any conformation of this on the TD website.

    • Tipswatch says:

      The TD website is vague about this, yes. But from every source I follow, your understanding is correct. Put it in the gift box FOR SOMEONE ELSE. It does start earning interest immediately. When you deliver it to that person in a future year, it will count against their purchase cap that year.

  6. Jack Jenkins says:

    My question revolves around how to set up my TD account so that my wife can inherit my iBoinds most easily should I pass first, or vice versa. I set up my first purchase yesterday and simply registered myself as owner. I did not see anyplace to set a beneficiary while setting up my account, but apparently you designate the beneficiary with each individual purchase. Is it ‘best’ for estate planning purposes to register my account as ‘Owner 1 (ie me) with Owner 2’ (ie my wife)? Since I opened my account as simply Owner 1, can I change my account to say ‘…with Owner 2’? If not, should I simply designate her as my beneficiary at each purchase? Also, my wife and I would like to buy $20k/yr of iBonds and I don’t want how I title our accounts to reduce how much we can purchase per year. Please advise.

    • Tipswatch says:

      Yes, you can change the registration for securities you have already purchased and also change the “default” registration for each future purchase. You will probably want to use the WITH registration. Each spouse needs a separate TD account to buy $20,000 a year.

  7. robj says:

    My question is what happens to the remaining balance after a partial I bond redemption in Treasury Direct? Since there will no longer be an exact I Bond, how is the balance of that bond displayed in my TD account?

  8. user says:

    When opening TD account, it asks about
    Taxpayer Identification Number Certificate
    By checking this box I certify, under penalty of perjury, that:
    The number shown on this form is my correct taxpayer identification number.
    I am not subject to backup withholding because: (a) I am exempt from backup withholding, (b) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of failure to report all interest and dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.
    I am a U.S. person as defined by the IRS.

    What does it mean? Should one check it if s/he is required to file tax return?

  9. Bill Smalling says:

    In January my wife & I purchased $10,000 each of I-Bonds. Can I now gift her another $10,000 & she gift me $10,000. Is this OK? Thanks for your informed response.

    • Tipswatch says:

      Yes, you can each place $10,000 in TreasuryDirect’s “gift box,” for delivery later to your spouse. They begin earning interest and can stay in the gift box until next year, or later. When they are delivered, they count against the $10,000 purchase limit in that year, so you technically cannot double up in one year.

      • Bill Smalling says:

        OK great understand. I purchase now & deliver next January at which time I can purchase another gift & hold that till the following January. Thank you very much for this would have never discovered this without your excellent advice.

    • Bill Smalling says:

      Sorry but I just read on the Treasury Direct website that the total for each individual is $10,000 which is to includes any gifts. You can obtain another $5,000 in paper I Bonds that are purchased with your tax refund.

      • Tipswatch says:

        This is correct. You can buy $10,000 for yourself and place $10,000 in a gift box for another person. That gift is no longer yours and doesn’t count against your purchase limit. When you deliver it to the other person, it then counts against their purchase cap. You can’t both buy and receive $10,000 in I Bonds in one calendar year. If you try to do that, TreasuryDirect will simply move the gift back to the gift box where it originated.

  10. David says:

    Hi,
    I really enjoy your information and depth of knowledge on I-Bonds. I understand the paper limit is $5,000 per tax return, so for a couple filing jointly the limit is $5,000. However, my son gifted me paper I-Bonds with his refund via his tax return, does this count towards the $5000 or is this a vehicle to add incremental I-Bonds annually.

    • Tipswatch says:

      I’ve never seen this question before. I don’t think it would count against your cap on electronic I Bonds, and it probably wouldn’t count against the paper I Bonds, either. But I’ve never seen TreasuryDirect address this question.

  11. Paul says:

    If you choose to redeem your I bonds after 1 year but before your five year you loose out on the last three months of interest payments. Does that include the inflation adjustment for those last three months or is it just the nominal interest rate set at the beginning?

  12. david says:

    Am I correct in understanding that the $5K paper I-Bond one can purchase in lieu of a tax refund (Form 8888) is in addition to the $10K purchased on TreasuryDirect? Since it doesn’t count toward the $10K, it’s a way for an individual to buy $15K of I-Bonds per year? Thanks!

  13. Chris Sinor says:

    If I wanted to buy before the Tax Day – April 18th, 2022, what tax year data is used to determine taxable income / limit for the $10k purchase.

    If I buy before April 18th and if it applies to 2021 tax year, when would I be eligible to buy another $10k – one year from date of purchase or any time during the next physical tax year?

    What happens if you buy $10k and your annual income exceeds the cut off limits?

    If you sell property and have a long term capital gain on it, does that impact your cut off limit?

    Also, I assume both my wife and I can buy $10k worth of I-bonds if we file a joint return?

    • Tipswatch says:

      The $10,000 limit is per person for a calendar year. There is no income test for the purchase, so don’t worry about that. … A couple needs two separate TreasuryDirect accounts to buy $20,000 a year.

  14. Bill says:

    Paper I Bonds were protected from loss if lost or stolen, from what I remember. We converted our paper I Bonds to electronic bonds at Treasury Direct.

    Now I wonder if the same protection is still there. For example if somehow my account were hacked, and the bonds were somehow cashed by a thief, would I still be protected? Or should I have just kept the paper bonds for better protection?

    Not expecting any issues like this, but would like to know the answer.

    • Tipswatch says:

      The Treasury doesn’t give specific assurances. The general belief is that if the Treasury itself is hacked, you will be protected. If you get phished and reveal account information, you are at risk. The Treasury sends many notifications of account activity, so you will get a warning.

  15. Joe says:

    Just here to ask about updates on the treasury website. I understand it won’t show anything for the first three months due to the penalty. However, I have some from 12/2021 and figured it would show something by now. December, January and February are the first three months of penalty. Granted the first landed on a Friday. I’m not too concerned, but figured I would ask when I could/should expect the update. Ten business days? A month? Just curious.

    • Steven says:

      Hi Joe, I believe your December purchase should have shown the interest for 1 month starting on Apr 1st. I too purchased $10k Dec. 2021 and my interested of $60 showed up April 1st.

      • Joe says:

        Hi Steven,

        That’s what I figured. I checked it again first thing this morning and I still didn’t see anything. However I went back and checked it around 9:30 AM and I saw the $60. Maybe it just didn’t update on mine? I don’t know. It’s there now though.

        *********************************************************************
        As a follow up question, when they compound the interest every six months, I would assume that is only with the fixed rate, correct? So in other words with a 0% fixed rate, there is basically no compounded interest for the entire life of the bond? Or would the next six month’s rate apply to it (ie $10,356 would be counted towards the new rate set in May)?

        Thanks!

  16. Edward Alpern says:

    Thank you for very helpful/informative website. ?s on buying paper I bonds: 1) It seems this can only be done if you are owed an IRS refund for a tax year filing by filling out form 8888 with your tax return, correct? 2) Assuming this is correct and if you intend to buy say $5k of I bonds (or at least have the possibility to do so) then would it make sense assuming you need to pay in 1/4ly tax estimates that several weeks before you expect to finalize/file your return that you would make an additional estimated tax payment of $5k so that you would have a refund coming to you? 3) If one is not obligated to make estimated 1/4ly tax payments could you voluntarily do so say via the EFTPS.gov website?

    • Tipswatch says:

      Q 1: Correct, paper I Bonds are only available in lieu of a federal income tax refund, limited to $5,000 per return.
      Q 2: Yes, overpaying your estimated taxes is one way to ensure a tax refund in the amount you want.
      Q 3: Yes, I believe anyone can pay estimated taxes. If you are still working, you could also set up over-withholding to get the same result.

  17. Robert E Ganz says:

    can you own I bonds in a roth ira account?

    • Tipswatch says:

      No. I Bonds cannot be purchased in any sort of tax-deferred account.

      • tfwakismet says:

        Why not? My wife and I both have most of our money in Roth IRA’s and we both are retired over 591/2 but still both working. We both collect soc. sec. also. Please explain as we were thinking this would be a safe retirement “haven” for us earning 7.12% interest tax free?

      • Tipswatch says:

        I agree it would be convenient to be able to purchase I Bonds in a retirement account, using tax-deferred money. But TreasuryDirect does not allow tax-deferred accounts. One thing to keep in mind: Interest on an I Bond grows tax deferred, so it is basically a “stealth” traditional, non-deductible IRA.

        • robj says:

          Correct, but if OP and his wife would establish a Trust and add the account to TD (just need the Trust number and can be done in an hour online) then each person with a trust can also contribute $10,000. $40K for a couple every year this way.

  18. watchuswinagain says:

    I’m using I-Bonds as a place to park my daughter’s college fund and it’s looking like the next period’s composite rate will be around 4% for the next six months. Regarding the forfeiture of 3 months of interest if they’re sold within 5 years, what if inflation reverses and the composite rate becomes 0% when it’s reset next Fall? Do I just hold the I Bonds for three more months at 0% and those three months constitute my forfeiture? Or do they go back to the last 3 months where I received interest?

    • Tipswatch says:

      My guess is that the next variable rate could be as high as 8% for the next six-month period. That would happen if non-seasonally adjusted inflation comes in at 0.7% or higher for both February and March. But you are correct that the 3-month interest penalty is on the last three months of interest earned. So you should avoid taking the penalty after the interest rate has been high, if possible. If the rate is zero, the penalty would be zero.

  19. Joe says:

    Hi David,

    I had a question about the 12 month change number. I’m a math geek and played around with the numbers and found out how all of it is calculated. However, I’m confused on why you include 12 month number. Is it somewhat like a stock 1 year graph? Just additional “info.” Or does it kind of forecast what will happen next year as far as percentage and therefore the chance of inflation going up (or down)? For example, inflation was 1.2% in October 2020 vs 6.2% October 2021 or 276.589/260.388 which equals a 6.22% increase. Just curious if I was missing something. Thanks!

    • Tipswatch says:

      I am assuming you are talking about the 12-month inflation numbers on the “I Bonds and Inflation” page? Yes, that is “additional info” and shows the trend over the last 12 months. It does not predict the future at all. I also use these number to talk about the inflation-based increase in TIPS principal balances, so it is helpful to have them here.

  20. Drake Stone says:

    I’m new to any kind of bonds but I’m kinda kicking myself about not knowing about I Bonds until now! Regarding the formula to calculate the composite rate:

    For a 6-month period, is the adjusted rate used actually 2X the inflation rate?

    Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]

    I’m fairly certain that is the case but I’m astounded that I never knew about this. I’ve had a couple of financial planners since 2002 and not one has ever even mentioned they exist!
    ———
    One other generalized question:
    When the Fed starts getting involved and actually starts raising interest rates in their attempts to “control” inflation, should we expect the fixed rate to increase and the adjusted rate to significantly decrease?

    Timewise, does that happen quickly or is it something that takes years? (just realized that is probably an economics dissertation!)

    • Tipswatch says:

      What I call the “inflation-adjusted variable rate” (a term not used by the Treasury) is 2x the six-month inflation rate. But that is an annualized rate, only in effect for six months. I think your understanding looks correct. In most cases, the composite rate will equal the fixed rate + variable rate, but if the fixed rate is rather high (not true recently) the formula will reflect a slightly higher composite rate, because of the effect of compounding.

      The Fed raises short-term interest rates, which probably will have little effect on the I Bond’s fixed rate. But if you see the 10-year nominal Treasury rising to a level of 2.5% or higher, that should push 10-year real yields above zero, and THAT could at least make a higher fixed rate possible. I don’t expect that to happen before the May reset.

      • Drake Stone says:

        Thanks, David. I of course now see that Joe had almost the same exact question last week regarding the Fed and potential impacts to an I Bonds fixed rate. I appreciate BOTH responses. Lots to learn.

      • Wayne says:

        I noticed today (April 17, 2022) that the 10 year treasury rate is at 2.83%. So possible fixed rate increase in May after all?

        • Tipswatch says:

          Don’t look at the nominal rate. Look at the real yield of a 10-year TIPS. Still negative at -0.06%. Why raise the I bond fixed rate? But … we are definitely much closer to that possibility.

          • Wayne says:

            Thanks for the reply. I should have read your latest post today on 5 year TIPS. Would have answered my own question.

  21. Joe says:

    Hi David,

    I have been reading your posts and you have answered many questions.

    I was wondering what numbers you focus on and when they come out. I’ve seen your excellent charts on the index and percent changes, but where do these numbers come from and how are they interpreted. For example, looking at your “Q&A on I Bonds” page, January’s inflation index hasn’t been posted. When are they expected and where would I find them if not for your website? I understand that we won’t know the numbers for the next 6-month rate, but I would think as it gets closer to March/April, we will have a pretty good idea of what it should be around (ie at least 3.00% by example only).

    I know you have no crystal ball, but I would like to think it is similar to knowing it’s going to be hotter in the summer than it will be in the winter. How much? Who knows, but we know it will be. Same with the fixed rate. I read your article on why buying now will payoff with 0.0% (ie 14 years to br

    • Tipswatch says:

      Good questions, Joe. The non-seasonally adjusted inflation numbers shown on the “Inflation and I Bonds” page come from the monthly inflation report issued by the Bureau of Labor Statistics. The January report will be issued Feb. 9 at 8:30 am EST. You can go to bls.gov that morning and read the entire report (which I always link to in my monthly inflation article).

      No one can accurately predict future inflation, especially more than a month out. The experts have been way off on estimates over the last year. I’ve been guessing that inflation from September 2021 to March 2022 will run in a range of about 2.25% to 3.75%, which would result in a new I Bond variable rate of 4.5% to 7.5%. That’s a guess, but it does look like “headline” inflation will be fairly high through March, because the baseline numbers for January to March 2021 were pretty low. But non-seasonally adjusted inflation might run a little lower. Those numbers were higher than the headline numbers back in January to March 2021 … 0.43% for January (versus 0.3% for headline), 0.55% for February (versus 0.4%), and 0.71% for March (versus 0.6%).

      • Joe says:

        Hi David,

        Thanks for the reply. I see my message cut off for some reason. I mentioned that I saw your article about comparing to wait for an uptick in the fixed rate vs going ahead and taking the 7.12% and how it would take years to catchup/break even.

        On that note, I meant to also ask about the government and raising interest rates. They’re talking about 3-4 rate hikes this year. Does this have anything (effect) on the fixed rate for I Bonds or is that apples and oranges? I know it’s not a total direct relationship, but does it lean towards the fixed rate going up for I Bonds? Thanks again.

        • Tipswatch says:

          Short-term rate hikes probably won’t have any direct effect on the I Bond’s fixed rate, but keep an eye on the 10-year nominal Treasury. As of today it is yielding around 1.88%, if it climbs to about 2.5%, that could bring 10-year real yields to close to zero. The 10-year real yield will need to be maybe 0.25% or higher before we see any increase in the I Bond’s fixed rate. In November? Possibly.

  22. L.I. Coleman says:

    How are the bonds affected in those years when the inflation rate was negative?

    • Tipswatch says:

      The interest rate of an I Bond can never go below zero, so in a time of extended deflation, the interest rate could fall to 0.0% for six months. This happened in the period of May to October 2015, when the variable rate was -1.60%. For six months, that would have been applied against any fixed rate the I Bond carried. But because an I Bond can’t return less than 0.0%, I Bonds actually outperformed inflation by at least 1.60% during that period.

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