Treasury I bond rates poised to slide in November

The Treasury Department’s popular inflation-protected I bonds won’t return as much when the rate adjusts on November 1, so buying them now is a better bet.

The rate will be at least 6.48%, according to estimates from Ken Tumin, a senior industry analyst at Lending Tree and founder of DepositAccounts.com, down from the current 9.62% the I bonds are offering until the end of October. The rate applies for the first six months you hold the bond.

That’s the second-best rate since November 2005 when the composite rate was 6.73% and the seventh-highest since the bond’s introduction in 1998, according to Treasury data. But if inflation cools quickly over the next six months, the bond won’t be worth as much.

“For November I bond purchases, we only can know the first six months I bond inflation rate. We won’t be able to estimate exactly the May I bond inflation rate until mid April 2023,” Tumin said. “It’s possible that the inflation rate could be much less. Then, the I bond will look much less appealing — like it has been before 2021.”

Closeup United States Treasury Savings Bonds Security Concept
(Photo Credit: Getty Creative_

How the rate is calculated

The I bond composite rate is made up of a fixed rate and a semiannual inflation rate calculated from a formula based on the six-month change in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items.

Then, those two rates are plugged into the following formula to come up with the composite rate:

[Fixed Rate + (2 x Semiannual Inflation Rate) + (Fixed Rate x Semiannual Inflation Rate)]

If the fixed rate stays at zero — where it has been since May 2020 — and the annualized inflation rate is 6.48% (or 3.24% for the semiannual rate), then the I bond’s composite rate in November would be 6.48%, Tumin calculated. The fixed rate is announced every May and November by the Treasury Department.

The rate at purchase is in effect for the first six months you hold the bond, then the rate is recalculated based on its fixed rate and the new inflation rate for six months, and so on.

The high return on I bonds in the last year is squarely because of inflation, since the fixed rate has remained at zero.

That’s not always the case.

For instance, from November 1999 to November 2000, the composite rate on I bonds fluctuated between 6.49% and 7.49%, not because the inflation rate was high but because the fixed rate was much higher at 3.4% to 3.6%.

In November 2005, both the fixed rate and semiannual inflation rate were moderately higher (1% and 2.85%, respectively), which combined for a high composite rate of 6.73% on I bonds purchased then.

But since inflation has been propping up the I bond rate lately, when it cools as the Federal Reserve is aiming to do — so, too, goes the rate. But it never can go negative — you can’t lose your principal by design.

“I think the best argument for I bonds is that it does protect you from high inflation, and unlike marketable bonds (like TIPS), there’s no risk of principal loss if you sell before maturity,” Tumin said. “CDs and high yield savings accounts can’t say this.”

Time to buy is now

And there’s still time to pick up your I bonds with a 9.62% rate before the end of the month.

If you purchase one between now and the end of October, you’ll earn the current lofty composite interest rate of 9.62% for the first six months. And then the expected lower rate of 6.48% will kick in for the next six months. The combo will land you a respectable annual rate of more than 8%.

But even if you look at it as a one-year investment, it’s a good deal.

“You can determine the return for I bonds purchased in October and redeemed in October to December 2023 by taking into account the three-month early withdrawal penalty, when redeemed from one to five years after purchase, and that still comes out to close to 7%,” Tumin said, “which is way above today’s top one-year CD rate [of] 4.00% APY.”

You can buy I bonds with no fee from the Treasury’s website, TreasuryDirect. In general, you can only purchase up to $10,000 in I bonds each calendar year. But there are ways to bump up that amount, such as using your federal tax refund to directly buy an additional $5,000 in I bonds.

You should “complete the purchase of this bond in TreasuryDirect by October 28, 2022 to ensure issuance by October 31, 2022,” according to the site.

One niggle: I bonds must be held for a minimum of a year and, as Tumin noted, bonds redeemed before five years lose the last quarter’s interest.

Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon

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