paper I Bond $50 principle value

US Department of the Treasury, Public domain, via Wikimedia Commons

The I bond fixed rate is the highest it has been in 16 years. The Fed announced a fixed rate of 0.9% and combined rate of 4.3%.

The new I Bond rate is 4.30%.  The last 6-month rate that ended April 30 was 6.89%.  Since this is a drop of nearly 2.6% you wouldn’t think there is much enthusiasm for the latest rate announcement.  However, there is some good news.

I Bond Rates

I Bonds pay a combination of a fixed rate and an inflation rate.  The MoneyMavenBlog post accurately predicted the inflation rate would be about 3.39% and it came in at 3.4%

see blog post here 

The latest I bond rate of 4.30% is made up of 0.90% fixed rate and 3.4% inflation rate.

I bonds interest rates — TreasuryDirect

Fixed Rate is the Good News

The good news here is the fixed rate has more than doubled.  It was 0.4% and it is now 0.9% for I Bonds issued from May 1 to October 31. The 0.9% fixed rate is an annual rate.   The last time the fixed rate for I Bonds was more than the current 0.9% was 2007.  So, this is the best fixed rate in 16 years! 

Another piece of good news is the fixed rate never changes.  If you keep the I Bonds you buy in the next 6 months for 30 years, you get 0.9% plus the inflation rate for 30 years.  If you were to keep your I bonds for the entire 30 years, this is an extra 30% in addition to the inflation rate.  Even if you keep the I Bonds for only 10 years, you would get an extra 9.4% in addition to the inflation rate.  Anytime you can get a return that is over the rate of inflation you are coming out ahead.

Beat Inflation

Alternatively, if you are likely to hold onto a bond for 30 years, you may want to look at TIPs.  At the last TIPs auction at the end of February, the interest rate on 30 years TIPs was 1.5%.

I bonds are much easier to cash in early than TIPs.  For TIPs you need to sell the bond on the secondary market if you want your principal back prior to the maturity date.  You may be selling the TIPs bond for less than what you paid for it or you may get lucky and sell it for more.  There is a good deal of uncertainty in knowing what the future TIPs secondary market will be. 

In contrast, there is no uncertainty of the secondary market for I Bonds.  You cash in I Bonds you cannot sell them.  With I Bonds you get all the money, both interest and principal, when you cash in the bond.  You can redeem an I bond after you have owned it for 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.  Once you have held the I Bond for 5 years you get all the interest.

If you have not yet purchased your maximum allowed amount of I Bonds, you should consider a purchase in the next six months.

Another idea is to sell I Bonds that have a 0% fixed rate and replace with the I Bonds that have 0.9% fixed rate.  Don’t forget to look at the composite rate on the I Bonds you own.  You probably don’t want to give up the 6.89% composite rate to get the current 4.3%.  However,  the timing may work out that O% fixed rate I Bonds can be cashed in and replaced with 0.9% fixed rate I Bonds when the interest rate changes. 

The interest rate changes depending on when you purchased the I Bonds.  You can look up on when the rates on your I Bonds will change.   Table on

table showing when I Bond interest rates change from

Don’t forget you can’t cash in an I Bond until you have owned it at least 12 months.  Also, if you cash in an I Bond in less than 5 years, you lose the last 3 months of interest.


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