I-Bond Rate Is 6.89% for Next Six Months

Though the potential return of U.S. Treasury I-bonds as a long-term investment is no sure thing, Americans are voting for them with their wallets: Billions of dollars of these formerly obscure  securities have been sold in 2022, including in a last-minute rush at the end of October to capture them at a rate of 9.62% that knocked the website for TreasuryDirect, the only place these can be bought, offline at times.

Of course, you can get them just fine today, now that rate they will pay for the next six months is down to 6.89%. That number is made up of two components: One is based on the government’s consumer price index from this past September (6.49%) and one is a fixed rate – picked by the Treasury Department without further explanation – that will only apply to bonds bought between now and May 1: 0.4%. And that fixed rate is, well, fixed – unlike the variable inflation component, whatever the fixed rate was when the bond was issued, you’ll get paid that for as long as you hold the bond (and the term is 30 years). 

So here’s an interesting twist, and possibly a consolation prize for anyone who didn’t manage to get I-bonds when they were paying a higher yield: those bonds paid a fixed rate of zero. 

Why does this matter? Because the variable yield that makes I-Bonds attractive now does swing - and, at times, offer investors no yield at all. This was the case for people holding bonds with a zero fixed rate during periods where inflation was flat (or even negative). This happened, for example, in 2015 and 2009. The Treasury Department publishes a chart tracking the historical payouts of I-bonds going back to 1998.

While it might seem unimaginable now as the Federal Reserve continues to hike short-term interest rates and other rates including mortgages climb to levels not seen in decades, zero inflation or deflation could return. And if that happens, those who hold bonds bought between now and May 1 will continue to receive 0.4% interest, while holders of the 9.62% bonds will receive – at least so long as inflation is flat or negative – nothing.

And, again, if 0.4% seems laughably low, remember that only a few years ago, savers looking to certificates of deposit, savings accounts and other low-risk investments would have been darn happy with that. (Looking for safer returns outside bonds? You might consider the advantages of brokered CDs.) 

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But that’s for the future. Are I bonds still a good deal now that they’re paying 6.89%? Per David Payne, Kiplinger’s staff economist, that yield is “still the best rate available on any investment which guarantees the return of principal” – a good reminder that U.S. Savings Bonds are as safe as houses. Like others, he is forecasting that the inflation rate will fall as the Fed’s battle against inflation continues. And he notes several key caveats about I-bonds, particularly for those new to these investments:

First, I-bonds must be held for at least a year. There is no way to cash them before this period. And second, if you redeem them before five years from the time they were issued, the last three months of interest is lost. How big a hit is that? Payne says that would reduce their yield for that year by about a percentage point given future estimates of what inflation is likely to be.

Another key issue: There’s a limit of $10,000 a year to how much you can buy (and there are ways around that, too.) In case you haven't noticed, I-bonds are complicated! Whether you’re a lucky new holder of a 9.62%-rate i-bond or still thinking of purchasing now, check out our FAQ, What Are I Bonds.