By David Enna, Tipswatch.com
It was inevitable that the trend of lower 5-year real yields would eventually push my I Bond fixed rate protection to 0.90%, down from the current 1.10% for I Bond purchases through this month.
The inevitable became fact on Friday, when the Treasury’s estimate of the 5-year real yield closed at 1.30%.
As I noted in an October 5 posting, the Treasury has no announced formula for setting the I Bond’s fixed rate, which is permanent for the potential 30-year life of the savings bond. However, I Bond watchers have settled on a forecasting tool that seems to work: Apply a ratio of 0.65 to the average 5-year TIPS real yield over the preceding six months. This formula has worked without fail at least since 2017.
As of Friday’s close, here is the updated forecast:
Friday’s close marked the first day the 0.65 ratio formula has resulted in a rounded fixed rate of 0.90% versus 1.00% earlier in October. The new fixed rate will take effect on November 1 and apply to I Bonds sold between November 2025 and April 2026.
Obviously, the ratio result of 0.9499% is a razor-thin margin (0.95100% would round up to 1.00%) but the trend is clear: The fixed rate is going to be 0.90% at the November reset, if the Treasury continues practices it has used over the last decade. To get back to 1.00%, the average over the next 12 market days would have to be 1.47% or higher, which doesn’t seem likely.
Is there a strategy?
Fill the purchase cap this month. If you are a committed I Bond investor and haven’t yet purchased up to the full $10,000 per person limit this year, I recommend that you do that this month at TreasuryDirect. In its BuyDirect system, you can schedule the purchase for later this month. I recommend setting the date for Oct. 28 or 29, to give some time to complete the process before the rate reset. An I Bond purchased late in a month earns a full month of interest.
Use the gift box to add to your purchases. I am not a “fan” of the gift-box loophole for purchasing I Bonds above the limit, but it is legit and can be used if you have a trusted partner for swapping purchases. I did that last year for two two extra sets at a fixed rate of 1.30%, and had no plans to do it again. However … I am doing it again this month.
For more on the gift-box process, read Harry Sit’s excellent summary, updated in 2023.
My plan is to purchase the I Bond gift-box sets in late October and deliver them in November, before the end of the calendar year. (Gift-box deliveries count against the purchase cap, but only if the investor has not yet purchased that year. Delivering in 2025 leaves the option open for a traditional purchase in 2026.)
Why use the gift box now? Because it looks likely that the changes are coming to the gift-box program, as I noted in an article last week: “TreasuryDirect email is an omen of coming changes.” I don’t know what’s coming, or when. But something is up.
The logical choice is to buy I Bonds at 1.10% instead of 0.90%. If you were going to make the purchase in January anyway, it makes sense to move it up to this month, if you can swing it financially.
Clarity coming on variable rate
The government shutdown was threatening to send the inflation-reporting process into chaos, but that situation was eased last week when the Trump administration allowed Bureau of Labor Statistics staffers to return to prepare the September inflation report. That report is crucial mainly because it will determine the 2026 Social Security cost-of-living adjustment, which by law must be set by November 1. It also will set a new variable rate for all I Bonds, no matter when they were issued.
We will get the September inflation report at 8:30 a.m. Friday, Oct. 24, just a few days before the Federal Reserve will meet Oct. 28-29 to decide if it will reduce short-term interest rates. The inflation report will set the I Bond’s new variable rate. On the morning of Friday, Oct. 31, we should learn the new fixed and composite rates for I Bonds purchased from November to April.
I haven’t yet seen projections for the September rate of non-seasonally adjusted inflation, but I would expect it to be in a range of 0.20% to 0.40%. Combine that with a fixed rate of 0.90% and you get these results:
- 0.2% = variable rate of 3.02%, composite rate of 3.93%
- 0.3% = variable rate of 3.22% composite rate of 4.13%
- 0.4% = variable rate of 3.42%, composite rate of 4.34%
If the result falls into this range, the new composite rate should be close to or higher than the current rate of 3.98%, even with the fall in the fixed rate to 0.90%. Purchases in October will receive the 3.98% composite rate for a full 6 months, and then transition to the next variable rate, combined with the current fixed rate of 1.10%.
Here are the potential future composite rates for I Bonds purchased in October with the higher fixed rate of 1.10%:
- 0.2% = variable rate of 3.02%, composite rate of 4.14%
- 0.3% = variable rate of 3.22% composite rate of 4.34%
- 0.4% = variable rate of 3.42%, composite rate of 4.54%
Keep in mind that the actual rate of non-seasonally adjusted inflation will be something like 0.25% or 0.34%, so a lot of variations are possible. These numbers are a rough guide.
At this point, the I Bond’s composite rate is competitive with the 13-week T-bill at 4.02%, and will gradually be even more appealing as the Fed cuts short term interest rates into next year. I remind, as always, that the three-month interest penalty for redemptions within five years reduces the I Bond’s advantage as a short-term investment. So think longer term.
I Bonds with a fixed rate of 0.90% will remain an attractive way to store inflation-protected cash for future uses.
• 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
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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.
