Barron’s estimates that the Treasury’s inflation linked savings bonds (I bonds) will have a new rate just above 3%. This is a decrease from the previous semiannual interest rate of 4.28%. This change was influenced by this years softer inflation metrics.
The new Treasury I bond rate is expected to be announced in the next few days, and will apply to all new purchases beginning November 1.
The publication reported that “This new rate reflects the stability of the consumer price index (CPI), as well as the Treasury’s updated calculation based on recent data on inflation.”
Cooling inflation affects the rate
The latest rate adjustment is calculated using the US CPI for March to September 2024. It also includes a fixed component of 1,3% that remains constant throughout the duration of the bond.
Barron’s, based on current data, projects an annualized inflation rate of around 1.9%.
The I bond rate will be approximately 3.2% with the fixed rate of 1,3%.
This adjustment marks the lowest rate for I bonds since 2021, reflecting a cooling of inflation.
This rate drop is a result of the steady consumer price increases in 2024. In 2022, inflation soared to 9.6%, triggering an increase in demand for I bonds.
Lower rates could impact demand for I bonds
During the inflationary spikes of 2022, I-bonds became a popular option among investors looking to hedge against price rises, and demand soared at a peak rate of 9.6%.
As short-term rates are approaching 5%, investors have begun to look at alternatives, such as Treasury bills and money market funds, which adds competition to I bonds, since they no longer offer the same yield.
The new rate will apply to all I Bonds purchased after November 1. It will also adjust every six-months based on CPI.
Investors can also redeem bonds after one year, but with a three month interest penalty if they are cashed in before the first five years.
I bonds are attractive because of their tax and compounding benefits
I bonds are still attractive despite the rate drop. They offer tax advantages, and interest is compounded on their principal value.
I bonds are compounded semi-annually and reduce reinvestment risk.
The tax on interest is delayed until the bonds are redeemed. This feature gives I bonds an advantage similar to a personal retirement account.
Moreover, the interest on I bonds is exempt from local and state taxes, making it more tax-advantageous compared to many traditional savings products.
As November approaches, investors can purchase the new I Bonds through TreasuryDirect. The annual limit per individual is $10,000, but structured business partnerships could allow for higher purchases.
This post Treasury I Bond rate expected to drop by 3% due to cooler inflation may be updated as updates unfold
This site is for entertainment only. Click here to read more
