U.S. Treasury Series I Savings Bonds are 30-year instruments whose interest rate is reset every six months and are a way to help protect one from inflation. The rate is a combination of an inflation calculation over a six-month timeframe and a fixed rate determined by the Treasury Secretary. With inflation increasing this year to multi-decade highs, I Bonds bought from May until Monday, October 31, will pay an annualized interest rate of 9.62%.
Keep in mind that the 9.62% rate is an annualized return, which means for the six months it is in effect the actual return will be 4.81% or $481 on the $10,000 maximum that can be invested.
What the next six months could bring for I bonds
I've built a model to calculate the interest rate that I bonds will be in the future. If there is no month-to-month inflation for the next six months, the September inflation rate will be 4.8%. Below are the year-over-year inflation rates with no inflation for each month the rest of this year.
- April 7.7%
- May 6.8%
- June 5.8%
- July 5.3%
- August 5.1%
- September 4.8%
While September’s year-over-year inflation rate would be 4.8%, the reset interest rate for I bonds would actually be 0% as it is determined by the last six months of inflation.
Even if inflation over six months is flat, and the Treasury Secretary does not add a fixed rate kicker, I bonds would generate a 4.8% return for a year. This is still meaningfully above the current one-year Treasury paying 2.08%.
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I believe it is very unlikely that there will be no inflation over the next six months. For this to occur various sub-categories, such as gasoline and diesel along with natural gas and used cars, will need to see price declines. While these saw minimal increases in April, there are some underlying trends, such as wage increases that could keep inflation from falling as fast as anticipated.
Trading Economics projecting about 6% inflation in September
In looking at the Trading Economics graph below it appears inflation should be around 6% year-over-year in September, which is the last month for the next I bond interest rate reset. In this scenario I bonds would have an annualized rate of just over 2%. While this will be a dramatic decline from the 9.62% currently being paid, the combination equates to almost a 6% return for a year.
Capital Economics forecasting inflation under 4% at year-end
Capital Economics is expecting inflation to fall to just under 4% at year-end. Its chart below indicates headline inflation could be about 5% in September, which essentially matches my model that shows no month-to-month inflation for six months. Even if this happens, which I believe is unlikely; the full year return is almost 5%.
Andrew Hunter, Senior U.S. Economist at Capital Economics wrote in an email, “We aren’t expecting headline CPI to fall all the way to 3% by the end of this year – it’s likely to be just under 4% as we are expecting some categories to decline from here – namely energy and used vehicles, while others keep rising but at a slower pace as supply and labor shortages ease.”
Check out TreasuryDirect.gov for more info
Below are three U.S. Treasury sites to provide more information and how to create an account.
This site provides a good overview of Series I Savings Bonds.
This site provides more in-depth information and historical interest rates.
This site is where one can open an account.
