I bet you’ve probably felt the pinch of inflation at the grocery store or gas pump these past few months. It’s been reflected in the government figures about inflation too – we’re seeing inflation figures we haven’t seen in decades.
One of the bright parts in all that is that Series I bonds have been in the news too – because they enjoy inflated adjusted interest rates that are seeing record high numbers too.
If you’re wondering how Series I bonds work, I hope this primer fits the bill.
We start with the big news, what the rate is expected to be when adjust in May, followed by how Series I bonds work:
Table of Contents
🔃 Updated November 2023 with the latest fixed and inflation rates for Series I bonds issued in the November 2023 to April 2024 time frame. We now know that Series I bonds issued in this time frame will yield 5.27% for six months after purchase.
💸 November 2023 Interest Rate: 5.27% APY
For the experts in the room who just want to know the numbers – the composite rate for I bonds issued from November 2023 - April 2023 has officially been announced – it is 5.27% APY.
And this is what we expected since the Treasury gives us the exact equation.
The only missing ingredient from our previous prediction was the fixed rate of the bond, which we now know will be a relatively generous 1.30%.
The March 2023 CPI-U was 301.836 and September 2023 CPI-U was 307.789, for an increase of 1.97%. We can use the equation (below) and calculate that the interest rate for bonds issued November 2023 - April 2023 will yield 5.27% APY
What did I do with this information? This rate is nice, especially when you consider the interest is exempt from state and local taxes, but there are withdrawal restrictions. You can’t withdraw the money within the first year. If you withdraw it within 5 years, you lose three months of interest.
With the highest no penalty CDs offering close to mid-5% right now, even paying Maryland income taxes of 5% on the interest makes them a fairly close tie. I’ll stick with more flexible options for now.
Now that we’re past the numbers update – are you wondering how Series I bonds work? Let’s dive in.
What Are Series I Bonds?
Series I Bonds are bonds issued by the United States Treasury that accrue interest for thirty years. That interest income is taxable at the federal level but they are tax free at the state and local level.
The interest rate is adjusted twice a year and is based, in part, on inflation (more that later).
Each person is allowed to buy up to $10,000 in Series I bonds each year, electronically through TreasuryDirect.gov. If you have a tax refund, you’re also allowed to buy an additional $5,000 of bonds using Form 8888.
The best part about Series I bonds is that the interest is only taxable at the federal level. Interest is tax free at the state and local level.
While your interest continues to accrue every month, it is only added to the principal every six months. You can elect to report the interest every month but most people, and TreasuryDirect.gov advises that you do this, report it at the end when you decide to cash in the bond. When you cash in your bond, you’ll get a Form 1099-INT.
If you use the interest to pay for higher education expenses, that interest may be excluded from your taxes too.
Finally, you cannot cash in the bond within a year of purchasing it. If you cash it within five years of purchasing it, you lose the previous three months of interest.
How Are Interest Rates Calculated?
The interest rate of the Series I bond has two components – a fixed rate and an inflated adjusted rate.
The fixed rate is set for the life of the bond when you buy it. The fixed rate is announced in May and November.
The inflation adjusted rate depends on the CPI-U, which is an inflation figure released every month by the U.S. Bureau of Labor Statistics. This is the number every refers to when talking about inflation, it’s the Consumer Price Index for all Urban Consumers (hence the -U).
The inflation adjusted rate is set twice a year, in May and November, based on CPI-U data released in April and October. In April, you get inflation from the prior October through March. With that information, you can determine the inflation adjusted rate.
The well-known equation is:
Composite interest rate = Fixed rate + 2 * Semiannual inflation rate + (Semiannual inflation rate * Fixed rate)
When you buy a bond, you get the inflation adjusted rate at the time of purchase for six months. Then it adjusts to the new rate.
If you purchase a bond in April 2023, you get the rate that was set in November 2022 for six months. Then, you get the rate announced in May 2023 for six months.
One final note on the rate, the inflation rate can be negative but the interest rate on the bonds will be negative. It just gets set to zero.
Interest Compounds Semiannually
The interest on the Series I Bond compounds semiannually, or every six months, based on the issue date of the bond.
So if you buy a bond today, you will earn the interest rate based on how much you purchased. Then, in six months, all that accrued interest is added to the principal of the bond. For the next six months, you earn interest based on the higher amount. And so on.
How To Predict Series I Bond Interest Rates
How are all these experts able to predict the interest rates of future bonds? It’s because the rates are based on inflation and inflation figures are released every month.
You can use the equation above to calculate exactly what the bond will be if you make assumptions about the fixed rate. The fixed rate is announced at the same time and the only part of the equation that is a “guess.” You can simply guess it’s 0% and smile at the bonus if it’s higher.
Historic Series I Bond Interest Rates
TreasuryDirect.gov has been kind enough to share a list of historic Series I bond interest rates dating back to 1998!
|Date the rate was set||Fixed rate||Inflation rate|
|November 1, 2022||1.30%||1.97%|
|May 1, 2023||0.90%||1.69%|
|November 1, 2022||0.40%||3.24%|
|May 1, 2022||0.00%||4.81%|
|November 1, 2021||0.00%||3.56%|
|May 1, 2021||0.00%||1.77%|
|November 1, 2020||0.00%||0.84%|
|May 1, 2020||0.00%||0.53%|
|November 1, 2019||0.20%||1.01%|
|May 1, 2019||0.50%||0.70%|
|November 1, 2018||0.50%||1.16%|
|May 1, 2018||0.30%||1.11%|
|November 1, 2017||0.10%||1.24%|
|May 1, 2017||0.00%||0.98%|
|November 1, 2016||0.00%||1.38%|
|May 1, 2016||0.10%||0.08%|
|November 1, 2015||0.10%||0.77%|
|May 1, 2015||0.00%||-0.80%|
|November 1, 2014||0.00%||0.74%|
|May 1, 2014||0.10%||0.92%|
|November 1, 2013||0.20%||0.59%|
|May 1, 2013||0.00%||0.59%|
|November 1, 2012||0.00%||0.88%|
|May 1, 2012||0.00%||1.10%|
|November 1, 2011||0.00%||1.53%|
|May 1, 2011||0.00%||2.30%|
|November 1, 2010||0.00%||0.37%|
|May 1, 2010||0.20%||0.77%|
As you can see, the inflation rate can sometimes be negative. In May 2015, it was -0.80% with a fixed rate of 0.00% – that just means bonds earned nothing for six months. You lost no money.
When Should You Buy Series I Bonds?
Whenever you want!
The best times to buy the bond is near the end of the month because you get “credit” for that entire month. If you buy it on April 20th, you get all the interest you would’ve accrued for the month of April. It’s a minor bit of optimization but worth noting.
We know that the inflation adjusted rate for November 2021 through April 2022 is 3.56%, which means the interest rate for Series I bonds issued for that period will be 7.12%. If you buy a bond in April 2022, you get the 7.12% rate for the next six months. Then you’ll get 9.62% for the following six months. That’s why we’ll be buying a bit before the month runs out.
If you plan to also and don’t yet have a TreasuryDirect account, get on it because it’s an old system and it can take a while!