New lower bond price comes with ‘pleasant surprise’

The yield on I-bonds is lower for new purchases starting this month, but its higher fixed rate is a welcome development for savers.

The annualized yield for Treasury inflation-protected assets is 4.3% for new purchases made through October 31. While it is down from the 6.89% annualized yield for I-bonds that has been in effect since November, new reset rate is a score higher than the 3.79% that analysts had expected.

This is because the fixed-rate portion of the compound rate of 4.3% rose to 0.9% from 0.4% in the past six months – the highest fixed rate in 16 years – which should boost the value of the bond for longer as inflation slows.

said Ken Tomin, LendingTree’s chief industry analyst and founder DepositAccounts.com, for Yahoo Finance. “The new fixed rate of 0.9% gives bonds a boost for those looking to hold them for the long term.”

Bonds: compound rate, inflation rate, and fixed rate

The bond rate I consists of the fixed rate, which applies to the life of the bond of 30 years, and the semi-annual inflation rate computed from a formula based on the six-month change in the seasonally adjusted CPI-U for all urban consumers (CPI-U) for all items .

Over the past 18 months, bond yields have risen as inflation has risen, on the heels of a massive spike in consumer price growth. But the flat rate in November 2021 and May 2022 — when rates were 7.12% and 9.62%, respectively — took its toll. 0% fixed an average.

The fixed rate in November rose to 0.4% for those who bought bonds through April.

The current fixed rate of 0.9%—the highest rate since it was set at 1.2% in November 2007—continues until the holder of Bond I pays off the first bond, or until it matures in 30 years.

While not an unacceptable type of investment, the safety factor is what makes these bonds attractive to many people who have money to spare. This is especially true for those who have been deeply shaken by the painful inflation and volatility of the stock market in recent months, and frankly frustrated by the low savings rates offered at most banks. While interest rates on savings accounts vary, the national average yield is 0.24% annual rate of return (APY), according to Bankrate’s April 26 weekly. reconnaissance of institutions.

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Meanwhile, the new compound price for I-bonds isn’t much lower than what existing Certificates of Deposit (CDs) offer – with yields of or just over 5% in online banking for about a year. Also, treasury bills with maturities of three and six months were hovering around 5%, while one-year treasury bills were yielding in the high range – 4%.

However, for those really looking for a short-term place to put cash aside, short-term CDs and T-bills are likely to offer a higher yield over the next year than bonds bought in May and redeemed in a year, Tommen said.

The ins and outs of i bonds

This is why bonds can have an edge over those other options for you. Selling point number one: The bonds are government-backed and guaranteed to keep pace with inflation because their yield is linked to the consumer price index, which is the government’s measure of consumer price growth.

In addition, the interest is usually free of state and local taxes. If you qualify, you may also be able to exclude some or all of the savings bond interest from federal income tax when it is used to pay for qualified higher education expenses at a qualifying institution or state education plan in the same calendar year that you redeem your qualifying I bond.

Bonds can be purchased in assignments of $25 or more when purchased electronically from the US Treasury website, TreasuryDirectWithout fees. Paper notes are sold in five denominations: $50, $100, $200, $500, and $1,000.

Generally, you can only purchase up to $10,000 of I-bonds each calendar year. There are several ways to increase this amount. For example, you could direct your federal tax refund to purchase an additional $5,000 of I bonds.

One big consideration. While I earn interest on the 30-year bond or until it’s cashed out – whichever comes first – you can only get paid after one year. And if you pay the money back five years ago, you lose out on three months of interest.

The Treasury Department sets new rates each May and November. Because of adjustments that happen twice a year, the date you purchased your I-bonds determines your returns. This year, all of a sudden, the date was changed from May 1st to April 28th. But any I-bond purchases made at TreasuryDirect from April 28th to April 30th will be issued on May 1st.

“This is the first time I remember the Treasury releasing rates before the start of the month,” Tommen said.

Kerry is a senior reporter and columnist for Yahoo Finance. Follow her on Twitter @employee.

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