I Bonds Are Set to Offer Their Strongest Fixed Rate in Two Decades. Why Income Investors Should Watch the Nov. 1 Update

If you are not familiar with how I Bonds work, their interest is made up of two parts. One is an inflation adjustment that changes every six months. For bonds purchased from May through October 2026, that adjustment was 3.34%, but based on recent inflation readings, it is expected to rise to 4.08% when the new rates are announced. That rate will apply to bonds bought from November through April and will remain in place for six months after purchase.

The other component is the fixed rate, and that is the figure investors should be watching closely. It stays attached to the bond for its full 30-year term and effectively guarantees a return above whatever inflation does in the future. Put simply, if you secure a relatively high fixed rate, your I Bonds can deliver positive real returns over time, provided you hold them for at least five years, since there is a penalty for cashing out sooner.

The current fixed rate on I Bonds is 0.90%. However, analysts expect the next one to land in the 1.30% to 1.40% range, based on inflation-protected Treasury yields.

Two points stand out:

• A 1.40% fixed rate would be the highest since November 2006.
• New I Bonds purchased from November through April 2027 would earn about 5.5% during the first six months.

Why income investors should pay attention

For income investors, this is an important benchmark to follow. A 5.5% inflation-protected starting yield is higher than what you would receive from T-bills or the 10-year Treasury, and I Bond interest is also exempt from state and local taxes.

In addition, while I Bonds are not suitable for every portfolio, they can be a strong fit for income-focused investors, especially when the fixed rate is relatively high. There are limitations, of course: investors can buy only $10,000 per person each year, and the bonds cannot be redeemed during the first 12 months. Even so, for an inflation-protected cash reserve that is unlikely to be needed soon, they can be an attractive income option.

In the end, the upcoming rate announcement will determine the level of inflation-protected, guaranteed income available for the next six months, along with the fixed spread that will apply on top of future inflation adjustments for the next 30 years.