I bonds return with a striking new 5.51% yield

I bonds that go on sale soon will offer the highest fixed rate in two decades, according to the U.S. Treasury.

These savings bonds adjust every six months and are designed to help protect cash from inflation. Their return has two parts: a fixed rate and a variable rate. The fixed rate stays in place for the entire life of the bond, while the variable rate changes twice a year based on inflation. For bonds sold in the upcoming six-month period, the annualized variable rate will climb to 4.08%, reflecting 2.04% inflation over the most recent six months, compared with 3.34% in the prior period. The fixed rate has risen to 1.4% from 0.9%, the strongest level since November 2006.

Combined, those two pieces push the 30-year I bond composite rate to 5.51% through the next reset period, ahead of current T-bill yields and the best rates offered by CDs and high-yield savings accounts. Analysts say that makes them an attractive low-risk option to consider. I bonds sold in the previous six-month period carried a composite rate of 4.26%.

"I bonds are a great, very safe investment, especially when used as a back-up emergency fund," said David Enna, a writer at Tipswatch who has invested in Treasury Inflation-Protected Securities since 1999. "The principal continues growing with inflation, plus the fixed rate, and can never go down in value."

How the new I bond rate compares with other investments

The new 5.51% return is still below the 9.62% rate the Treasury offered in 2022, when inflation hit a 40-year high and sparked a surge in I bond purchases. Even so, it is higher than most top CD, money market, high-yield savings and T-bill rates, and it could climb further if inflation heats up again.

Here is how the 5.51% I bond rate compares with other yields:

• T-bills and notes: about 3.976% for 1-month T-bills to 4.945% for a 10-year note, according to Treasury data.
• CDs: 4.5% for 6 months, and 4.8% for 24 months and 36 months, according to CD Valet.
• High-yield savings: up to 4.4%, according to NerdWallet.
• Money market accounts: up to 4.5%, according to Bankrate.

Should consumers buy I bonds now?

There is no downside to buying the new I bonds as soon as they become available if you want to lock in the rate. Still, bond watchers say there is a better time to buy.

"Late in the month, because every savings bond is dated the first day of the month you buy it, so a purchase on the 28th earns exactly the same interest as one on the 1st," wrote Savings Bond Value, an independent bond calculator and tools site, in a blog post.

"The difference is what your money was doing in the meantime," it said. "Buy on the 28th and your cash spent those extra weeks in your own bank account, earning whatever your bank pays. Buy on the 1st and you gain nothing extra from the Treasury. Waiting until late in the month is a small, free edge."

To avoid missing the cutoff, analysts advise buying a few days before the end of the month, since the Treasury can take a couple of days to process the purchase.

"A purchase around Nov. 25 would be a good target," Enna said.

How to buy I bonds

I bonds are sold only electronically through a TreasuryDirect account. Buyers must have a Social Security number or Employer Identification Number.

An individual can buy up to $10,000 in I bonds each calendar year. Gift bonds count toward the recipient's limit, not the giver's. For example, if you buy I bonds for a child, the bonds are issued under the child's Social Security number and count toward that child's separate annual $10,000 cap.

The purchase limit resets on Jan. 1. So if you have not bought any this year, you "will get a nice opportunity in November and December," Enna said.

But "I'd suggest waiting until mid-April to make a purchase in 2027, because at that point, we will know the new variable rate and have a pretty good idea of the new fixed rate," he said.

Do you pay taxes on I bonds?

I bond earnings are subject to federal income tax but not state or local taxes. You can report the interest each year or defer taxes until you cash in the bond. You can redeem them only after 12 months, and if you cash them in before five years, you forfeit the last three months of interest.

If the money is used for qualified higher education expenses, the earnings may be tax-free.