Terry Savage: An update on savings bonds

The interest rate on Series I Savings Bonds has risen to 5.51% for the next six months, made up of a fixed rate of 1.40% plus an inflation adjustment of 4.08%. That rate applies to all new purchases, while existing bonds receive the new inflation adjustment on top of their fixed base rate.

The six-month inflation adjustment is what drove the headline rate higher. Even so, the increased rate is still attractive for an investment that is designed to keep pace with inflation.

Here is how the adjustment works: the composite rate is reset every six months, based on changes in inflation. When inflation eased, the rate declined from a peak and then moved up again as the base rate and inflation component changed.

Back in the earlier part of the cycle, the fixed base rate for the bonds was essentially zero. The inflation-linked bond instead paid 9.62% for the first six months on a $10,000 bond, earning about $481.00 during that period.

As inflation later started to cool, the next six-month period brought a combined rate of only 4.22%, followed by 3.38%, and then an increase to the current 5.51% for bonds now being sold.

The current inflation adjustment is the highest since inflation began easing, but future projections suggest it could eventually return toward lower levels, even as the Treasury continues to set rates for newly issued bonds.

The fixed base rate is an important part of the bond’s long-term value. It was zero from the start of 2020 through most of the pandemic period, then climbed to 0.20%, later to 0.40%, and finally to the current 1.40% on bonds being sold now.

That higher fixed rate offers a cushion if inflation falls in the future, helping preserve the bond’s return over its life.

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