On October 31, the US Treasury announced the I bind current rate. The rate for the period November 1, 2024 to April 30, 2025 is 3.11%, which includes a fixed rate of 1.20%. This is a decrease from their previous rate of 4.28%.

Bonds are a popular investment thanks to their low risk profile and nature protected against inflation. However, with the significant drop in rates, investors will see a change in their returns. These lower rates will not only affect new bond investors, but also those who previously purchased bonds and will now benefit from the new lower inflation rate.

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How Bond Interest Rates Are Set

Bond interest rates are set every six months by the U.S. Treasury. These bond rates have two components: a fixed rate and an inflation rate. Here are some key points to know:

• Like other types of bonds, I bonds have a fixed rate that remains the same for the life of the bond. Investors who purchase their bonds during the six-month period from November 2024 to April 2025 will benefit from a fixed rate of 1.20% until their bond reaches maturity.

• The inflation rate applies to all new and existing bonds and changes every six months. The inflation rate is based on changes in the consumer price index. Regardless of when a bond was purchased, it reports the current inflation rate.

• The higher the current inflation rate, the more money you will make on your I bond. Conversely, a lower inflation rate will cause I bond yields to fall.

• The fixed rate and the inflation rate together make up the combined rate, which is the bond’s total annual interest rate. The combined rate of all new and current I Bonds changes every six months based on the rate of inflation.

What the new bond rate I means for investors

The current I-bond rate of 3.11% is the lowest since early 2021, when inflation began to rise, dragging I-bond rates with it. The previous combined I-bond rate from May to November 2024 was 4.28%, while the previous rate was 5.27%.

The new inflation rate affects both new and existing bondholders. For example, if you purchased your bond two years ago, you will maintain the same fixed rate as when you purchased the bond, but your inflation rate and combined rate will be reduced.

Bond yields will be even lower for new bond purchases since the fixed rate and inflation rate have decreased compared to the previous period. The good news is that these lower rates reflect a slowdown in inflation, but they also mean lower investment returns.

Why some bonds may earn less

When you invest in bonds Iyour earning potential relies on a few key factors:

• Flat rate component: The fixed rate remains the same for the life of the bond, so someone who bought their bond in November 2022 will earn a different fixed rate than someone who buys it in November 2024, even earning the same rate inflation. The available fixed rate is based on the current pricing environment.

• Timing of bond purchase: The time of year you purchase your bond affects when your rates adjust. As the U.S. Treasury releases new rates in November and May, your bond rates will adjust based on when you purchased them.

• Inflation rate: When the U.S. Treasury adjusts bond inflation rates, it does so based on current inflation. Since inflation decreases in 2024, the inflation rate available on I bonds has also decreased.

To give you an idea of ​​how timing affects bond rates, here’s a comparison between a new I bond purchased in November 2024 and one purchased in July 2022, assuming both investors invest $1,000.

An investor who purchased their bonds in July 2024 benefits from a fixed rate of 1.30% based on the current interest rate market. This investor will also continue to benefit from the previous inflation rate of 1.48% until their rate adjusts in January 2025.

Meanwhile, an investor who purchases their bond in November 2024 will benefit from the current combined rate of 3.11%, with a fixed rate of 1.20% and an inflation rate of 0.95%.

In January 2025, the first investor will see their rate adjusted to the current inflation rate. However, since their fixed rate is higher than that of the second investor, they will continue to earn a little more.

Impact of bond rate changes on your investment strategy

At the end of 2024, we are experiencing a unique economic environment in which interest rates and inflation are falling. As a result, I-bond fixed rates and inflation rates decrease, reducing investors’ earning potential.

This doesn’t necessarily mean you shouldn’t continue investing in I-bonds. They have their place as part of a broader investment strategy, especially for conservative investors. Not only do you not run the risk of losing your primary investment as is the case with stocks, but you also know that your returns will be keep pace with inflation due to the fluctuation in the inflation rate.

Current rates on I bonds are still higher than those on other inflation-protected bonds, such as Treasury Inflation Protected Securities (TIPS). Additionally, the low-risk nature of Treasury securities may make them more attractive to conservative investors than corporate bonds. Finally, keep in mind that as interest rates fall, the rates on all bonds are likely to fall with them, not just those on I bonds.

Regardless of the current interest rate and inflation environment, it is important to balance your fixed income investments, including bonds, with your broader investment portfolio, including stocks and bonds. other asset classes. Have a well diversified portfolio can help protect you from the risks presented by any individual investment.

How to Maximize Bond Returns

One way to maximize the returns on your I bonds is to buy them in a high rate environment to get the highest fixed rate possible. However, this is not always possible, especially in a time like late 2024 when interest rates are falling.

Another way to maximize the return on your I bonds is to hold them for at least five years before cashing them in. Although the U.S. Treasury allows you to cash in your I Bonds after only one year, cashing them in during the first five years will result in the loss of your final three months of interest.

Fortunately, the inflation-protected nature of I bonds helps maximize your returns to a point. As inflation rises, the inflation rate on your bonds will also rise to ensure that your returns at least keep pace with inflation, even if they don’t exceed it.

Finally, keep in mind that you can only purchase up to $10,000 of electronic I Bonds per year and up to $5,000 per year of paper I Bonds. If you plan to invest more than that in bonds each year, you can balance your I bonds with other bond purchases.

Conclusion: Key Takeaways for Bond Investors I

I bonds are a popular investment due to their low-risk nature and protection against inflation. Like other government bonds, I bonds are guaranteed by the federal government, so you can be sure they will be repaid. Plus, because they have both a fixed rate component and an inflation rate component, the latter of which adjusts throughout the life of the bond, you know your returns will keep pace with the inflation.

Of course, any investment carries some risks, and bonds are no exception. In the current economic environment, where interest rates and inflation are falling, I bond returns may not keep up with those of other asset classes, particularly those that carry higher risk. However, they may still have a place in your investment portfolio.

If you are a current I bond holder, be sure to monitor future inflation reports and Treasury inflation rate adjustments to see how your bond returns will be affected.

This article was originally published on GOBankingRates.com: Announcement of a new I bond rate of 3.11%: what this means for your investment in 2024