US I Bond interest rates rise slightly to 4.03%, fixed rates lowered but still outperforming most savings products.

The official website of the U.S. Department of the Treasury announced on Friday that the annualized interest rate for the new round of inflation-linked savings bonds (I Bonds) has been set at 4.03%, effective from this Saturday, and will be maintained for six months. This interest rate is slightly higher than the 3.98% of the past six months, and is basically in line with the market's previous prediction of "slightly above 4%". This interest rate is composed of the change in the U.S. Consumer Price Index (CPI) from March to September 2024, plus a fixed rate of 0.90%. It should be noted that this fixed rate has significantly decreased from the previous rate of 1.1%, reflecting a recent decline in the yield of Treasury Inflation-Protected Securities (TIPS) in the market. Once the fixed rate is locked in, it will remain unchanged for up to 30 years of the bond's existence, while the variable rate will be updated every six months based on the CPI. The new interest rate applies to the first six months investors hold the bond, and will be reset based on the current CPI and 0.9% fixed rate thereafter. The minimum holding period for an I Bond is 12 months, and if an investor redeems the bond before holding it for five years, they will be penalized by deducting the interest accrued in the latest three months as an "early redemption penalty". In 2022, I Bonds experienced explosive demand, with interest rates reaching as high as 9.62% from May to October, becoming a popular tool for investors to combat high inflation. Now, although the 4.03% interest rate has significantly decreased compared to the high inflation period, it still exceeds the interest rates of most savings accounts and short-term U.S. Treasury bonds. The bond has multiple tax and interest advantages. The interest is automatically added to the principal and compounded every six months, instead of being paid in cash like traditional U.S. bonds, thus eliminating reinvestment risk. In addition, investors can choose to pay interest income tax upon redemption, enjoying the benefits of a "tax deferral account". Although market analysts generally believe that the attractiveness of I Bonds is lower than the peak in 2022, in the context of inflation remaining above the Federal Reserve's 2% target and monetary policy not fully transitioning, these bonds still have allocation value, especially for individual investors outside of institutions, to hedge against inflation erosion and interest rate uncertainty.