The Treasury has set a new rate of 4.28% for Series I inflation-linked savings bonds that will apply to purchases starting May 1 and continuing for six months through the end of October, according to the TreasuryDirect website.

The current rate is down from the 5.27% rate that prevailed since Nov. 1, 2023, reflecting a decline in the inflation rate. The Treasury sets a new I bond rate every six months based on the consumer price index. Existing I bonds also see a rate adjustment every six months.

The new rate reflects a 2.98% annualized rate of inflation in the six months ending in March 2024 plus a fixed rate of 1.3% that prevails over the life of the bonds, which can be held for 30 years. The fixed rate is unchanged from the previous six months.

The new rate on I bonds will apply for the first six months that an investor holds them, and then reset every six months based on the CPI. I bonds mature in 30 years, but can be redeemed after 12 months. Investors lose a quarter of a year of interest if the bonds are cashed in before five years.

The new rate is in line with a Barron’s estimate made earlier in April when the March CPI report was released. We projected the new rate would be about 4.3%,

I bonds were very popular in 2022, when inflation was running hot. The I bond rate was 9.6% from May through October that year.

But demand has ebbed, partly because of the drop in inflation since then, but also as a result of the sharp rise in short-term rates to 5%, which has increased the popularity of money-market funds and Treasury bills.

I bonds are available through the TreasuryDirect website. Individuals are limited to $10,000 in annual purchases, but those with businesses structured as certain partnerships can get around that cap.

Semiannual interest is added to the principal value of the bond, compounding over the life of the bond. This differs from Treasury notes and bonds, which make cash interest payments. This is a favorable feature because it eliminates risk on the reinvestment of interest.

Another appealing feature of I bonds is that holders can defer paying taxes on the interest income until they redeem the bonds. This gives I bonds a quality like an individual retirement account.

Interest is exempt from state and local income taxes, but subject to federal income tax, which is the same as for Treasury notes and bonds. This makes I bond taxation more favorable than that for bank deposits, whose interest is subject to federal, state, and local income taxes.