I Bond (Series I Savings Bond)
A Series I Savings Bond, commonly called an I Bond, is a non-marketable, inflation-indexed U.S. government savings bond issued directly by the Treasury that earns a composite interest rate combining a fixed rate and a variable inflation component tied to the CPI. I Bonds are designed for individual investors seeking a low-risk inflation hedge.
I Bonds are issued exclusively through TreasuryDirect, the U.S. Treasury's direct-purchase platform, and cannot be bought or sold on the secondary market — a fundamental distinction from TIPS. Each I Bond earns a composite rate consisting of a fixed rate set at issuance and an inflation adjustment recalculated every May and November based on CPI-U changes. Because the composite rate cannot fall below zero, I Bonds do not lose nominal value even during deflation.
The purchase limits for I Bonds are strictly capped: as of the mid-2020s, individuals may purchase up to $10,000 per year in electronic I Bonds through TreasuryDirect and up to $5,000 per year in paper I Bonds purchased with a federal tax refund. These caps distinguish I Bonds from TIPS, which carry no purchase limits and are accessible through broker accounts. The relatively modest purchase caps mean I Bonds function primarily as a retail savings vehicle rather than a tool for institutional portfolio construction.
I Bonds must be held for at least twelve months before redemption. Bonds redeemed before five years forfeit the last three months of interest, a penalty that diminishes the net return for short-term holders. After five years, I Bonds can be redeemed without penalty and continue to earn interest for up to 30 years from the issue date.
Interest on I Bonds is exempt from state and local income taxes, and federal income tax can be deferred until redemption. When I Bond proceeds are used to pay qualified higher-education expenses, they may qualify for an additional federal tax exclusion under the Education Savings Bond Program, subject to income phase-out rules. These tax features make I Bonds particularly attractive to investors in high-tax states who hold assets in taxable accounts.
I Bonds attracted significant retail demand during periods of elevated CPI readings, as their composite rate temporarily exceeded yields available on short-term bank deposits and money market funds. The TreasuryDirect platform experienced capacity constraints during such periods, reflecting the extent to which consumer awareness of I Bonds surged when their rates became competitively attractive.