I Bonds Paid Nine Percent and Almost Nobody Knew They Existed
A government savings bond indexed to inflation briefly offered a rate that beat nearly everything available, and the purchase limits and rules explain why it never became a mainstream product.
The Product
Series I savings bonds are issued directly by the United States Treasury to individuals. Their interest rate has two parts: a fixed rate set at purchase and held for the life of the bond, and a variable rate reset every six months based on the change in the consumer price index.
In 2022, with inflation running near four decade highs, the variable component pushed the combined annualized rate above 9 percent for a six month period. For a security carrying the full backing of the United States government, that was extraordinary relative to every alternative available to a retail saver.
Why the Rate Was Not Really Nine Percent
The headline overstates what a buyer earned, and understanding why is the actual lesson. The rate is annualized but applies for six months, then resets. A purchaser earned roughly half that figure over the six month period, after which the rate changed with inflation.
As inflation fell over the following years, the variable component fell with it, and the rate declined substantially. Anyone who bought expecting 9 percent for years misread the product. It paid 9 percent annualized for one reset window.
An annualized rate on a security that resets every six months is a description of one window, not a promise about a year.
The Constraints That Kept It Small
Several rules limit the product deliberately. An individual can purchase a limited amount per calendar year through the Treasury's website, with a modest additional amount available via tax refund. That cap means the bond cannot absorb meaningful institutional money and is not useful for large portfolios.
The bonds also cannot be redeemed at all within the first twelve months, and redeeming before five years forfeits the most recent three months of interest. That makes them unsuitable for an emergency fund in the first year and mildly penalized thereafter.
They are purchased through a government website that is famously dated, and they are not held in a brokerage account, which adds friction that keeps casual savers away.
The Tax Treatment
Interest is exempt from state and local income tax, which is a genuine advantage in high tax states. Federal tax is owed but can be deferred until redemption, which allows a saver to control the year in which the income is recognized.
There is also an education provision allowing interest to be excluded from federal tax when proceeds are used for qualified higher education expenses, subject to income limits. It is narrow and frequently overlooked.
What It Teaches Beyond Itself
The broader point is about reading a rate correctly. Three questions apply to any advertised yield. Is it fixed or floating. Over what period does it apply. And what does it cost to exit early. I bonds answered floating, six months, and a three month interest penalty before five years.
Applying those three questions to certificates of deposit, high yield savings accounts, and bond funds resolves most confusion about which is genuinely paying more.
The Bottom Line
I bonds paid a headline rate that beat everything and came with caps, lockups, and a reset that most buyers did not price. The rate was real, the framing was misleading, and the difference lived in the fine print.