For investors seeking passive income, the 2025 US Treasury market presents a clear divergence: short-duration bills (3-6 months) at 3.75-3.78% fail to outpace projected inflation, delivering negative real returns as low as -1.73%. Conversely, intermediate-duration inflation-protected securities offer the most compelling value. The 10-Year Treasury Inflation-Protected Security (TIPS) provides a guaranteed 1.81% real yield above the Consumer Price Index, making it the superior instrument for genuine capital preservation. Series I Bonds, with a 4.03% composite rate, offer robust inflation hedging but require a one-year holding period, a critical liquidity constraint for some portfolios.

Yield Curve & After-Tax Return Analysis

As of November 2025, the Treasury yield curve is notably flat, with the 10-year to 2-year spread at a modest 0.55%. This environment, shaped by expectations of Federal Reserve rate cuts into 2026, penalizes investors holding cash-equivalent instruments. With core PCE inflation at 2.9%, any nominal yield below this threshold erodes purchasing power. The data reveals that only securities with maturities of one year or longer generate a positive real return, a crucial distinction for wealth accumulation.

1.81%
10-Year TIPS Real Yield (Guaranteed above CPI)
4.71%
30-Year T-Bond Nominal Yield (Highest Cash Flow)
-1.73%
3-Month T-Bill Real Return (After 2.7% Inflation)

Analyzing a $50,000 investment over a one-year holding period quantifies this divergence. While longer-duration nominal bonds provide higher gross income, TIPS deliver superior after-tax returns for high-income investors due to the tax treatment of inflation adjustments. An investor in the 37% federal tax bracket nets $1,764 from 10-Year TIPS versus just $1,291 from a 10-Year T-Bond, a 36.6% increase in take-home income. The most significant structural advantage for US investors, however, is the state and local tax (SALT) exemption. For a California resident in the top 13.3% state tax bracket, this exemption on a $50,000, 4.10% T-Bond is worth $270 annually compared to a similarly yielding corporate bond. Over a 10-year holding period, this amounts to over $2,700 in tax savings.

Security 1-Yr Gross Income Real Return (post-2.7% inflation) After-Tax Income (37% fed bracket) After-Tax Return
3-Month T-Bill $485.79 -1.73% $388.63 0.78%
1-Year T-Note $1,825.00 0.95% $1,149.75 2.30%
10-Year T-Bond $2,050.00 1.40% $1,291.50 2.58%
10-Year TIPS $2,205.00 1.81% $1,764.00 3.53%
I-Bond (composite) $2,015.00 1.33% $1,612.00 3.22%

Reinvestment and Duration Risk in a Rate-Cutting Cycle

The primary risk facing income investors in 2025 is not default but reinvestment. With the Federal Reserve expected to implement two additional 25-basis-point rate cuts by mid-2026, short-term yields are projected to decline. An investor employing a "T-Bill ladder" or rolling 3-month bills faces significant yield compression. A 3.78% yield today could become 3.50% upon reinvestment in three months and potentially 3.25% by year-end 2026. This strategy creates a negative carry of 28-53 basis points relative to locking in a longer-term rate now, actively working against the goal of stable passive income.

Critical Risk: T-Bill Rolling Strategy
Rolling short-term T-bills in a rate-cutting environment exposes investors to significant reinvestment risk. Current market pricing implies a 50-75 basis point decline in short-term yields by the end of 2026, creating a negative carry for those who do not lock in longer-duration instruments.

For those selecting longer-duration instruments like 20- and 30-year bonds for their higher nominal yields (4.67% and 4.71%, respectively), the primary concern shifts to duration risk. A 30-year Treasury bond has a duration of approximately 18-22, meaning a 1% increase in prevailing interest rates would cause the bond's market price to fall by 18-22%. This level of price volatility is unsuitable for investors who may need to liquidate their position before maturity. These instruments should only be considered by those with a high degree of certainty they can hold the bond for its full 30-year term, collecting the semi-annual coupons and receiving par value at the end.

Advantages of Locking Duration

  • Certainty: A 10-Year T-Bond at 4.10% guarantees that yield for a decade, eliminating reinvestment guesswork.
  • Capital Appreciation: If rates fall as predicted, the market value of existing longer-duration bonds will increase.
  • Simplified Management: Avoids the need for quarterly or semi-annual decisions on reinvesting matured T-bills at lower rates.

Drawbacks of Short-Term Rolling

  • Reinvestment Risk: Directly exposed to falling short-term rates, leading to progressively lower income over time.
  • Negative Real Returns: Current short-term yields already fail to compensate for inflation, eroding principal value.
  • Active Management: Requires constant monitoring of auction schedules and market rates to redeploy capital.

Strategic Allocation by Investor Objective

The optimal Treasury security is dictated entirely by the investor's primary objective: capital preservation, maximum cash flow, or a balance of both. No single instrument serves all needs. For those prioritizing the preservation of purchasing power above all else, inflation-protected securities are non-negotiable. For investors requiring predictable, liquid monthly income to cover living expenses, nominal bonds offer higher cash flow and secondary market liquidity. A blended approach can often provide the best of both worlds.

Investor Objective Primary Security Key Metric Primary Trade-Off
Maximum Capital Preservation 10-Year TIPS 1.81% Real Yield "Phantom income" taxed annually on principal adjustments.
Maximum Monthly Cash Flow 10-Year or 30-Year T-Bond 4.10% - 4.71% Nominal Yield No inflation protection; principal value at risk from rising rates.
Highest Inflation Hedge Series I-Bond 4.03% Composite Rate 1-year lockup period; 3-month interest penalty if sold before 5 years.
Balanced Income & Protection 50% 10-Yr T-Bond / 50% 10-Yr TIPS 1.61% Blended Real Return Lower nominal cash flow than a pure bond portfolio.

A balanced portfolio for a $50,000 allocation could consist of $25,000 in 10-Year T-Bonds and $25,000 in 10-Year TIPS. This structure would generate approximately $2,127 in gross annual income ($1,025 from the T-Bond and $1,102 from the TIPS, assuming 2.7% inflation). It provides a blended real return of 1.61%, offering a hedge against unexpected inflation while still capturing a solid nominal yield. Both securities are highly liquid on the secondary market, avoiding the lockup constraints of I-Bonds.

Purchase Procedures: TreasuryDirect vs. Brokerage

Investors have two primary channels for purchasing Treasury securities: directly from the government via TreasuryDirect or through a traditional brokerage firm. TreasuryDirect is a no-fee platform ideal for buy-and-hold investors, while brokerages offer greater flexibility and secondary market access.

1
Account Setup (TreasuryDirect)
Visit TreasuryDirect.gov to open an account. Requires SSN/ITIN, a driver's license, and a linked US bank account. Activation is typically completed within 15 minutes.
2
Locate Auction
Under "Buy Direct," select the desired security type (Bills, Notes, Bonds, TIPS, or Savings Bonds). The auction schedule is published months in advance.
3
Place Non-Competitive Bid
Select "Non-competitive" to accept the auction-determined rate, guaranteeing your bid is filled. Specify the purchase amount (minimum $100). Bids are due by 11 AM ET on the auction date for T-bills.
4
Execution & Settlement
Funds are automatically debited from your linked bank account on the settlement date. Securities are then credited to your account. No fees are charged for this process.

Purchasing through a brokerage like Fidelity, Schwab, or Interactive Brokers offers distinct advantages. Investors can buy securities on the secondary market, allowing them to target specific maturity dates not available at auction. Selling before maturity is also simpler. Most major brokerages charge zero commission for new-issue auction purchases, making them cost-competitive with TreasuryDirect. However, secondary market purchases involve a bid-ask spread, typically a negligible 0.01-0.05% of face value. For UK residents, purchasing through a US brokerage that can properly handle W-8BEN forms is crucial to benefit from the US-UK tax treaty, which can reduce withholding on interest payments. While Treasury interest is exempt from US state taxes, UK investors should consult a tax advisor regarding their UK tax liability on this income.

The Complete Guide to Passive Income Through Treasury Bonds and I-Bonds: Rates, Returns, and Tax Strategies

What are the best Treasury bond rates available in 2025?

Current Treasury yields as of November 2025 are: 10-year Treasury at 4.10%, 3-month T-Bills at 3.80%, and 6-month T-Bills at 3.79%. These rates remain above 4% with the 10-year expected to hover around 4.10-4.17% through year-end, making Treasuries attractive for fixed-income investors.

What is the current I-Bond composite rate for November 2025?

I-Bonds issued from November 1, 2025 through April 30, 2026 have a composite rate of 4.03%, comprising a fixed rate of 0.90% and a semiannual inflation adjustment of 1.56%. This represents a slight decline from the May-October 2025 rate of 4.24%.

What is the Treasury rate forecast for 2025?

Analysts expect the 10-year Treasury yield to trade around 4.10% for the next three to six months and potentially reach 4.17% within one year. The curve is projected to steepen, with the 2-3 year spread potentially reaching 60-82 basis points by year-end, primarily driven by persistent inflation and a resilient economy.

What are the best bonds to invest in 2025?

US Treasury securities (Treasuries and T-Bills) offer safety backed by the US government with yields of 4.10-4.32% across maturity lengths. I-Bonds provide inflation protection with a 4.03% current composite rate but require a 1-year holding period before redemption. High-yield bonds offer approximately 7.5% average yields but carry credit risk requiring active management.

Are Treasury bills a good investment in 2025?

Treasury bills are an excellent 2025 investment for risk-averse investors seeking yields above 4% with zero default risk and high liquidity. Current 6-month T-Bill rates of 3.79% and 3-month rates of 3.80% compare favorably to bank CDs (averaging 4.00-4.30%), with the advantage of easier secondary market sales.

What is the interest rate on bonds in 2025?

Bond interest rates vary by type: US 10-year Treasuries yield 4.10%, I-Bonds composite 4.03%, Treasury Bills range from 3.79-4.32%, UK NS&I Guaranteed Growth Bonds pay 4.04%, and high-yield corporate bonds average 7.5%. Rates depend on maturity length, credit quality, and inflation adjustments.

Are CD rates going down in 2025?

Yes, CD rates are declining significantly. High-yield CDs fell from 5.10% in January 2024 to 4.10% by December 2024 and have continued dropping to 4.00-4.20% by November 2025. This decline follows the Fed's interest rate cuts and is expected to continue if the Fed cuts rates further in December 2025.

Which bond is paying 7.5% interest?

A retail bond launched in June 2025 pays 7.5% annual interest until maturity in July 2030. This rate far exceeds traditional savings accounts and standard Treasury yields but carries higher credit risk than government bonds. Individual corporate bonds may also offer comparable rates depending on credit quality and maturity date.

Where can I get a 10% return on investment in 2025?

A consistent 10% return is not realistically available in 2025 through traditional bonds. High-yield corporate bonds average 7.5%, Treasury securities top at 4.32%, and I-Bonds max at 4.03%. Achieving 10% returns typically requires accepting equity risk or investing in distressed debt/emerging markets with corresponding default risk.

Where can I buy an 8% Treasury bond in 2025?

An 8% Treasury bond is not available in 2025; current Treasuries yield 4.10% at most. Historical 8% rates were last seen during high-inflation periods. To achieve 8% returns, consider high-yield corporate bonds (7.5% average), UK retail bonds, or diversified fixed-income ETFs, though all carry higher credit risk than Treasuries.

Is NS&I's 6.2% 1-year fixed rate still available?

No. NS&I's 6.2% one-year fixed rate was withdrawn in 2023. Current NS&I Guaranteed Growth Bonds pay 4.04% for one-year terms (as of September 2025), down from previous highs. The 6.2% rate is considered a historical peak unlikely to return unless inflation spikes significantly.

What are the tax implications of Treasury bonds vs. I-Bonds?

Both Treasury bonds and I-Bonds are exempt from state and local income taxes. However, Treasury interest is taxable at federal rates annually, while I-Bond interest can be deferred for up to 30 years before reporting. I-Bonds have additional tax advantages if used for education expenses and for federal employees in specific circumstances.

How much passive income can I generate with $100,000 in Treasuries?

A $100,000 Treasury investment at current 4.10% yields generates approximately $4,100 annually in passive income before taxes. At state+federal rates averaging 25-40%, net income would be $2,460-$3,075 yearly. I-Bonds at 4.03% would generate $4,030 gross annually with tax deferral options.

What is the breakeven analysis between Treasury bonds and high-yield savings accounts?

High-yield savings currently offer 5% APY compared to 4.10% Treasury yields, providing a 90 basis point advantage. However, Treasuries offer tax-free state/local treatment worth 0.50-1.50% to high-tax-state residents, effectively equalizing returns. Treasuries also provide price appreciation if rates decline and better liquidity for emergencies through secondary markets.

What percentage allocation to I-Bonds is optimal for a conservative portfolio?

Financial advisors typically recommend 5-15% portfolio allocation to I-Bonds for conservative investors, balancing inflation protection against liquidity constraints (1-year minimum holding period). Combined with Treasuries (15-25%), this creates a 20-40% fixed-income core that maintains purchasing power while generating 4%+ passive income.

How do I purchase Treasury bonds and I-Bonds in 2025?

Purchase Treasury securities directly through TreasuryDirect.gov (no fees) or through brokers (typically $1-10 per transaction). I-Bonds are only available through TreasuryDirect.gov in digital form; paper purchases ended January 1, 2025. Both require a US bank account and Social Security number or tax ID.