Savings bonds used to be something that were mostly known for being gifts that grandparents gave their grandkids at birth. Yet when inflationary pressures reared up in recent years to their worst levels since the 1980s, Series I savings bonds -- also known more simply as I bonds -- suddenly got their moment in the spotlight.
The reason is simple: It's not every day that you can get a government-guaranteed return approaching 10%, and the 9.62% offered to those who purchased I bonds between May and October 2022 was a great way to fight back against inflation. Rates on I bonds have fallen since then, but those who buy them today or during the rest of the month of April will get 6.89% for the first six months they own the bond. With inflation continuing to ease, it might seem like a no-brainer to buy I bonds now to get that initial 6.89% rate. However, there's a longer-term consideration to keep in mind that might lead you to prefer waiting on your savings bond purchase.
Understanding I bond rates
I bond interest rates change every six months, and not all I bonds pay the same rate. When you initially purchase an I bond, the Treasury assigns a fixed-rate component that's based on recent conditions in the Treasury Inflation-Protected Securities (TIPS) bond market. That fixed rate remains constant throughout the lifetime of the I bond.
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The fixed rate is only half of what goes into the calculation of interest rates at each six-month reset. The Treasury also looks at the Consumer Price Index (CPI), taking the numbers before seasonal adjustment each March and September and comparing them to CPI figures from six months earlier. That determines what's known as the variable rate. To come up with the annualized total rate, you essentially double the six-month inflation rate and then add in the fixed-rate component.
As an example, take the calculation for the I bonds sold between November 2022 and April 2023. The semi-annual rise in the CPI was 3.24%, and the fixed rate on those I bonds was 0.4%. Doubling 3.24%, you get 6.48%, and then adding in the fixed rate boosts that up to 6.89% (including a final small 0.01 percentage-point adjustment).
The trade-off with I bonds
With the release of March inflation numbers earlier this week, we now know that the variable rate for bonds sold between May and October 2023 will fall to 1.69%. That's considerably lower than the current rate and reflects the slowing pace of inflation in the U.S. economy.
However, we won't know until May what the fixed-rate component will be. There's no set rule for determining the fixed rate, but historically, it has tended to track yields on five-year TIPS. Those yields turned positive late last year, prompting the increase from the previous 0% fixed rate to 0.4%. Over the past six months, however, five-year TIPS have yielded between 1% and 2%, spending considerable time above the 1.5% mark. Despite many experts predicting a minimal rise in fixed rates, I believe that the Treasury is more likely to boost the fixed rate to 1% or more based on those figures.
Even if the fixed rate rises to 1%, the resulting combined rate of 4.40% would be well below the current 6.89%. For those who expect to hold I bonds only for the minimum 12-month period, waiting until May won't make much sense.
However, those who expect to own I bonds for the long haul benefit more from a higher fixed rate than they lose by missing out on that initial 6.89% rate. Giving up six months of 6.89% works out to $344.50 if you invest the $10,000 maximum on an I bond. However, if you wait until May and the fixed rate is 1% instead of 0.4%, then you'll earn $60 extra each year that you own the I bond. That makes the breakeven point about six years.
I'm waiting
Because I have a long-term mindset and want the inflation protections that I bonds offer, my plan is to wait until May in hopes of getting the higher fixed rate. If I'm wrong about the size of the fixed-rate increase, then that might turn out to have been a mistake, but that's a bet I'm willing to make.
FAQs
If you buy I bonds now, you'll receive 5.27% annual interest for six months and the new May rate for the following six months. He suggests buying a few days before April 30. Enna expects the fixed rate will be 1.2% or 1.3% in May, based on the half-year average of real yields for 5- and 10-year TIPS.
Is it worth buying I bonds right now? ›
Right now, the fixed rate of 1.30% is the most compelling reason to buy I Bonds. The fixed rate hasn't been this high since October 2007. I Bonds got famous for the high inflation rates in 2021 & 2022 – they may stay popular for new purchases based on the 16-year high fixed rates.
What is the expected I bond rate for May 2024? ›
The current I-bond rate, valid for bonds issued May 1 through Oct. 31, 2024, is 4.28%. That includes a fixed rate of 1.30%. To put that in context, the best high-yield savings accounts and the best CD rates are giving returns over 5%.
Are I bonds a good investment for seniors? ›
Investing in I bonds offers retirees significant tax advantages. The interest earned on I bonds is tax-deferred, meaning you don't have to pay taxes on the interest until you decide to redeem the bonds. This can be a valuable feature, allowing you to postpone tax liability and potentially lower your annual tax bill.
How long should you hold Series I bonds? ›
Can I cash it in before 30 years? You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.
What is a better investment than I bonds? ›
Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity. When the TIPS matures, if the principal is higher than the original amount, you get the higher amount. If the principal is equal to or lower than the original amount, you get the higher original amount.
What is the downside to I bonds? ›
Cons of Buying I Bonds
I bonds are meant for longer-term investors. If you don't hold on to your I bond for a full year, you will not receive any interest. You must create an account at TreasuryDirect to buy I bonds; they cannot be purchased through your custodian, online investment account, or local bank.
Is now a good time to invest in bonds in 2024? ›
There are indications that interest rates may start to fall in the near future, with widespread anticipation for multiple interest rate cuts in 2024. Falling rates offer the potential for capital appreciation and increased diversification benefits for bond investors.
What are the disadvantages of TreasuryDirect? ›
Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.
What will my bond rate be in May 2024 on Reddit? ›
"The current composite I bond rate is 4.28%. This includes a 1.30% fixed rate and a 1.48% inflation rate. The current rate applies for six months to bonds purchased between May 1, 2024, and Oct. 31, 2024."
Can I buy I bonds every calendar year? Yes, you can purchase up to $10,000 in electronic I bonds each calendar year. You can also buy an additional $5,000 in paper I bonds using your federal tax return.
Do I pay taxes on I bonds? ›
The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.
Should a 70 year old invest? ›
Indeed, a good mix of equities (yes, even at age 70), bonds and cash can help you achieve long-term success, pros say. One rough rule of thumb is that the percentage of your money invested in stocks should equal 110 minus your age, which in your case would be 40%. The rest should be in bonds and cash.
Are I bonds better than CDs? ›
Bonds often offer higher interest rates than CDs, which may be appealing to those looking for a higher profit potential. Unlike CDs, where interest may accumulate and only be paid at maturity, bonds often provide ongoing interest payments, usually at monthly or quarterly intervals.
Should seniors invest in bonds? ›
Bond funds are typically a good fit for retirement investors seeking capital preservation because they tend to be much less volatile than stocks.
Will Series I bond rates go up? ›
The interest rate on a Series I savings bond changes every 6 months, based on inflation. The rate can go up.
Will bonds go up in 2024? ›
There are indications that interest rates may start to fall in the near future, with widespread anticipation for multiple interest rate cuts in 2024. Falling rates offer the potential for capital appreciation and increased diversification benefits for bond investors.
Do Series I bonds ever lose value? ›
Your composite rate will vary over the life of your Series I savings bond as the inflation rate adjusts, but it will never drop below 0%. And the higher inflation gets, the more you will earn.
