Are I bonds a good investment? With inflation at a 40-year high and uncertainty on the horizon, I bonds should be considered to protect your cash in the short-term.
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.
Returns Are Solid, But Falling
“Although inflation is still high, it isn't rapidly increasing the way it was a year or so ago.” For this reason, the rate on I bonds has fallen from 9.62% from May 2022 to November 2022, to 6.89% over the same period in 2023.
The May 2023 I Bond Rate
The May 2023 I bond composite rate is 4.30% (US Treasury) which is 2.15% earned over 6 months.
Series I savings bonds are often considered a hedge against inflation. The current composite rate for I bonds is 4.3%. You can't buy more than $10,000 in electronic I bonds for yourself annually.
I bonds are a type of savings bond that are designed to protect your investment from inflation. Some people opt to use their tax refund to purchase I bonds. I bonds have a 4.30% interest rate until October 31, 2023. If rates stay the same you could earn over $434 in interest in one year.
Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
The composite rate for I bonds issued from May 2023 through October 2023 is 4.30%.
But I Bond rates will be shockingly lower if you wait to buy on May 1 or later, instead of rushing to buy I Bonds by April 27. If you buy I Bonds issued in April, you'll lock in the attractive 6.89% that applies for six months after your purchase.
The annual rate may drop below 4%
Of course, the combined annual yield is only an estimate until TreasuryDirect announces new rates in May. In November 2021, the annual I bond yield jumped to 7.12%, and hit a record high of 9.62% in May 2022 before falling to 6.89% in November 2022.
Another advantage is that TIPS make regular, semiannual interest payments, whereas I Bond investors only receive their accrued income when they sell. That makes TIPS preferable to I Bonds for those seeking current income.
"It is possible that the I Bond fixed rate could rise in May," he said, "so it does make sense to hedge your bets by buying half of your annual I Bond purchase before May and the other half after April." Buying before the end of April also makes sense to lock in the 6.89% annualized rate for the next six months.
The short answer is bonds tend to be less volatile than stocks and often perform better during recessions than other financial assets. However, they also come with their own set of risks, including default risk and interest rate risk.
Cashing in a savings bond (Series EE or Series I) is relatively easy. But you can't cash one in until you've had it for at least one year. And if you cash it in before it's 5 years old, there's a penalty.
The most common way to buy I Bonds is to visit TreasuryDirect, the government website that allows for the purchase of government securities. You won't need to worry about paying fees or a commission to buy the bonds.
No, I Bonds can't lose value. The interest rate cannot go below zero and the redemption value of your I bonds can't decline.
Both EE and I savings bonds earn interest monthly. Interest is compounded semiannually, meaning that every 6 months we apply the bond's interest rate to a new principal value.
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.
I bonds also have important tax advantages for owners. For example, interest earned on I bonds is exempt from state and local taxation. Also, owners can defer federal income tax on the accrued interest for up to 30 years.
Some of the disadvantages of bonds include interest rate fluctuations, market volatility, lower returns, and change in the issuer's financial stability. The price of bonds is inversely proportional to the interest rate. If bond prices increase, interest rates decrease and vice-versa.
May 2023 fixed rate will be 0.90%, total composite rate is 4.30% for next 6 months. For Savings I bonds bought from May 1, 2023 through October 31, 2023, the fixed rate will be 0.90% and the total composite rate will be 4.30%.
(a) Interest, if any, accrues on the first day of each month; that is, we add the interest earned on a bond during any given month to its value at the beginning of the following month.