You Can Still (Probably) Make Money on I Bonds
With skyrocketing inflation causing fears about your investment, US Savings Bonds are considered a win-win because they are fully backed by the government. In October , we advised you to buy Series I bonds to lock in the interest rate at 9.62% because the Treasury cut the yield to a (still high!) 6.89% in November. So many people were trying to do just that that the I bond web portal became almost unusable at the end of October . But despite this drop, there are arguments in favor of why buying Series I bonds now may be even more profitable than fixing the previous rate at 9.62%.
What are Series I Savings Bonds?
The Treasury Department explains that with Series I bonds, you get both a fixed interest rate and a rate that changes with inflation (the ministry adjusts the inflation rate twice a year). (To learn more about what bonds are and how they work in general, check out our previous post here .) Series I savings bonds are considered inflation hedges. Since the interest on the bond will rise at about the same rate as inflation, your savings will not lose their purchasing power. And for several months, an unusually high rate of 9.62% was attractive to many investors.
However, as with any investment, even these government bonds come with some risks. Most relevant now is the fact that the initial yield only applies during the first six months of holding the bond. According to Britannica Money , after those first six months, your bonds act like any other variable instrument, which means “rates can drop and you can’t control it.” If you wait a few years to buy an I-bond, you run the risk of waiting for any future interest rate.
Why Buying Series I Bonds Now Can Be Better Than Before
So how can the current 6.89% yield beat the previous 9.62%? It comes down to taking the base rate into the equation. In addition to the adjustable rate of inflation – described above, which lasts only for six months – Series I bonds consist of a guaranteed base rate that is valid for the life of the bond. Smart Asset explains what this means for new bond buyers:
All bonds purchased between May 2020 and October 2022 had a base rate of 0%. The bonds are currently issued with a base rate of 0.40%. Even if inflation falls to 0%, they will still receive a return of 0.40%. This higher base rate means that buyers who receive Bond I at 6.89% should outpace buyers who lock in 9.62% in about four years.
This essentially means that if you hold a bond for at least 4 years before cashing out, you will outperform investors who bought the bonds at a higher rate, provided you invest before the 6.89% rate drops. in future.
Takeaway
US Treasury-backed Series I Savings Bonds are considered a relatively safe way to earn a high return on your investment. However, keep in mind that you cannot simply sell a bond as soon as the interest rate drops. You are completely locked out during the first year of holding the bond; after that, there is still a three-month interest penalty if you sell before five years. If you think you’ll need access to your money before five years have passed, you might be better off using a short-term savings facility .
If you are interested in buying bonds, visit the US Department of the Treasury website . For the rest of the process, follow this step by step video explanation that will walk you through buying bonds. More information on I bond rates and how they are calculated can be found here , and a historical chart of the entire history of each bond is posted here .