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Saturday, November 4, 2023

You Can (Probably) Still Make a Killing on I Bonds

The Department of the Treasury announced ↗ last week that the new rate for I bonds issued between November 2023 and April 2024 is 5.27%. This number includes a fixed rate of 1.30%. With inflation ↗ causing concerns for your investments across the board, U.S. savings bonds are considered a safe bet, since they’re fully backed by the government. Last year I told you to buy Series I bonds ↗ in order to lock in an interest rate of 6.89%. Although 5.27% is a drop, it’s still a historically high yield for anyone interested in I bonds. In fact, here’s why buying Series I bonds now could be even better than ever.

What are Series I savings bonds?

The Treasury Department ↗ explains that with a Series I bond, you earn both a fixed rate of interest and a rate that changes with inflation (the department adjusts the inflation rate twice a year). (For a broader primer on what bonds are and how they work in general, check out our previous post here ↗.) Series I savings bonds are considered a protection from inflation. Because the bond’s interest will grow at around the same rate as inflation, your savings won’t lose their buying power.

However, as with any investment, even these government-backed bonds come with a few risks. Most relevant right now is the fact that the initial yield only applies for the first six months you own the bond. After those first six months, your bonds acts like any other variable vehicle, meaning rates could go down and you have no control over it. If you wait a few years to buy an I bond, you risk waiting on whatever the interest rate is down the line.

Why buying Series I bonds now could be better than before

So, how could the current yield beat the previous higher ones? It comes down to factoring in the fixed rate into the equation. In addition to the adjustable inflation rate—the one explained above, which is only good for six months—Series I bonds are made up by a guaranteed base rate good for the life of the bond.

For instance, many rushed ↗ to buy I bonds when the yield was a record-setting 9.62% in May 2022. If you missed that eye-popping number and are kicking yourself now—not so fast. All those bonds came with a fixed rate of 0%. Without a fixed rate boosting the yield, those same I bonds purchased in 2022 are now earning only 3.94%.

Compare that to the current bonds are being issued with a fixed rate of 1.3%. Even if inflation drops to 0%, they’ll still get a return of 1.3%. This higher base rate means that the buyers who get I bonds at the 5.27% rate should be ahead of buyers who locked in the 9.62% after about four years.

All this means that as long as you keep the bond for at least four years before cashing out, you’ll come out ahead of investors who purchased bonds at the higher rate—provided you invest before the 5.27% rate adjusts lower in the future.

When to buy Series I savings bonds

Backed by the U.S. Treasury, Series I savings bonds are considered a relatively safe way to see a high yield on your investments. However, keep in mind that you cannot simply sell the bond once the interest rate falls. You’re completely locked in for your first year owning the bond; after that, there’s still a penalty of three months’ interest if you sell before five years. If you think you’ll need access your money before five years have passed, you’re better off with a short-term savings vehicle ↗.

If you’re interested in buying bonds, go to the U.S. Treasury website ↗. For the rest of the process, follow this step-by-step video explainer ↗ that walks you through buying the bonds. More information on I bond rates and how they’re calculated can be found here ↗, while a historical chart of the entire history of each bond is published here ↗.

This post was originally published in December 2022, when the Treasury Department announced a 6.89% rate for I bonds, and was updated on Nov. 3, 2023 to reflect the new rate of 5.27%.

BFIA Admin
BFIA Admin
The big boss.

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