Are I-bonds Still a Good Investment?

I-bonds issued by the U.S. government have been an investment option for many years. However, they came back into the spotlight in early 2022 as inflation soared and these bonds were paying a very nice interest rate—which is tied to inflation. This article explores whether these investments are still a good option.

A Look at the Numbers

I-bonds earn interest based on both a fixed rate (which the holder keeps for the life of the bond) and an inflation rate (which adjusts every six months).

The combined annualized rate for bonds issued May 2022-October 2022 was 9.62% (a bondholder earned an actual 4.81% for those six months). For the next six-month cycle, the I-bonds paid an annualized inflation rate of 6.48%. The current six-month period is paying an annualized inflation rate of 3.38%.

If you purchased I-bonds May 2022-October 2022, the interest calculation is simple because the fixed rate portion of your bonds was 0%. Thus, you earn whatever the current inflation portion is.

For bonds purchased later, the fixed portion went up to .4% if purchased November 2022-April 2023 and .9% if purchased May 2023-October 2023. This means that if you bought an I-bond in May 2023, you are earning an annualized 4.3% (.9% fixed plus 3.38% inflation). However, an I-bond purchased in May 2022 is earning only 3.38% because your fixed portion is at 0% for the bond’s life.

You face some restrictions if you choose to sell your I-bonds. You cannot sell them prior to 12 months from purchase. After 12 months of ownership, you can sell them, but if you have not held them for at least five years, you forfeit the prior three months of interest.

  • Example: You purchased $10,000 of I-bonds in May 2022. Your current annualized interest rate is 3.38%. If you were to sell your I-bonds now, you would forfeit .85% in interest.

If You Use I-Bonds as a Cash Alternative

If you look at I-bonds as a fairly short-term alternative to cash, it could make sense to sell them now as you can get better interest rates on one-year CDs, high-yield savings accounts, and institutional money markets. Even paying the three-month penalty, you would likely be better off within a year.

The caveat is that we don’t know what will happen with interest rates. The ability to earn such good rates on short-term funds depends on what the Federal Reserve does with interest rates. When the Fed starts lowering rates, these short-term rates will come down.

However, the current interest rate on I-bonds isn’t terrible, so waiting to see the new rates for the next six-month cycle is also an option.

If You’re Looking at the Long Term

For long-term investing, a diversified portfolio still makes more sense and gives you more growth opportunities.

I-bonds will likely not be a good option for long-term funds for which you want to see growth above inflation—primarily because they are designed to mostly target the inflation rate, not exceed it. The Fed clearly wants to target inflation around 2%, which should give you an idea of what you can expect from the inflation portion of I-bonds in the future.

Talk to a Financial Advisor

Every situation is unique, especially since I-bonds will have different annualized rates depending on whether you purchased them with a fixed portion above 0%. Please reach out to your advisor with any questions about your situation.

Schedule a complimentary 30-minute call with a financial advisor to discuss your situation.

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Barbara Duncan, CFP®

As Partner and Senior Wealth Advisor, Barbara Duncan's favorite moments come when a client reaches a long-sought milestone and shares their appreciation for her help in reaching it.