I bonds: What to know about this inflation-protected asset that is offering a 9.6% return (2024)

FAQs

What is the downside of I bonds? ›

Key Points. 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.

CONs: Amount – Each individual can only purchase up to $10,000 in a calendar year. If the current inflation and interest rate remain the same until next May, a person will earn $962 on the $10,000 investment.

Inflation-indexed bonds offer stability and protection against inflation for investors. However, there are some drawbacks to investing in these securities, such as less earning potential than other options and uncertainty around the accuracy of the inflation rate measure used.

Are I bonds a good investment for you? I bonds can make good short-term investments, but you should feel comfortable holding them for at least one year and ideally, five years before cashing them in. They can be a good fit for seniors who want to earn interest on their savings while also keeping their nest egg safe.

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.

TIPs offer comparable inflation protection relative to I Bonds at higher yields, a significant advantage. TIPs are also somewhat riskier, more volatile securities, with quite a bit of interest rate risk. Both asset classes are good investments, but TIPs are slightly better, due to their higher yields.

If you keep the I bonds through the date they mature, generally 30 years, and you didn't otherwise include the interest income in a prior year, you will be taxed on all the accrued but previously untaxed interest in the year of maturity, whether or not you cash them in.

What will the May 2023 I Bond inflation rate be? The May 2023 I Bond inflation rate is projected at 2.40%* based on 4 months (out of 6 needed) CPI-U data.

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.

Inflation risk is an issue because the interest rate paid on most bonds is fixed for the life of the bond. As a result, the bond's interest payments might not keep up with inflation. For example, if prices rise by 3% and an investor's bond pays 2%, then the investor has a net loss in real terms.

Are inflation linked bonds risky? ›

Risks of Inflation-Linked Bonds

TIPS also present complications in trading and taxation that don't affect other fixed-income asset classes. This is mostly because inflation-linked bonds have two values: the original face value of the bond and the current value adjusted for inflation.

In any case, you want to make sure your portfolio is well-diversified, but increasing certain types of securities, like bonds, may be a good choice when inflation hits. A common way investors usually hedge against inflation is by purchasing TIPS, since the principal is adjusted based on inflation.

The current bond composite rate is 6.89%. That rate applies for the first six months for bonds issued from November 2022 to April 2023. For example, if you purchased I bonds on Nov. 1, 2022, the 6.89% rate would be in effect until April 30, 2023.

Individuals, organizations, fiduciaries, and corporate investors may buy Treasury securities through a bank, broker, or dealer.

Why Are Bond Funds Losing Money? From the start of this year, bond funds sold off as investors anticipated the Fed would need to boost interest rates for the first time in years to combat rising inflation.

The composite rate for I bonds issued from November 2022 through April 2023 is 6.89%.

After the one-year mark, you can go ahead and cash in your bond, but you will get hit with a penalty of three months' interest earned on the bond. There is no penalty if you simply hold onto the bond after five years.

When the bond market crashes, bond prices plummet quickly, just as stock prices fall dramatically during a stock market crash. Bond market crashes are often triggered by rising interest rates. Bonds are loans from investors to the bond issuer in exchange for interest earned.

High-yield bonds face higher default rates and more volatility than investment-grade bonds, and they have more interest rate risk than stocks. Emerging market debt and convertible bonds are the main alternatives to high-yield bonds in the high-risk debt category.

Bonds, especially bonds from governments and major companies, also tend to be a safe investment. They can also offer much higher return than savings accounts. In exchange for the higher return, you give up flexibility because you cannot redeem bonds at any time.

What is the most risky type of bond to invest in? ›

Bonds that are rated below investment grade (that is, BB or lower by S&P, Ba or lower by Moody's) are sometimes called "junk" bonds. ² They may be appropriate for investors who can withstand higher price volatility and default risk while seeking increased investment cash flow potential.

More about savings 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.

until redemption, final maturity (30 years after issue date), or other taxable disposition, whichever occurs first. Question: How long will my Series I bond earn interest? Answer: I bonds earn interest for up to 30 years. Question: Is there a tax advantage for Series I bonds used for college tuition?

Note: You only get a 1099-INT if you actually got the interest on a savings bond. If you are waiting until your EE or I bond matures (finishes its life) to take the interest on it, you will not get a 1099-INT for that bond until we actually pay you the interest.

The rules of purchasing I bonds

While you're only allowed to buy up to $10,000 worth of I bonds in a single calendar year, once a given year is over, that limit resets for you. So if you bought $10,000 worth of I bonds recently, you can purchase additional I bonds in January 2023 since it's a new calendar year.

A given Social Security Number or Employer Identification Number can buy up to these amounts in savings bonds each calendar year: $10,000 in electronic EE bonds. $10,000 in electronic I bonds. $5,000 in paper I bonds that you can buy when you file federal tax forms.

The fixed rate of an I Bond will never change. Purchases through April 30, 2023, will have a fixed rate of 0.4%, which means their return will exceed official U.S. inflation by 0.4% until the I Bond is redeemed or matures in 30 years.

How to cash in Series I savings bonds. Paper Series I savings bonds: You may be able to cash these bonds in at your bank if it provides that service. You can also cash them in by mail through TreasuryDirect.gov. Complete FS Form 1522 and mail your bonds with the form to the address provided.

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.

Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise.

When should I invest in inflation-linked bonds? ›

Investors that expect higher inflation rates that the market suggests, can buy inflation-linked bonds at a good price according to their views. Later, if they are right and inflation soars, they can sell their inflation-linked bonds for a gain when inflation numbers come out.

Inflation-indexed bonds and Treasury Inflation-Protected Securities (TIPS), tend to increase their returns with inflationary pressures. Consumer staples stocks mostly do well because price increases are passed on to consumers.

There are a couple of things you should know before buying an I bond. — You have to set up an account at TreasuryDirect.gov to buy the bonds. — The interest rate on new Series I savings bonds is 9.62 percent through October 2022. — Individuals can only purchase up to $10,000 in electronic I bonds each calendar year.

The most significant sell signal in the bond market is when interest rates are poised to rise significantly. Because the value of bonds on the open market depends largely on the coupon rates of other bonds, an interest rate increase means that current bonds – your bonds – will likely lose value.

If your objective is to increase total return and "you have some flexibility in either how much you invest or when you can invest, it's better to buy bonds when interest rates are high and peaking." But for long-term bond fund investors, "rising interest rates can actually be a tailwind," Barrickman says.

The best bet is to wait 3 more months until the March CPI report is issued on 4/12/2023. That will allow the investor to know the variable rate on I-Bonds sold after May 1. (Or the rate for the second six months on I-Bonds sold before May 1.) Only if the rate is better than CDs would I then buy I-Bonds before May 1.

You can buy I bonds as often as you'd like! However, you can't buy more or be gifted more than a total of $15,000 in I bonds per year.

Series EE bonds issued from May 2022 through October 2022 earn today's announced rate of .10%. All Series EE bonds issued since May 2005 earn a fixed rate in the first 20 years after issue. At 20 years, the bonds will be worth at least two times their purchase price.

EE Bond and I Bond Differences

The interest rate on EE bonds is fixed for the life of the bond while I bonds offer rates that are adjusted to protect from inflation. EE bonds offer a guaranteed return that doubles your investment if held for 20 years. There is no guaranteed return with I bonds.

You can redeem the bond after holding it for a minimum of 12 months. If you cash in an I bond less than five years old, you'll lose the last three months of interest.

Can I cash an I bond in at a bank? ›

Banks and credit unions can redeem savings bonds over the counter. Find out more about becoming an agent and redeeming savings bonds.

Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.

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 6.89% interest rate until April 2023. If rates stay the same you could earn about $701 in interest in one year.

We see opportunities in 2023 for the bond market to provide attractive yields at lower risk than we've seen for several years. It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors.

Sitting in cash also presents an opportunity cost as it forgoes potentially better investments. Bonds provide interest income that often meets or exceeds the rate of inflation, and with the potential for capital gains if bought at a discount.

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.