The U.S. Department of the Treasury on Tuesday announced Series I savings bonds — also known simply as I bonds — will pay a 6.89% annual interest rate through April 2023, down from the 9.62% the paid to those who purchased from May through the end of October.
It's the third-highest rate since I bonds debuted in 1998, but that may feel like a bit of a consolation prize for those who attempted to lock in the 9.62% rate last-minute. Investor traffic flooded and ultimately crashed TreasuryDirect — the site that exclusively sells these bonds — in the days leading up to the interest rate change, which occurs every six months.
But if you missed out, all is not lost. In fact, buying these bonds could still be a wise choice for you, even at the lower rate, says Naveen Neerukonda, a certified financial planner with PVA Financial in Chicago, Illinois.
"[I bonds] could still be a good investment for the short- to medium-term," he says. "Even though most people expect inflation to come down, they still offer attractive yield given their nearly risk-free nature."
Here's what you need to know.
Why I bonds are still worth considering for your portfolio
A quick refresher on I bonds: These inflation-adjusted bonds pay a fixed rate throughout the life of a bond coupled with an inflation rate pegged to the consumer price index. The latter adjusts each November and May. Whenever you buy, you'll lock in the current rate for six months.
Unlike other bonds, I bonds aren't available to buy and sell on the secondary market, so their value won't fluctuate based on investor demand or movements in interest rates. Typically, bond prices and interest rates move in opposite directions.
And because these bonds are issued by the U.S. government, they carry very little risk of defaulting. Historically, Uncle Sam has yet to welch on his debts.
Taking that into consideration, I bonds' 6.89% yield looks plenty healthy. You'll earn 4.27% on a similarly risk-free 5-year U.S. Treasury. And if you're willing to take on the associated risks risks, you'll find a 4.98% yield on an index tracking the broad U.S. bond market.
Beware of I bonds' drawbacks
Before you invest, it's important to be aware of a few rules that come with investing in I bonds. The biggest red flag for short-term investors: You can't redeem these bonds for a year after you purchase them, and you'll owe a penalty equal to three months' interest if you cash out any time over the first five years of owning the bond.
That means you'd be wise to avoid sinking cash into I bonds unless you have a well-funded emergency fund, says Neerukonda. "If there is any chance you need this money within the next 12 to 15 months, then you need to think very cautiously about this," he recently told CNBC Make It.
You can generally buy no more than $10,000 worth of I bonds per person per calendar year, though you can buy an additional $5,000 worth using money from your tax refund if you file Form 8888.
And remember that website that was crashing in late October? That's still the only place to buy I bonds, and even when the site is up and running, it's no picnic, Bret Stephens, a CFP with AdvicePoint in Wilmington, North Carolina, previously told Make It.
"It's a huge hassle to open the account and navigate the website," he said. "Imagine if the DMV had an online store — that's what this experience is like."
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Now, let's delve into the article about the recent announcement from the U.S. Department of the Treasury regarding Series I savings bonds, also known as I bonds. The Treasury declared that these bonds will pay a 6.89% annual interest rate through April 2023, marking a decrease from the previous rate of 9.62% for those who purchased from May through October.
I bonds, introduced in 1998, have become a notable investment option. Despite the lowered interest rate, experts like Naveen Neerukonda, a certified financial planner, suggest that they could still be a wise choice, particularly for the short- to medium-term. Let's break down the key concepts presented in the article:
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Interest Rate Adjustment:
- I bonds offer a fixed rate throughout their life coupled with an inflation rate pegged to the consumer price index, adjusting every November and May.
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Investor Traffic and TreasuryDirect:
- The surge in investor traffic leading to the crash of TreasuryDirect highlights the popularity and demand for I bonds, especially during interest rate changes that occur every six months.
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Risk and Return:
- I bonds, issued by the U.S. government, carry minimal risk of default. Despite the lowered rate, the 6.89% yield is considered attractive, especially when compared to other relatively risk-free options like a 5-year U.S. Treasury or a broad U.S. bond market index.
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Drawbacks of I Bonds:
- Short-term investors need to be cautious due to restrictions on redeeming bonds within the first year, with a penalty equal to three months' interest if cashed out in the first five years.
- Limited annual purchase amount per person, generally capped at $10,000, with an option to buy an additional $5,000 using tax refund money.
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TreasuryDirect as the Exclusive Platform:
- I bonds are not available on the secondary market, emphasizing their unique nature. The article mentions the challenges associated with buying these bonds exclusively through TreasuryDirect, highlighting the cumbersome process.
In conclusion, despite the recent rate decrease, I bonds are presented as a viable option for investors, especially those with a medium-term investment horizon. However, potential investors need to consider the drawbacks and limitations associated with these bonds, including the purchase process and redemption restrictions.
