Why You Should Buy I Bonds Now

Treasury Series I savings bonds, one of the most exciting current bond offers, are expected to become less appealing in November when a new rate on the popular instrument is determined.

Individual investors should buy the inflation-linked I bonds by the end of October to lock in the current 9.6% interest rate for the first six months. Experts predict that the new rate, which will apply to bonds acquired in November, is anticipated to be closer to 6%, based on the methodology used by the US Treasury to determine the semiannual rate.

The biggest disadvantage of I bonds is that individuals can only acquire $10,000 annually, while an extra $5,000 can be purchased with income from federal tax returns. Additionally, Americans who own certain corporations can acquire $10,000 in I Bonds each year through such organizations. The I bonds must be purchased directly from the Treasury via its TreasuryDirect program.

Because of rising inflation in late 2021 and early 2022, the rate on I bonds based on the US consumer price index touched a record 9.6% for bonds acquired beginning May and continuing through October. However, the consumer price index has slowed recently, with the main CPI index rising 0.1% in August.

“You should purchase now,” says Trinity Financial Planning founder John Scherer of Middleton, Wis. He claims that the present rate is quite competitive with bank CDs.

I bond rates include an inflation component based on the CPI index and what the Treasury refers to as a fixed rate, which is now zero. The inflation rate is established twice a year, in early May and November, and applies to bonds acquired six months after that. The fixed rate will be adjusted in November and will most likely be at or around zero.

The 9.6% interest rate in May was calculated using the CPI index from September 2021 to March 2022.

Treasury employs the non-seasonally adjusted CPI index, which differs somewhat from the more widely publicized seasonally adjusted CPI. From September 2021 to March 2022, the non-seasonally adjusted CPI increased by 4.8%. This sum is multiplied by two to get the 9.6% rate, which applies to bonds purchased between May and October this year.

The new rate, which will be published in early November, is based on the March through September CPI index. According to the current study, consumer prices increased by 3% from March to August.

Investors who purchase I bonds before November 1 will receive the 9.6% rate for the first six months and the new rate for the remaining six months.

I bonds are an excellent secure investment to bolster your emergency cash, says Ken Tumin, creator and editor of the Bank Deals Blog.

I bonds must be kept for at least a year, and bonds redeemed before five years carry a one-quarter interest penalty. Tumin considers the interest penalty moderate compared to bank CDs, which often have early-withdrawal penalties.

I bonds have two appealing features: investors can postpone paying taxes on interest payments until they mature – I bonds can be held for up to 30 years. And, unlike bank CDs and corporate bonds, I bond interest, like that on other Treasuries, is free from state and local taxes.

One risk associated with I bonds is that inflation falls, resulting in lower interest rates in the following years. There is a good chance that markets potentially discount inflation by approximately 2.5% over the next five to ten years, which would affect the returns on the I Bonds. However, I Bonds will appear very attractive if inflation remains stubbornly high.

Investors seeking inflation-linked bonds can also acquire Treasury inflation-protected securities (TIPS), which are auctioned off by the Treasury regularly and are accessible through TreasuryDirect, banks, and brokerage companies. They have maturities of five, ten, and thirty years, and TIPS are not subject to individual purchasing limits.

TIPS have an advantage over I Bonds in that they currently offer a real, or inflation-adjusted, interest rate of roughly 1%, implying that investors get the inflation rate + 1%. TIPs prices, on the other hand, can vary and have declined this year while actual rates have risen from -1.5% to 1%. I bonds now have a zero actual yield.

TIPS may be purchased in a lower-risk manner through ETFs such as the iShares 0-5 Year TIPS Bond ETF STIP -0.22% (ticker: STIP), which presently has a total yield of approximately 10% based on a calculation following Securities and Exchange Commission criteria. It has a real yield of around 1.5%, which is augmented by the inflation adjustment.