Are I Bonds Still a Safe Bet Against Inflation? A Look at Their Pros and Cons in 2023
With inflation being a consistent headline in 2022, investors sought ways to increase their returns on their idle cash. I Bonds were an excellent option to do just that. This year, the inflation rate has been slowly declining. So, the question is: are I-Bonds still a good place to invest now that the variable interest rate has declined?
What Are I Bonds, Again?
I Bonds, or Series I savings bonds, are U.S. savings bonds that earn a variable interest rate. The interest rate is composed of two parts: a fixed rate and a variable rate. The U.S. Treasury Department sets the fixed rate, which remains the same for the bond's life. The variable rate is tied to the Consumer Price Index (CPI), which measures inflation.
The interest rate on I Bonds is an excellent way to protect your money from inflation. When inflation is high, the variable rate on I Bonds will also be high. This means that you will earn more interest on your I-Bonds, which will help to offset the effects of inflation.
I Bonds are considered a safe and secure investment. They are backed by the full faith and credit of the U.S. government, which means that the chances of default are extremely low.
I Bonds can be purchased through the TreasuryDirect website. You can buy up to $10,000 worth of I Bonds per person annually. You can also buy an additional $5,000 worth of I Bonds annually with your tax refund.
Another critical factor to remember when investing in I Bonds is the penalty for early redemption. I Bonds must be held for at least 12 months, and if investors cash them in before holding them for five years, they will lose one quarter's worth of interest as a penalty. Therefore, investors must carefully consider their investment time horizon and ensure they are comfortable with the potential penalties associated with early redemption.
What Made I-Bonds A Good Option?
I Bonds gained a lot of attention last year as the U.S. inflation rate spiked and the variable interest rate I Bonds earn rose to a peak of 9.62%, which significantly exceeded the interest rate you could earn in a savings account, a money market, or a CD even if you had to forfeit a quarter's worth of interest. Last June, we wrote a blog post about why you might have wanted to consider using excess cash to purchase I Bonds. If you want more context, please read our blog: Should You Add I Bonds to Your Portfolio.
I Purchased I Bonds Last Year; What Now?
The inflation rate has declined from last year's peak, as have the yields on I-Bonds. The rate for bonds purchased between November 1, 2022, and April 30, 2022, was 6.89%. In May 2023, the composite rate for I Bond purchases was 4.30%. The 1-year T-Bill (Treasury Bill) rate was 5.06% as of May 25, 2023. Investors with shorter time horizons looking for a place to park some of their cash reserves may want to consider purchasing T-Bills instead of an I Bond.
Investors that purchased I Bonds last year should mark their calendar for the date they cross over the 15-month holding period. Then, compare the rates on the I Bond with the rate on T-Bills and determine if it makes more sense to continue with the I Bond or redeem it and purchase T-Bills.
In summary, I Bonds can be a safe and attractive investment option for investors looking to earn a return while protecting their principal from inflation over the long term, especially now that the fixed portion of the rate is 0.9%. However, keeping an eye on the inflation and interest rates and adjusting your investment strategy as necessary is essential.
Don't hesitate to contact us with further questions regarding I Bonds and your portfolio.
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