Even at a lower 6.89%, I bonds aren’t losing their sheen anytime soon

Even after the slash in its interest rate, an inflation-proof government bond remains a sound investment.

As of yesterday (Nov. 1), the US treasury department announced that Series I bonds will pay 6.89% annual interest through April 2023, down from the record 9.62% yearly rate offered since May. While it’ll yield a lower return, lending the US government money and making an interest on it is seen as one of the least volatile investments.

Here’s how I bonds work: “I bonds protect you from inflation because when inflation increases, the combined rate increases,” the treasury department explains. No wonder it’s become more popular in the last couple of years as inflation hit 40-year-highs. And when there’s deflation, the state department doesn’t let the combined rate turn negative—they stop it at zero.

Once someone purchases the bond, their interest is locked in. That explains the mad rush to secure the higher rate at the end of last week, which led to the TreasuryDirect website—the only place to buy the bonds online—repeatedly crashing. Over 730,000 new accounts were created in October, of which over 95,000 were opened on Friday (Oct. 28) itself. Despite the glitches, TreasuryDirect sold a record nearly $1 billion on the day—nearly as much in a single day as were sold in three years between 2018-2020.

While lower than the last I bond rate, an interest rate of 6.89% is not bad at all. Especially when you compare it to the average 0.16% interest savings accounts deliver, or the low single digits certificates of deposits (CDs) offer.

How is the I Bond interest rate calculated?

The I bond rate is combination of two rates revised every May 1 and Nov. 1:

the fixed rate that stays the same for the life of the bond. (It’s unclear how this rate is chosen but experts believe it has something to do with demand and the yield from Treasury inflation-protected securities.)
the inflation rate, which is based on the non-seasonally adjusted Consumer Price Index for all Urban Consumers for all items, including food and energy.

datawrapper-chart-KuhMM

How many I bonds can I buy?

Individuals can spend up to $10,000 buying I bonds on TreasuryDirect. An additional $5,000 from federal tax returns can also be spent on purchasing paper bonds, which are available in denominations of $50, $100, $200, $500, and $1,000.

Pros and cons of I bonds

I bonds are one of three prominent savings methods governments offer citizens. The other two are Treasury Inflation Protected Securities (TIPS) and EE bonds. So how do you decide if I bonds are the best fit for you? Here are some things to consider about I bonds:

🙋‍♀️ The principal amount is always protected.

🙅‍♀️ You can’t cash out for 12 months…

🙋‍♀️ …but after that you can cash out at any time before the bond matures in 30 years (but before five years, you’ll have to forego the last three months of interest as penalty).

🙋‍♀️ Partial withdrawals are allowed for online I bonds…

🙅‍♀️ …but not for paper bonds.

🙋‍♀️ The bonds can be tracked on the website, and there’s a calculator for the paper bonds.

🙋‍♀️ The only tax you pay on I bonds is a federal one, which can be deferred until you redeem them or they expire. EE bonds, which guarantee your investment will at least double in 20 years, also follow a similar tax model. But with TIPS, you pay tax on accrued inflation adjustments every year.

🙆‍♀️ There’s no room for middlemen. I bond purchases have to be done by individuals. In contrast, TIPS is more liquid because it can be bought and sold in the secondary securities market via banks, brokers and dealers.

🙆‍♀️ For I bonds, investments are capped, whereas TIPS have virtually no purchase constraints. “Some investors find this amount too small to make a difference in their asset allocation,” according to Tipswatch’s David Enna, a longtime journalist who has been investing in such bonds since 1999. “However, an investor using multi-year purchases can build a substantial stake in I Bonds.”

One more thing: Using I bonds for education

Those who fulfill seven stringent criteria laid out by the treasury department—including age and income parameters as well as making sure the educational institute qualifies—may be eligible for an education exclusion. But is that reason enough to invest?

“Series I bonds may make a compelling choice to pay for educational expenses this year or next, but the real test will come over time. For the Series I bond to remain a compelling investment for education, inflation will need to remain high, a situation that the Federal Reserve is actively combating,” financial publication Bankrate warns. “So, while the Series I bond may remain attractive for the next few years, it’s unlikely to be a solid long-term solution for those looking to pay for the always-rising costs of college.”

How is the I Bond interest rate calculated?

How many I bonds can I buy?

Pros and cons of I bonds

One more thing: Using I bonds for education

Related stories