Series I savings bonds have gotten a lot of attention in the last two years and have certainly performed well.
The I bonds currently being sold carry an interest rate of 6.89%. But the rate may not be so attractive in the future. There are two components to the total interest rate on I bonds: a fixed rate and a rate that adjusts every six months to match inflation.
The bonds available from now until April have a fixed rate of 0.4%. The rate of adjustment to inflation is 6.49%. That rate is calculated every May 1 and November 1, using the consumer price index for the last six months. Combining the two interest rates gives you 6.89%.
When inflation was rising, up until June, that was a good deal for I bondholders, as their inflation-adjusted rate shot up. But after peaking in June at an annual rate of 9.1%, CPI inflation slid to 6.5% in December.
And the inflation-equivalent interest rate of 6.49% for I bonds captured part of that drop. This compares to 9.62% for the six months through October.
Future inflation is the key issue
So now the issue is what will happen to inflation in the future. With a fixed interest rate of just 0.4%, today’s bond is almost entirely dependent on the inflation-matching interest rate to provide a decent return.
Inflation is likely to continue to fall, so interest payments on the bond are likely to continue to fall as well. Of course, inflation is gradually falling, so the yield could remain attractive for some time.
I-bonds last 30 years, and the current full interest rate of 6.89% compares to 3.65% for a 30-year Treasury, which isn’t much of a competition.
Plus, you can redeem your I-bonds after you’ve held them for one year. If you redeem them before five years, you will lose your last three interest payments.
But the only reason to redeem them would be if your interest payments fell precipitously. So in that case, you wouldn’t be losing a lot of money in interest anyway.
I bonds are still attractive to many investors, but less so. I bought I bonds myself in 2021 and 2022.
But I won’t be buying any more, partly because of the problem I just mentioned and partly because I want to put my investable cash in a retirement account.
