Though the potential return of U.S. Treasury I-bonds as a long-term investment is no sure thing, Americans are voting for them with their wallets: Billions of dollars of these formerly obscure securities were sold in 2022, including in a last-minute rush at the end of October of that year to capture them at a rate of 9.62%. The demand was so robust that it knocked the website for TreasuryDirect, the only place these bonds can be bought, offline at times.
Of course, you can get them just fine today, now that the rate they will pay for the next six months is down to 5.27%. That number is made up of two components: One is based on the government’s consumer price index (CPI) and one is a fixed rate — picked by the Treasury Department without further explanation — that will only apply to bonds issued November 1, 2023 to April 30, 2024: 1.30%. And that fixed rate is, well, fixed — unlike the variable inflation component, whatever the fixed rate was when the bond was issued, you’ll get paid that for as long as you hold the bond (and the term is 30 years).
So here’s an interesting twist, and possibly a consolation prize for anyone who didn’t manage to get I-bonds when they were paying a higher yield: those bonds paid a fixed rate of zero.
Why does this matter? Because the variable yield that makes I-bonds attractive now does swing — and, at times, offer investors no yield at all. This was the case for people holding bonds with a zero fixed rate during periods where inflation was flat (or even negative). This happened, for example, in 2015 and 2009. The Treasury Department publishes a chart tracking the historical payouts of I-bonds going back to 1998.
While it might seem unimaginable now as the Federal Reserve has continued to hike short-term interest rates and other rates including mortgages climb to levels not seen in decades, zero inflation or deflation could return. And if that happens, those who hold bonds bought between now and April 30 will continue to receive 1.30% interest, while holders of the 9.62% bonds will receive — at least so long as inflation is flat or negative — nothing.
And, again, if 1.30% seems laughably low, remember that only a few years ago, savers looking to certificates of deposit, savings accounts and other low-risk investments would have been darn happy with that. (Looking for safer returns outside bonds? You might consider the advantages of brokered CDs.)
First, I-bonds must be held for at least a year. There is no way to cash them before this period. And second, if you redeem them before five years from the time they were issued, the last three months of interest is lost. How big a hit is that? Payne says that would reduce their yield for that year by about a percentage point given future estimates of what inflation is likely to be.
Another key issue: There’s a limit of $10,000 a year to how much you can buy (and there are ways around that, too.) In case you haven't noticed, I-bonds are complicated! Whether you’re a lucky holder of a 9.62%-rate I-bond or still thinking of purchasing now, check out our FAQ, What Are I-Bonds.
In his former role as Senior Online Editor, David edited and wrote a wide range of content for Kiplinger.com. With more than 20 years of experience with Kiplinger, David worked on numerous Kiplinger publications, including The Kiplinger Letter and Kiplinger’s Personal Finance magazine. He co-hosted Your Money's Worth, Kiplinger's podcast and helped develop the Economic Forecasts feature.
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