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If you are looking for ways to combat rising prices, I bonds, protected from inflation and almost risk-free asset, may now be even more attractive.
The bonds will pay 9.62% annual rate until October 2022, the highest yield since their introduction in 1998, the US Treasury Department said on Monday.
The rise is based on data from the consumer price index in March, with annual inflation rising by 8.5%, the US Department of Labor said.
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“This is a milestone for I bonds,” said Ken Tumin, founder and editor of DepositAccounts.com, which closely monitors these assets.
I bonds backed by the US government do not lose value and earn a monthly interest rate based on two parts, a fixed and a variable interest rate that changes every six months.
While the variable interest rate is 9.62% by October 2022, the fixed interest rate remains at 0%, according to the Ministry of Finance.
I bond is a great place for people to invest the money they don’t need right now.
Christopher Fleiss
founder of Resilient Asset Management
The fixed interest rate remains the same for the 30-year life of the bond, which means that someone who has bought I bonds with a higher fixed interest rate can beat inflation in at least six months, Tumin explained.
Although the flat rate is 0% since May 2020, it peaked at 3.6% in six months, starting in May 2000. You can see the history of both rates here.
How to buy I bonds
There are only two ways to purchase these assets: online through TreasuryDirect, limited to $ 10,000 per calendar year for individuals, or through a refund of federal tax to purchase an additional $ 5,000 in paper I bonds. Here are the redemption details for everyone.
You can also buy more bonds through companies, trusts or properties. For example, a married couple with a separate business can buy $ 10,000 per company plus $ 10,000 as individuals, for a total of $ 40,000.
Disadvantages of I bonds
One of the disadvantages of I bonds is that you can’t buy them for at least a year, said certified financial planner George Gallardi, founder of Coromandel Wealth Management in Lexington, Massachusetts. And if you cash them in five years, you will lose the previous three months of interest.
“I think it’s decent, but like everything else, nothing is free,” he said.
Another possible disadvantage is the lower future return. The variable portion of I’s interest rates can be adjusted downward every six months, and you may prefer higher-paying assets elsewhere, Gallardi said. But there is only a one-year commitment with a three-month interest rate if you decide to withdraw earlier.
However, bonds may be worth considering for assets outside of your emergency fund, said Christopher Fleece, CFP and founder of Resilient Asset Management in Memphis, Tennessee.
“I think the bond I is a great place for people to invest the money they don’t need at the moment,” he said, as an alternative to a one-year certificate of deposit.
As of May 2, the average return on savings accounts is below 1%, and most one-year CDs are below 1.5%, according to DepositAccounts.
“But bonds are not a substitute for long-term funds,” Fleiss added.
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