I Bonds – are they a good deal?

What is an I Bond?

An I Bond, or a Series I Savings Bond, is a Treasury Bond that is adjusted each six months for inflation. As inflation has surged in recent months, they have gotten a great deal of attention.

  • You purchase the bonds directly from the US government
  • There is a purchase limit amount of $10,000 per year
  • The yield is comprised of two components: a fixed rate and an inflation adjustment. The fixed rate is set for the life of the bond. The bond’s inflation adjustment rate is reset every six months after purchase.
  • Liquidity restraints apply. You can’t access your money for one year after purchase. If you withdraw the money within five years of purchase, you lose the last three months of interest, and won’t receive the full interest rate on your investment.
  • The price you pay is the face value of the bond. If the face value of the bond is $100, you will pay $100 for it.

As of May 2022, the current rate for an I Bond is 9.62%, and this rate will be reset in October.

What are the potential benefits?

  • I Bonds are a type of Treasury Bond, which are high quality instruments backed by the full faith of the US Government. The credit risk is generally lower than buying a corporate bond or a high yield bond.
  • Because they are adjusted for inflation, they offer a higher rate of return than having the money just sit there in a CD, checking or savings account, earning a negligible rate of interest.
  • If you are looking for a lower risk investment that will help you to counteract the effects of inflation, and you are willing and able to hold it for the prescribed amount of time, they may be worthy of consideration.
  • The bond’s redemption value never changes.

What are the risks?

  • This is a long-term investment. I Bonds should not be used for money that may need to be drawn upon immediately, or for the next five years. As per the lock up provisions stated above, your money will either be inaccessible or will fail to reap the full return should you need it any earlier.
  • As with any investment, there is risk of loss of principal.
  • With a $10,000 maximum investment amount, it won’t be a large portion of your portfolio if you hold a large amount of assets.
  • Although its redemption value never changes, the semi-annual inflation rate may vary. In times of deflation, this may lead to a lower rate of interest being paid and/or accrued over time.

This information is general in nature and can not be interpreted as a recommendation specific to any one individual. Only an in depth analysis of your goals and risk tolerance can determine if any investment is suitable for you. If you have inflationary concerns, there are other ways to counterbalance this exposure. It starts with a conversation about your financial plan, objectives, and investment strategy. If you would like to discuss, let us know.

-Judd

Sources

TreasuryDirect. Series I Savings Bonds Rates and Terms: Calculating Interest Rates. Retrieved on May 19th, 2022 from from https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#now