Savings bonds are as old a monetary tool as you’ll find, but one type in particular is having a real moment lately, with a 7.12% interest rate locked in until April.
Between a stumbling stock market and inflation that soared to 7.5% in January for the biggest year-over-year gain in four decades, Series I inflation-protected savings bonds sparked new interest from savers and investors. “I bonds are something that haven’t made the headlines in years,” says Collin Martin, director of fixed income at the Schwab Center for Financial Research.
“And then when you see a rate at 6%+, you suddenly see a lot of interest from investors, so we get a lot of questions there.”
“Investors are hungry for any safe investment that offers a good return,” says Bridget Jones, founder and coach of Smart Sister Finance, a financial education resource for women. “Concerns about inflation make investments like Series I bonds attractive.”
With an interest rate above 7% through April 2022, Series I Savings Bonds suddenly offer a guaranteed return in line with conservative expectations of what investors can expect from the stock market based on its performance at over the past 50 years. To determine if a Series I savings bond is right for you, here’s what you should consider, according to three experts.
What are Series I Savings Bonds?
Federal savings bonds do not normally offer high yields. Series I savings bonds, however, are tied to the rate of inflation, so they offer an opportunity right now.
“A 7.12% return is way above what’s available on a CD of any length at this point,” Jones says, referring to certificates of deposit, in which your money stays in an account for a period of time. defined period of time. CDs currently offer yields generally below 1%.
And there’s a security that comes with buying a Series I bond. “It’s for investors looking for security and inflation protection, because it’s backed by the US government.” , says Martin.
I bonds pay interest for 30 years, as long as you don’t cash them in first. You must keep them for at least a year, and if you redeem them after less than five years, you lose the previous three months of interest. This means that bonds make more sense if you can afford to put money aside for the long term. The Treasury Department offers a savings bond calculator on its website where you can run the numbers to see how much you can earn over time.
Bonds are particularly attractive to investors looking for something safe that can help balance inflation. “We have experienced historic levels of inflation, and I bonds are inflation-protected, making them a popular choice for investors to protect their purchasing power in the future,” says Kevin Matthews II , MS, former investment advisor and author of “Starting Point: How to Build Wealth That Lasts.” “This protection has been a priority given our financial environment.”
Series I Savings Bond Rates vs. Inflation
Series I savings bonds adjust to protect the dollar value of principal against erosion due to inflation (hence the “i”, which stands for inflation). The bonds were first issued in 1998 and consist of two parts:
- Basic rate: Fixed for the life of the bond
- Floating rate: Changed regularly, depending on inflation rate
Together, these rates are expressed as a composite rate, currently 7.12%. Historically, inflation has had a negative impact on bonds because it reduces future value at maturity, Matthews says. “I bonds solve the inflation problem by fixing their interest rates based on the consumer price index,” he says. “For example, if inflation rises to 7%, then I bonds will adjust their rate to pay just a little above that amount to attract investors.”
When will the Series I interest rates be updated and how will that change?
Most of the current yield on Series I savings bonds is tied to the variable portion of the rate, which can change every six months, Jones says.
“The Series I bonds that are currently being issued have a fixed interest rate of 0%,” says Jones. “The entire 7.12% interest rate currently offered is based on the current inflation that the US economy is experiencing and is intended to offset it.”
The next adjustment period begins in early May 2022, after the Federal Reserve is expected to start raising interest rates in March to help contain inflation. If the Fed’s attempts are successful and interest falls, the interest rate offered by Series I savings bonds is likely to drop, Jones says.
“Note that although the inflation rate is adjusted in May and November, the interest rate on your particular bond will be updated on a six-month schedule, based on the issue date,” says Jones. . “If the yield on Series I bonds becomes less attractive over time as interest rates rise on regular savings accounts or CDs, you have the option of selling the bond after holding it for a year. Just remember the penalty for selling before five years.
Although you want to prepare for lower returns, maybe even 1% in a few years, chances are you can still enjoy the higher rate for a little while, says Martin. “Given the next reset is two months away, it’s likely to reset to another high: 7%, 6%, 8%,” he says.
Comparison of Series I bonds with the stock market
If you’re looking to diversify your portfolio in a lackluster stock market right now, you might consider Series I bonds a safe, long-term investment with a reliable return.
For most people, investing in low-cost index funds for the long term is the best path to financial independence. Experts tend to recommend index funds because they help you diversify rather than risk the ups and downs of a stock, bond, or security, and they tend to have lower fees than other funds, so you can keep more of your earnings.
The 7.12% yield on Series I bonds brings them closer to traditional stock market returns, which typically average about 10% per year over the long term. And with bonds offering a similar yield at least for the foreseeable future, some people might consider devoting a portion of their portfolio to this more stable investment.
Are Series I bonds right for you?
To determine if I bonds are right for your portfolio, you’ll need to consider a few things in addition to whether you can wait five years to avoid an interest penalty.
“If you’re a security-seeking investor who traditionally uses CDs or money market funds, considering an I-bond is a logical answer,” says Martin. “It’s diversification for your diversification. You hold a money market fund or CDs or treasury bills to help offset risk elsewhere, and that’s another piece of that puzzle.
With a return of 7.12% from November 2021 to April 2022, Series I Savings Bonds are a means of combining performance and safety.
They can also work well if you want a little break from the stock market. “If you look at the market today and you’re frustrated and you don’t know where to put your money, but you’re looking for safety, it’s almost like a set and forgotten type of investment,” says Martin. . And while you have to set them up separately from your other accounts, that can be a good thing. “You kind of forget about it, knowing you’re protected from inflation if it keeps going up.”
The I bond probably isn’t suitable if you’re a high net worth investor because of the $10,000 maximum, Martin says. “It’s not going to impact a wallet as much as it does for someone whose $10,000 is a big percentage,” he says, adding that it’s a question of whether it’s worth opening. a Treasury Direct account to invest a small sum.
It also might not be a good choice if you need immediate feedback. “The way interest works, it adds to the principle and then you get that lump sum at maturity or when you decide to redeem,” he says. “For many retirees who rely on semi-annual payments from their bond holdings,” Bond I does not provide that income.
How to Buy Series I Bonds
You can go to TreasuryDirect.gov to buy a Series I bond. Keep in mind that there are some restrictions.
The minimum purchase amount for an electronic deposit is $25. If you want paper bonds, they must be purchased in denominations of $50, $100, $200, $500, and $1,000.
You can only buy up to $10,000 in e-bonds per calendar year, but you can use your tax refund to buy up to an additional $5,000 in paper bonds, bringing your potential total to $15,000 by Social Security number each calendar year, Jones says. “Even with these caps and limitations on purchases, the Series I bond is an attractive way to earn high interest on an incredibly safe investment backed by the US government,” she says.