Series I bonds are back to being the best game in town for interest rates on cash, and that should probably scare people a little bit.
“It shows that inflation can be unpredictable,” said Ken Tumin, co-founder of Deposit Quest, an I-bond watcher and buyer. “It makes sense to hedge bets, and then you could get a surprise on the upside in the future.”
The latest I-bond rate reset on May 1 has a fixed component of 0.9% and a half-year inflation part of 1.67%, which combines for an annualized return of 4.26%.
If you’re thinking about buckling up for safety, now would be a good time to jump into I-bonds. However, there are some restrictions. You are locked into an I-bond for a year, have a purchase limit of $10,000 per individual per calendar year and lose the last three months of interest if you cash out before five years.
Even with the restrictions, that deal is currently better than a 1-year Treasury bond or a bank CD, which come in at around 3.75% to 4%. Also, are better than many money-market and high-yield savings accounts. These are hovering around 4%, with some special deals that can push them higher but have conditions.
Tumin said that when he compares I-bonds to TIPS, he sees I-bonds winning most of the time. “With I-bonds, you can defer federal income tax on the interest until you redeem or until the 30-year maturity. That’s a pretty significant benefit,” he said. “The main downside is [that they are] limited to $10,000 per year for individuals. If you have a lot to invest, you need to go into TIPS.”
I-bonds as a signal
The reason I-bonds leapt to the front of the pack in 2022 is that interest rates were low, and then inflation jumped. That pushed I-bonds up just as other fixed-income products were sinking lower. The best time to buy for aggressive rate seekers was when I-bonds on the upswing crossed paths with everything else on the downswing.
Financial adviser Jeremy Keil, a podcast host and the author of a book titled “Retire Today,” sees potential for this again. “Technically, today’s I-bond rate is the best since the November 2022 rate, relative to 12-month Treasurys,” he said. He has calculated that I-bond rates are historically 1% higher than 12-month Treasury rates. “I would call today’s I-bond rate a ‘fair deal’ as opposed to 2023-2025, when it was a ‘bad deal.’”
Consider the Trend
No one knows what will happen next, but if trends continue, with inflation rising and interest rates falling, it could create a situation similar to 2022. Even if things remain static for a while, I-bonds could prove a good place to park cash for the foreseeable future.
“I-bonds are ‘trending up,’ which is similar to 2020, but not the ‘canary in the cave’ that the May 2021 rate was. At the time, it was better than the 12-month Treasury.
But another thing that’s different now is that the I-bond fixed rate is nearly a full percentage point. Whereas in 2022 it was 0%, and the whole headline phenomenon was caused by inflation. Buyers can get in now at a good rate and then hold that fixed rate as long as they hold the I-bonds they buy now. That means they’ll have 1% plus the inflation rate at every six-month interval. Basically, if inflation rises and interest rates drop, they’ll be getting much more than they would with other options.
“You won’t get rich, but this is a strong investment for preserving capital,” David Enna, editor of Tipswatch, a blog that covers fixed-income products.
A savings strategy, not a get-rich-quick scheme
These are not the kind of return numbers that most people are looking for compared with equities, but more than 4% on cash is good for retirees. Most I-bond experts recommend that people stay in this for the long haul. Which means developing a layered strategy for their nest eggs that protects the principal.
That strategy might look like a high-yield savings account for the money they need immediately. So, the next $10,000 (or $20,000 for a couple) would go into I-bonds to serve as a reserve for more than a year out. The rest of the fixed-income portion of their portfolio can go into TIPS, Treasurys or CDs.
“Definitely, high-yield savings accounts and CDs provide safety and simplicity,” said Tumin. “Rates are still high compared with what they have been.”
Long-Term
Looking out longer than three years is hard for McKay. “We’re hyper-short at the moment,” he said, and not just because of the situation with Iran. His firm started to see trouble at the end of 2025. They feared that if anything remotely trembled the market, it would cause aftershocks in the economy. Obviously resulting in higher inflation and lower interest rates. “Long-term bonds should be up 10%, but they’re not, because we have so much pressure on the debt.”
McKay pointed to a bright side for the overall economy. However, that may push I-bonds out of favor in the future for those just seeking the highest yield available at the moment. Long-term savers, however, can always use an extra 1% on top of the current inflation measure.
“With I-bonds that have a positive fixed rate, you’re guaranteed to stay ahead of it,” said Tumin. “Like in the last five years, you never know when inflation will jump up.”
Source: MarketWatch©
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