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Q&A: Should I consider investing in U.S. Treasury Series I Bonds?

Series I Bonds

Interest rates remain at historically low levels. While we expect the Federal Reserve to start a path toward higher interest rates in March, we are also experiencing high inflation. This can put a strain on those focused on generating current income from their investments. US Treasury Series I Bonds (or I Bonds) are one investment option we are often asked about in these markets.

WHAT ARE I BONDS?

I Bonds replaced the old Series EE Savings Bonds that were issued in paper form. Unlike the Series EE bonds, these bonds pay interest based on a fixed interest rate and an inflation component. The fixed rate for I Bonds is set at issuance and does not change over the life of the bond. This is separate from the inflation component that is changed on a semi-annual basis following the first 6 months of the investment.

WHAT IS THE CURRENT INTEREST RATE OF I BONDS?

The current 7.12% interest rate is based on the current inflation rate and applies for the first 6 months of the investment. It then resets semi-annually based on the inflation rate. The current “fixed rate” on bonds issued today is 0.0%. The rest of the interest is coming solely from the inflation component, which could go up or down over the next few years. I Bonds interest rate will never go below zero, but could decline to zero in a deflationary period.

OTHER CONSIDERATIONS:

  • Bonds do not pay periodic interest. Rather, interest is added to the face value of the bond and paid at maturity or when redeemed.
  • Bonds accrue interest for 30 years.
  • You cannot redeem the bonds in the first 12 months. If you redeem the bonds within the first 5 years, you will pay a penalty of 3-months’ interest.
  • You may redeem I Bonds after 5 years without penalty, providing you with the face value of the bond plus any accrued interest.
  • There is a $10,000 per year investment limit (per social security number), with an additional $5,000 allowed if you choose to receive your tax refund in I Bonds.

While the current interest rate for I Bonds is attractive, there is no guarantee that you will earn anything near that level going forward. This is especially true if inflation begins to ease over the next year, or at least the near term. The inflation adjustment over the last several years has been between 0.70% and 1.2%. If inflation settles back to 3% you may still earn a decent yield, but would have to hold the bonds for 5 years to avoid penalty.

Given the amount you can buy is limited to $10,000 a year, the amount of interest you earn is also somewhat limited. Another caveat is that you must purchase and redeem these bonds directly from Treasury Direct www.treasurydirect.gov. Much like the old savings bonds, these are attractive investments, but are probably best geared towards long-term savings for individuals and as gifts for children, grandchildren, etc.

QUESTIONS?

Should you have additional questions about US Treasury Series I Bonds, please click here or contact your Wealth Management Advisor.

For additional information, go to TreasuryDirect.Gov or click here.

Author: Kevin Riley | Wealth Management Advisor
Written: February 15, 2022