Are I-Bonds Still a Good Investment?

As inflation soared in 2021, so did the rate you could earn risk-free on government I-bonds. I originally wrote about the benefits of these in January of last year. Later in the year, the starting interest rate peaked at nearly 10%. There was so much consumer interest in buying them, that the treasury website crashed the day before interest rates reset lower.

With inflation starting to come down, I have gotten a few questions about whether these bonds are still attractive. I still think they are a good place to stash a limited amount of cash savings given that the alternatives do not pay as much. While treasury bond yields have risen sharply, they are still lower than I-bonds. Below are the yields of each as of December 22nd, 2022.

In addition to offering yields of 2+% higher, there is no price volatility in owning I-bonds, as you are simply paid the stated yield.

However, there are a few drawbacks to the I-bonds.

1 – You can only buy up to $10,000 per year. There is no cap on Treasury bond purchases.

2 – You cannot access the funds for 1 year. Treasury bonds are very liquid and could be accessed if needed.

3 – If you cash it out within the first 5 years, you lose the last 3 months of interest. In my opinion, this is not a huge drawback because you can keep the I-bond if inflation is high and then redeem it once inflation is low, which means the interest lost in the last 3 months will generally be minimal.

4 - Lastly, the interest rate resets every 6 months in May and November to current inflation levels. Treasury bond rates also adjust, but the price typically increases when this happens, which can be a buffer against lower rates. If you are looking to time the bond market, which I would advise against, I-bonds could potentially offer a lower total return than treasuries if interest rates drop.

Despite these drawbacks, I still think it is a great place to stash a small amount of cash savings that you will not need in the next year.

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.