I-Bonds: What You Should Know

By Jonathan Harper on April 25, 2022

With market volatility abounding and nowhere to hide in the stock market or the traditional bond market during this recent inflationary period, investors are constantly seeking new ideas. Bank savings accounts provide investors little interest, so the US Treasury’s inflation-adjusted savings bonds, better known as I-bonds, have recently become an interesting alternative. Since a number of clients have asked about this option, we thought it prudent to answer your questions and provide useful information. 

These savings bonds offer a floating interest rate, fully backed by the US government, that rise and fall with the Consumer Price Index (CPI). The interest rates are reset every six months, in May and November. The rates the bonds pay are calculated using a fixed interest rate plus a semiannual CPI inflation rate. Right now, they are paying 7.12% annually, with rates expected to rise to 9.6% in May. Sounds enticing. So, there has to be a caveat, right?

There are restrictions on these instruments that render them inadequate for many investors. First, there is a maximum investment of $10,000 per person per year (or $15,000 if you put $5,000 of last year’s tax return towards this). If you own a Trust, you can invest another $10,000 in the name of the Trust. However, I-bonds are illiquid for the first twelve months of the holding period, and if you redeem the position within the first five years, you forfeit the final three months’ worth of interest. Also, I-bonds cannot be held in your brokerage accounts with us. You must establish an account directly with the US Treasury on the TreasuryDirect website, and file an additional 1099 tax form each year. Finally, in reference to the interest rates highlighted above, there is a chance these rates reset lower in November, assuming inflation has peaked and consumer demand slows, which would mean the final six months of your first year’s interest could be significantly lower than currently advertised. For reference, as recently as 2015, I-bonds were paying 0% as the US experienced deflation.

That said, if you don’t need your cash for the next year (at minimum), and know that you have adequate emergency funds after taking into account this potential $10,000 investment, I-bonds may be a good fit for you. We’d be happy to discuss your individual situation and determine whether these are right for you. Making sure your cash is in play – that’s HMA!