Inflation is falling. Do Americans still need their I Bond protection? Experts weigh

I bonds are no longer the darling of investors since the Federal Reserve raised interest rates 10 times in a row to calm inflation.

The interest rates on the I bonds, which are fixed twice a year on May 1 and November 1, are based on a fixed rate and a variable rate which changes with inflation. Last year, as inflation hit a 40-year high peaking at 9.1% in June, I bonds paid as high as 9.62%. Americans flocked to them because this return was far better than the losses suffered by investors in the bond and stock markets last year and better than the relatively tiny interest rates offered by banks for deposits.

Since then, inflation has dipped below 5%, bringing the May I bond rate down to 4.3%, below the benchmark short-term federal funds rate from 5% to 5.25%, and investors of more than 5% can obtain risk-free short-term treasury bills. , the financial advisers said.

“You can get better short-term rates now,” said Tom Balcom, adviser at 1650 Wealth Management. “Even most brokerages have a high-yield money market fund yielding close to 5%.”

Money market funds invest in short-term debt securities such as US Treasury bills and commercial paper and pay investors income in the form of dividends.

Why people bought I bonds last year: Worried about the Fed rate hike? Savers can fight back with these 9.6% inflation-resistant U.S. bonds

What is an I-link and how do they work?

It’s a 30-year Treasury bond that protects you against inflation. It pays both a fixed interest rate and a rate that changes twice a year with inflation.

Interest is compounded semi-annually. This means that every six months a new interest rate is applied to a new principal value equal to the previous principal plus interest earned over the last six months. The value of the bond increases because it pays interest and because the principal value increases.

You can buy for $10,000 from the treasury and another $5,000 using your tax refund.

You will never lose money by holding an I bond until maturity.

You will never lose money by holding an I bond until maturity.

How big was the I bond market last year?

More than $32.3 billion of I bonds were purchased from the Treasury last year, according to its data. That was about $5 billion in 2021.

Nearly $6.8 billion of I bonds were purchased in October alone, with demand so high that the Treasury website crashed.

Can I raise bond rates further?

Bond yields may rise again if inflation resumes climbing, but they are unlikely to hit 2022 highs. Most economists and the Fed expect inflation to continue to rise. cool down.

If inflation slows further, as expected, the I bond rate of 4.3% could fall further when the Treasury issues its next I bond rate in November.

What happens if I continue to hold my I bonds?

You will never lose money by holding an I bond until maturity. The interest rate cannot fall below zero and the redemption value of your I bond cannot fall.

“If you don’t know if inflation has come down completely because there are still problems – like wages and gas are still high … you can keep holding them to see how it goes,” John Bergquist , a managing member of Lift Financial, said. But he cautioned, “if the rate ends up being repriced and goes down 2 or 3 (percentage) points, then at that point it might not be worth it.”

What is a better investment than I bonds right now?

Unlike last year, many investments offer a better yield than I bonds. Online savings accounts earn interest between 4% and 5%; short-term Treasuries are offering more than 5% and the stock market, as measured by the benchmark S&P 500, has returned around 11% so far this year.

Treasury bills paying the same or more than I bonds are particularly attractive. “They’re 100% liquid,” Bergquist said. “You could sell them any day, instead of having to keep them for a year or more.”

You can cash in I Bonds after 12 months, but if you do so in less than five years, you lose the last three months of interest.

Advisors also suggest short-term bond floating-rate exchange-traded funds, which invest in short-term bonds whose payouts increase as interest rates rise. Since fluctuations in payments explain the rise in rates, floating rate bond prices remain fairly stable.

In contrast, the prices of fixed-rate bonds generally fall to bring their yield more in line with higher market interest rates. Prices and yields of fixed rate bonds have an inverse relationship.

But floating rate ETFs “can keep you invested in the bond market, rewarding investors with higher returns when the Fed raises rates, rather than trying to time the market and wait for the ‘good’. “time to invest in bonds,” wrote brokerage firm Charles Schwab in a report.

Note that there is a wide range of floating rate ETFs. Some invest in corporate bonds, which can be riskier, but others invest primarily in safe treasury bills.

“For short-term cash, don’t take the risk,” said Balcom, who likes the WisdomTree Floating Rate Treasury Fund and the JPMorgan Ultra-Short Income ETF.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.

This article originally appeared on USA TODAY: I bonds are unattractive as inflation falls and rates rise: Advisors

Leave a Comment