I bonds are all the rage right now. Are they a good choice for your wallet?

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Check out the bonds that make debt investing sexy!


Key points

  • I bonds are US government debt securities that pay a rate linked to inflation.
  • High inflation rates have driven I bond yields to close to 10%.
  • With uncertain returns and extended holding requirements, I bonds are far from perfect savings vehicles.

Seemingly overnight, Series I Savings Bonds (known as I Bonds for short) became the talk of the town. What are I bonds and why are they experiencing a renaissance? Keep reading to find out.

What is an I bond?

At its core, an I bond is just another version of debt issued by the US Treasury. However, their power to grab headlines lies in one thing: variable interest rates. Unlike a traditional bond, where rates are fixed until maturity, an I bond’s interest rate is calculated by adding a fixed rate to the inflation rate. This means that when inflation is up, so are the interest rates offered on I bonds.

There are a few other things you should know about I-bonds. First, they mature in 30 years, but can be redeemed without penalty after a five-year holding period. I Bonds cannot be redeemed until 12 months after purchase. I bonds are issued in penny amounts, plus $25. This means that you can buy an I Bond worth $25.01 if you wish. Additionally, any U.S. citizen or resident who has a Social Security number can purchase I Bonds, and they can be purchased or gifted to children. However, eligible buyers can only buy a limited number of I bonds per year.

As mentioned above, the most distinctive feature of an I bond is its interest rate, which increases with inflation. And for those who live under a rock: inflation is high right now. Currently, inflation rates are above 8%, well above the 2% average. In this context, interest rates on I bonds have reached considerable heights. Currently, I bonds yield 9.62%.

This is a big problem due to a mismatch between risk and reward. As a general rule, a high reward, such as a high interest rate, cannot be obtained without taking a commensurate risk. So when the US Treasury, one of the “safest” debtors, offers returns close to those of the stock market, investors tend to take notice.

Looking for current rates? Discover our best CD prices.

Before buying…

Although interest rates may currently be high, there is no guarantee that they will remain so. Bond rates are recalculated every 6 months, so an interest rate of 9.62% today does not mean a rate of 9.62% in the future. In an economy where interest rates typically hover around 2%, a return to normal will also mean a return to lower rates on I bonds.

And if you’re not careful, you’ll be stuck with those rates for a while. I bonds must be held for one year before they can be cashed in, if the rate drops dramatically. And cashing in before 5 years has passed has a high cost – a three-month interest discount to the value of the bond. Buying an I bond means you’re locked in for a few years or you’ll be forced to pay the price.

U.S. citizens and residents can only buy $10,000 of I bonds in any given year, which means relatively low-risk, high-yield I bonds probably won’t make or break your account. ‘investment. Although I bonds are currently a very attractive investment, buyers should consider their ability to weather future rate changes and hold to them for the long term before buying.

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Garland K. Long