Series I Bonds and Their Current Returns
Series I bonds are a popular investment option for those seeking inflation protection and minimal risk. Over the past year, there has been an unprecedented demand for Series I bonds, a type of investment that is both inflation-protected and almost risk-free. However, despite high demand, the rates for these bonds have been declining steadily over the past year. According to experts, the yield is expected to drop again in May, with newly purchased I bonds currently offering 6.89% annual returns through April.
Inflation Data and Its Impact on I Bond Rates
The yearly rate for I bonds may fall below 4% in May based on the latest consumer price index data. Although annual inflation rose by 5% in March, down from 6% in February, according to the U.S. Department of Labor, Ken Tumin, founder, and editor of DepositAccounts.com, a website that tracks these assets, expects the variable portion of the I bond rate to drop to 3.38% in May. Meanwhile, the fixed portion of the rate, currently at 0.4%, may increase a little in May, but Tumin does not expect much movement.
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Historic Returns of Series I Bonds
If the fixed rate remains at 0.4%, the new annual rate may drop to 3.79%, Tumin said. Although this would represent “a pretty big fall from the previous rates,” it is still “above average” compared to historic returns. Backed by the U.S. government, I bonds earn monthly interest with two parts: a fixed rate and a variable rate.
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Factors Affecting I Bond Rates
The variable portion of the rate changes every six months based on inflation, while the fixed rate may adjust every six months for new purchases but stays the same after buying. The U.S. Department of the Treasury announces new rates every May and November, based on inflation data from the past six months.
Alternatives for Short-Term Savings
While the new I bond rates may still appeal to longer-term savers looking to preserve purchasing power, they may no longer be attractive for investors seeking yield just for a year or two. As a result, options such as Treasury bills or certificates of deposit have emerged as relatively safe alternatives for shorter-term savings. As of April 12, the top 1% average of one-year certificates of deposit were paying 5.19%, according to DepositAccounts. Three-month and four-month Treasury bill yields were also above 5% as of April 12.
The Appeal of I Bonds for Longer-Term Savers
David Enna, founder of Tipswatch.com, suggests that the new I bond yields may still be appealing to longer-term savers looking to preserve purchasing power. These investors are often more focused on the inflation protection aspect of I bonds than on the yield. By investing in I bonds, these savers can hedge against inflation and ensure that their money maintains its value over time.
Why Interest in I Bonds is Shifting from Yield to Inflation Protection
Enna believes that the recent surge in interest in I bonds was due to the high yields offered over the past year, which attracted investors seeking yield rather than just inflation protection. However, as rates are expected to decline, Enna expects the focus to shift back to investors looking for inflation protection. While I bonds may no longer be as attractive to short-term investors seeking high yields, they still provide an excellent way for longer-term investors to protect their purchasing power against inflation. With a low-risk investment like I bonds, these investors can avoid the volatility of the stock market and ensure that their savings keep pace with inflation over the long term.
Should You Purchase I Bonds Before May to Lock in High Yields?
For those investors who are willing to lock in current rates before they decline, purchasing I bonds before May can still provide an opportunity to earn high yields for six months. However, it’s important to keep in mind that after the initial six-month period, the variable rate on I bonds will adjust every six months based on inflation data, so future yields are not guaranteed. Despite the expected decline in I bond rates, you can still lock in 6.89% annual returns for six months by purchasing I bonds before May. Enna suggests buying I bonds before April 27, a few days ahead of the rate announcement, for those eager to capture the 6.89% yield.
Balancing Risk and Return
While the I bond rate is expected to fall below 4% in May, it still offers above-average returns compared to historic rates. Longer-term savers looking to preserve purchasing power may still find I bonds appealing, despite the decline in rates. For shorter-term savings, alternatives such as Treasury bills or Certificates of Deposit (CDs) may be a more attractive option, with some offering higher yields than the expected I bond rate in May. However, those looking to lock in the current 6.89% annual returns should consider purchasing I bonds before May.
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