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The U.S. Department of the Treasury on Tuesday announced Series I bonds will pay 6.89% annual interest through April 2023, down from the 9.62% yearly rate offered since May.
It’s the third highest rate since I bonds were introduced in 1998, and investors may lock in this rate for six months by purchasing anytime before the end of April.
“The rate of 6.89% is another very competitive rate for the I bond compared to other conservative alternatives,” said Ken Tumin, founder and editor of DepositAccounts.com, that tracks I bonds, among other assets.
Backed by the U.S. government, I bonds don’t lose value and earn monthly interest with two parts: a fixed rate, which stays the same after purchase, and a variable rate, which changes every six months based on inflation.
While early estimates for the I bond rate were 6.48%, the new rate includes a 0.4% increase for the fixed portion of the rate, based on higher Treasury Inflation Protection Securities yields, Tumin explained.
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TreasuryDirect announces new rates every May and November.
On Oct. 28, TreasuryDirect crashed as investors rushed to meet the deadline to lock in the 9.62% annual rate for six months. A department spokesperson said the traffic put “significant pressure and strain on the 20-year-old TreasuryDirect application.”
Despite technical issues, TreasuryDirect sold a record $994 million of I bonds on Oct. 28, nearly as much in a single day as were sold in three years from 2018 to 2020.
While the current I bond rate may be attractive, experts point to several downsides.
One of the trade-offs is you can’t touch the money for at least one year, and you’ll lose the previous three months of interest if you redeem before five years.
Another drawback is lower future returns, explained certified financial planner Christopher Flis, founder of Resilient Asset Management in Memphis, Tennessee.
Depending on future inflation, the variable portion of I bond interest may adjust down again in May. Aiming for 2% inflation, “the Federal Reserve is not going to rest until that number comes down,” he said.
And as interest rates increase, the difference in yields between I bonds and other government-backed assets, such as the 2-year Treasury, is getting smaller. “The relative attractiveness of these assets is dwindling,” Flis said.
Even with excess money after covering other financial priorities — no credit card debt, an emergency fund, and your 401(k) match — Flis wouldn’t pick I bonds as the next option.
“Long-term investors, specifically younger ones, should really be looking to the stock market for the backbone of their portfolio,” he said. “Certainly not I bonds.”