For iBonds issued from November 2023 to April 2024, the current composite interest rate guaranteed by the U.S. Treasury is 5.27%. Investors should keep in mind some of the limitations and conditions of iBonds before investing, but as inflation has continued to grow, this could be an attractive option for the fixed-income portion of your portfolio. Consider working with a financial advisor as you seek capital appreciation or capital preservation in a high-inflation environment.
What Are iBonds?
Known as the Series I Savings Bonds, or iBonds for short, the Treasury created them in 1998 as a way to help savers deal with inflation. They come in durations that range from one year to 30 years. This bond has two interest rates, both of which are adjusted every May 1 and Nov. 1: a fixed rate and an inflation rate that’s linked to the Consumer Price Index for all Urban Consumers (CPI-U).
The interest earned every six months is added to the value of the bond’s principal. In May and November, the Treasury adjusts this bond’s inflation rate to bring it in line with the latest CPI-U reading. Together the interest rate and the inflation adjustment on the iBonds, which are sold at face value, are called the “composite rate.”
The composite rate on this kind of bond can never fall below zero, even in the rare event that deflation would otherwise drag a bond’s composite rate into negative numbers. This is why many people consider it a “safe” investment.
Pros of iBonds
Several aspects of these bonds make them attractive:
- Good returns: The current composite interest rate through April 2024 is 5.27%. That’s less than half the rate from May 2022 through October 2022, when these bonds paid 9.62% interest. However, it’s hard to ignore that getting a guaranteed 5.27% return for the first six months, if you buy an iBond before the end of April 2024, is still impressive.
- Tax efficiency: Series I Savings Bonds are not subject to state or local taxes.
- Government backing: They have the security of a U.S. government guarantee.
- Easy to buy: You can buy up to $10,000 worth of them online. You also can buy an additional $5,000 of paper bonds using your federal income tax refund.
Potential Drawbacks of iBonds
These bonds carry a few conditions and limitations that may dampen their appeal to some fixed-income investors. For one thing, their future returns can decline since they are pegged to the CPI-U. Only U.S. citizens, legal residents or civilian employees of the U.S. government (regardless of citizenship or residency) may buy iBonds. There’s no market for your iBond.
Finally, iBonds also carry these restrictions related to cashing them in:
- Within one year of purchase: You cannot cash the bond out for any reason less than one year from purchase.
- Within one year and five years of purchase: You can cash out the bond, but you’ll forfeit the previous three months’ interest payments. This is known as early redemption. For example, if you cash it out during this period in April 2024 then you won’t receive any interest earned from January, February and March 2024.
- Five years or longer: If you want to avoid a penalty, you have to wait at least five years to cash out the bond.
- After 30 years of purchase: The bond ceases to pay interest and becomes vulnerable to inflation.
Why Other High-Yielding Bonds Can Be Less Attractive
A Series I Savings Bond is an exception to the caution currently being voiced by financial experts about other higher-yield bonds.
Charles Schwab, for example, says credit spreads – the difference in rates between corporate bonds and government bonds of similar duration – are small. Corporate bonds pay more than government bonds to reward investors for taking the risk of lending to a private enterprise that could default. But currently, the difference in rates between the two is still too small to justify buying the higher-yielding corporate bonds.
Schwab also notes that corporate profit growth is slowing, citing inflation, supply chain issues and borrowing costs. “Rising borrowing costs via higher interest payments can eat into corporate profits,” the firm said. “Meanwhile, wage gains are good for consumers, but can be a pain point for corporations, as it’s another input cost on the rise.”
Finally, the yield curve is not looking favorable for high-yield bonds – except iBonds. The yield curve is a curve on a graph that tracks the yield of bonds of various durations. Normally, shorter-duration bonds yield less than long-duration bonds, and high-yield bond total returns relative to Treasurys have been strongest when the yield curve is steep (long-duration bonds paying more than short-duration bonds).
Bottom Line
Series I Savings Bonds are low-risk savings bonds issued by the U.S. government that can pay a relatively high interest rate. Through April 2024, they were paying a lofty 5.27%. You may purchase these either electronically via TreasuryDirect (up to $10,000) or you can use your IRS tax refund to buy paper Series I bonds (up to $5,000). By combining electronic and paper purchases, you can buy up to $15,000 of Series I bonds each year. Keep in mind that there is no secondary market for them.
Editor’s Note: The information in the article was accurate as of December 2023. For the most up-to-date interest rates of iBonds, visit treasurydirect.gov.
Tips on Investing
- A financial advisor can help you handle the fixed-income portion of your portfolio as interest rates rise and inflation rates. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Check out SmartAsset’s no-cost inflation calculator to help you determine the buying power of a dollar over time in the United States.
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