Series I Bonds Top 9% for the First Time Ever. Here’s How You Can Use Them as a Hedge Against Inflation

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Savings bonds are as old-school a money tool as you’ll find, but one type in particular is having a real moment, with a historic rise to a 9.62% annual rate.

The Treasury Department announced the new rate on May 2, which is active through October this year. The stock market is stumbling, and the recent 40-year high wave of inflation, which was 8.3% in April, an inflation-protected Series I savings bonds have drawn new interest from savers and investors.  “I bonds are something that didn’t make headlines for years,” says Collin Martin, director of fixed income at the Schwab Center for Financial Research.

The previous rate of 7.12% was already garnering a heap of demand. “When you see a rate at 6%+, you suddenly see a lot of interest from investors, so we’re getting a lot of questions there.”

“Investors are hungry for any safe investment that is providing a good return,” says Bridget Jones, founder and coach at Smart Sister Finance, a financial education resource aimed at women. “Concerns about inflation make investments like Series I bonds attractive.”

Series I savings bonds are offering a guaranteed return in line with conservative expectations of what investors can expect from the stock market based on its performance over the last 50 years. To figure out whether a Series I savings bond makes sense for you, here’s what you should consider, according to three experts.

What Are Series I Savings Bonds? 

Federal savings bonds don’t normally offer high yields. Series I savings bonds, however, are connected to the inflation rate, so they offer an opportunity right now. 

The new rate is well above that of a CD, or certificate of deposit, in which your money sits in an account for a set period of time. CDs currently offer returns that are generally below 1%.

And there’s a security that comes with buying a Series I bond. “It’s for investors who are looking for safety and inflation protection, because it’s backed by the U.S. government,” says Martin.

I bonds earn interest for 30 years, as long as you don’t cash them in before then. You need to hold them for at least one year, and if you redeem them after less than five years, you forfeit the previous three months of interest. That means the bonds make the most sense if you can afford to put the money aside long-term. The Treasury Department offers a savings bond calculator on its website where you can run the numbers to see how much you can earn over time.

The bonds hold particular appeal for investors who are looking for something secure that can help balance inflation. “We’ve seen historic levels of inflation, and I bonds are inflation-protected, making them a popular choice for investors to protect their purchasing power in the future,” says Kevin Matthews II, M.S., a former investment advisor and author of “Starting Point: How to Create Wealth That Lasts.” “This protection has been top of mind given our financial environment.” 

Series I Savings Bonds Rates Compared to Inflation

Series I savings bonds adjust to protect the principal dollar value from eroding under inflation (hence the “i,” which stands for inflation).  The bonds were first issued in 1998 and are made of two parts: 

  • Base rate: Fixed for the life of the bond 
  • Variable rate: Changed regularly, depending on the inflation rate

Together, these rates are expressed as the composite rate, currently 9.62%. Historically inflation has a negative impact on bonds, as it lowers the future value at maturity, Matthews explains. “I bonds address the problem of inflation by setting their interest rates based on the consumer price index,” he says. “For example, if inflation is rising at 7%, then I bonds will adjust their rate to pay just a bit above that amount to entice investors.” 

When Will Series I Interest Rates Update and How Will It Change?

Most of the current yield on Series I savings bonds is related to the variable part of the rate, which can change every six months, says Jones.

The Series I bonds currently being issued have a fixed interest rate of 0% and the overall rate is structured to compensate for the U.S. inflation rate.

The next adjustment period starts at the beginning of November 2022, and could be affected by any interest rate hikes the Federal Reserve implements to help rein in inflation. If inflation drops, the rate of the Series I bond is likely to drop.

“Note that while the inflation rate is adjusted every May and November, the interest rate on your particular bond will be updated on a six-month schedule, based on the issue date,” says Jones. “If the Series I bond yield becomes less attractive over time as interest rates rise on regular savings accounts or CDs, you do have the ability to sell the bond after holding it for one year. Just remember the penalty for selling before five years.”

How Series I Bonds Compare to the Stock Market

If you’re looking to diversify your portfolio amid the sluggish stock market right now, you might consider Series I bonds as a safe long-term investment with a reliable return. 

For most people, long-term investing in low-cost index funds is the best path toward financial independence. Experts tend to recommend index funds as they help you diversify rather than risking the ups and downs of one stock, bond, or security, and they tend to have lower fees than other funds, so you can keep more of your earnings. 

The 9.62% return rate of Series I bonds gets them closer to traditional stock market returns, which usually average about 10% annually over the long term. And with bonds offering a similar return for at least the foreseeable future, some people might consider devoting a portion of their portfolio to this more stable investment

Do Series I Bonds Make Sense for You?

To determine if I bonds are a good fit for your portfolio, you’ll want to consider a few things on top of whether you can wait five years to avoid an interest penalty. 

“If you’re an investor who looks for safety and traditionally uses CDs or money market funds, considering an I bond is a logical answer,” says Martin. “It’s diversification for your diversification. You hold a money market fund or CDs or Treasurys to help offset the risk elsewhere, and this is another piece of that puzzle.”

Pro Tip

With a yield of 9.62% from May 2022-October 2022, Series I savings bonds are one way to combine yield with safety.

They can also work well if you want a little break from the stock market. “If you’re looking at the market today, and you’re frustrated and don’t know where to put your money, but you are looking for safety, it’s almost like a set it and forget it type of investment,” says Martin. And while you have to set them up separately from your other accounts, that can be a good thing. “You kind of forget about it, knowing that you’re protected from inflation if it continues to rise.” 

The I bond probably isn’t a great fit if you’re a high net worth investor because of the $10,000 maximum, says Martin. “It is not going to make as much of an impact on a portfolio as it might for someone who $10,000 makes up a great percentage,” he says, adding that it’s a matter of whether it’s worth your while to open a Treasury Direct account to invest a small amount.

It might also not be a good choice if you need immediate returns. “The way the interest works, it’s added to principle, and then you get that lump sum at maturity or when you decide to redeem,” he says. “For a lot of retirees relying on the semiannual payments from their bond holdings,” the I bond doesn’t provide that income.

How to Buy Series I Bonds

You can go to TreasuryDirect.gov to buy a Series I bond. Keep in mind that there are some restrictions.

The minimum purchase amount for an electronic bond is $25. If you want paper bonds, they must be purchased in denominations of $50, $100, $200, $500, and $1,000. 

You can only purchase up to $10,000 in electronic bonds per calendar year, but you can use your tax refund to purchase up to an additional $5,000 in paper bonds, bringing your potential total to $15,000 per Social Security number each calendar year, says Jones. “Even with these caps and limitations on purchases, the Series I Bond is an attractive way to earn a high interest rate on an incredibly safe investment backed by the U.S. government,” she says.