Series I savings bonds have recently come back into mainstream investor consideration after a long hiatus. Throughout much of the 2010s, inflation was barely a concern, with rates ranging anywhere from 0% to 3%. Since mid-2021, though, inflation has come back with a vengeance, ranging anywhere from 5% to just over 9%. As a result, investors are reconsidering I-bonds as an option to provide their portfolios with some much-needed inflation protection and stability.
Let's walk through how I Bonds work, and whether they might make sense for you to invest in today.
A brief review on I Bonds
Series I savings bonds, or "I Bonds," are government-issued securities that pay a total rate of interest based on two components: a fixed interest rate and a rate tied to the semi-annual inflation rate. Throughout much of the past decade, both the fixed interest rates and the inflation rates remained nearly invisible, and I Bonds were an unattractive proposition. Between the macroeconomic conditions and the soaring stock market, people seemed to forget that these types of savings bonds existed.
Now that inflation has surged, I Bonds have become not just competitive but quite attractive. The current interest rates for securities issued through October 2022 are 9.62%, which is many times higher than the average rate paid on a bank savings account. One caveat: You're only allowed to buy $10,000 worth of I Bonds per year, per person. Still, for a family of four, you could buy up to $40,000 worth in any one calendar year -- all with a guarantee to make money.
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I Bonds and your asset allocation
I Bonds can fit naturally into most portfolios. Assuming you don't want to invest all of your money in the stock market, and you're also concerned about rising interest rates (which dampen bond index fund prices), I Bonds make a ton of sense -- especially when they're currently paying nearly 10%. Even though the purchase limits aren't particularly high, it still makes sense to collect guaranteed interest when you can.
You're able to redeem I Bonds after a year of holding them. But if you redeem them before five years have elapsed after purchase, you'll forfeit the previous three months' worth of interest. So there is a cost to consider if you expect to need that money within the next five years. Still, locking in a solid return when it's readily available feels like a no-brainer, particularly in the current economic environment.
For longer-term consideration, I Bonds will at least keep pace with inflation over the next 30 years. Historically, stock market indices have generally done well to combat long-run inflation, but equity markets also face volatility. In this context, I Bonds should be seen as a supplement for your traditional stock market index funds rather than as a replacement for them. Over time, it's likely that both investments will yield benefits.
Consider I Bonds right now
With a large number of economists putting the odds of a recession at 50/50 or worse, it makes sense to take guaranteed returns where you can. Whatever funds you put into I Bonds, you know you'll get back and then some. The same cannot be said about stocks, especially if you're going to need the money to meet short- or medium-term obligations.
Finally, I Bonds operate differently than corporate bonds: As interest rates rise in the economy, your I Bond principal won't be affected. By contrast, corporate bonds will experience price declines as interest rates rise. Because of that, swapping $10,000 in corporate bonds for $10,000 in I Bonds would be a sensible move.
Given today's high levels of economic uncertainty, locking in knowable returns now when you have the chance is going to look like a smart move several years down the line.
