I Bond Interest Rates Just Fell. Are They Still a Smart Place to Put Your Money to Work?

Every six months, the United States Treasury Department reveals the yield that will be paid on newly issued Series I Savings Bonds, or "I bonds."

We recently learned the new rate that will be paid on new I bonds sold from May through October 2024, and it is a significant reduction from the previous rate. With savings accounts and CDs still paying elevated interest rates, are I bonds still a good place to put your cash to work?

I bond interest rates just fell

I won't keep you in suspense. The U.S. Treasury announced that the new interest rate for I bonds will be 4.28% for new bonds issued from May 1 through the end of October 2024. This is a significant reduction from the 5.27% rate that has been in place from November 2023 through the end of April.

Technically speaking, there are two components of I bond interest rates -- a fixed rate and an inflation adjustment. The fixed-rate component is loosely based on the current interest rate climate, while the inflation adjustment is based on CPI data. For new bonds issued from May through October, the fixed-rate component is 1.3%, with the rest coming from the inflation adjustment.

This is important to know because the fixed-rate component will stay the same for as long as you own the bond. For example, when your I bond interest rate resets in six months after purchase, you'll have a 1.3% fixed rate plus whatever the inflation adjustment is.

This interest rate change will also affect current I bond holders, although it may not affect them right away. When you buy I bonds, the interest rate at the time of purchase stays the same for six months, then resets to the current rate set by the Treasury. So, if someone bought an I bond in April, they'd still get the 5.27% yield until six months from the date of purchase in October.

I bonds versus savings accounts and CDs

There are a few factors to keep in mind when deciding where to put your cash. Are I bonds the best choice for you, or are savings accounts and CDs the better choice? After all, you can get a higher yield right now from some of the top online savings accounts. It also isn't difficult to find CD yields in excess of 5.00% for maturity terms of one year or less.

This isn't meant to be an exhaustive list, but here's what you need to consider:

• ·Keep in mind that I bond yields are (mostly) based on inflation, while savings and CD rates are based on the prevailing interest rate environment. It's completely possible to have low interest rates and high inflation, and vice versa. I bonds are designed to protect you from inflation -- savings accounts and CDs are not.
• There are some major drawbacks to putting your money in I bonds, specifically for your ability to cash out. While taking your money out of a CD early will result in a penalty, you cannot redeem I bonds within the first year, and you'll be penalized for selling within the first five years.
• I bonds have a purchase limit of $10,000 per person, per year. If you have more savings to put to work, you'll have to find another place to do it.

Are I bonds still a good place to put your money?

Sure, I bonds might not be quite as appealing as they were a couple of years ago, but they can still be a smart way to protect your purchasing power from inflation over time. However, like most financial products, there are pros and cons to keep in mind.