Are I Bonds a Good Buy Now?

Series I Savings Bonds, which are more commonly referred to as I bonds, have yields that vary based on inflation. The basic idea is that yields rise along with inflation, so your savings maintains its value better than it is likely to do in a savings account or other non-protected instrument -- especially during periods of high inflation.

First, the bad news. I bond yields have declined significantly since inflation peaked in 2022. The guaranteed yield on I bonds purchased in mid-2022 was 9.62%, and this has since cooled down to 4.3% for I bonds issued from May through October 2023. However, I bonds can still be a smart place to put some of your cash and help you diversify your investments. Here's what you should know.

How do I bonds work?

I bonds are a special type of U.S. savings bond issued by the Treasury Department. Every six months, the Treasury reveals updated I bond interest rates that take effect for bonds purchased from May through October, and those purchased from November through April.

Regardless of when you buy, the yield that is in place at that time is guaranteed for six months. So, if you buy an I bond before the end of October, you'd still have the current 4.3% yield for six months, regardless of what yield is announced starting in November.

It's important to realize that an I bond's yield has two components: a fixed rate that is guaranteed for the life of the bond, as well as an inflation adjustment. For example, as of this writing, a new I bond would have a yield of 4.3%. However, 0.9% of this is the fixed-rate component, with the other 3.4% coming from the inflation adjustment.

This is very important to know, as 0.9% is actually a significantly higher fixed rate than recently issued I bonds have had. For example, bonds issued from May through October of last year had a 9.62% yield, but had a 0% fixed-rate component. So, those bonds are only paying the inflation adjustment now and yield significantly less than new I bonds issued today.

How it works

Let's say you buy $5,000 worth of I bonds on Oct. 2, the day of this writing. You'd get a guaranteed 4.3% yield until early April. At that time, your yield would change to the bond's fixed rate of 0.9% plus whatever inflation adjustment is in place at that time.

After another six months, the inflation-based component would change again, with the 0.9% fixed rate staying the same.

The biggest downsides to buying I bonds are the restrictions involved. You have to keep your I bonds for a minimum of one year, and there's a penalty equal to three months' worth of interest if you cash in before five years. And I bonds are limited to $10,000 per person, per year, so if you have a lot of cash to put to work, I bonds might not completely meet your needs.

Are I bonds better than savings accounts or CDs?

You might be thinking, "Well, I can get a 5% (or higher) yield from a high-yield savings account or CD right now, so why should I go through the trouble of buying an I bond?" But there are benefits and drawbacks to both.

For one thing, I bond yields are based on the current inflationary environment, not the interest rate environment, which can be two very different things. This is why I bond yields were significantly higher last year, even though we've been in a rising-rate environment since then. It's also why the fixed component of I bond yields has risen from 0% to 0.9% in that time.

On the other hand, if inflation collapses, I bonds could pay next to nothing even if interest rates are high. And the $10,000 annual limit could be an issue if you're trying to protect a large amount of money from inflation.

The bottom line on I bonds

I bonds can be a great way to protect your money from inflation over time. You aren't going to make a ton of money, but these can be excellent financial instruments if you aren't worried about getting consistent yields from your cash (meaning that you don't rely on the yields to cover living expenses) and don't want your savings to lose value in inflationary environments.