A yield plunge below 4% threatens to dull the lustre of I Bonds

A golden age of I bonds seems to be coming to an end.

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Inflation has started to show signs of softening in the series I savings bond, so it's likely that their yields will plummet. Just a few months ago, they offered an historic 9.62% rate on the popular Series I savings bonds. The expectation is that the yield will fall to 3.8% in the near future, which would put the yield in line with certificates of deposit, high-yield savings accounts and money market funds.

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Investors have been searching for ways to shield their cash from rising prices over the past two years, which has resulted in an explosion in interest in low-risk, inflation-linked I bonds. As a result, sales of I bonds topped $40 billion during a 15 month period beginning in November 2021, when rates rose for the first time ever above 7%, according to the US Treasury Department, when rates rose from 5% to 7%.

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The answer to the question of “Should I buy an I bond?”, was yes for almost three years running from May of 2020 to October of 2022” said Jeremy Keil, a financial adviser with Keil Financial Partners in New Berlin, Wisconsin. “Today, the answer would be a possibility.

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We have asked financial advisers across the country whether they think it is a good time at this point to purchase I bonds, or whether it is better to wait until later. We have compiled their responses.

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Is this the right time for you to buy?

As a result, the yield was mainly determined by the semiannual inflation rate from September to March, which cooled from the previous six months, plus a mystical fixed rate that was determined by the Treasury Department in a relatively obscure manner. In the end, investors will not be able to know for sure until the new I bond rate is announced on May 1st, although it will be possible to estimate the new I bond rate based on the assumption that the fixed rate won't change. 

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It is still worth noting, however, that anyone seeking peace of mind regarding their rates for the next 12 months should be considering purchasing an I bond before the end of April. 

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There's a reason for that, and it's because of how I bond rates are designed and timing. There are two different kinds of bonds: a fixed rate and a variable rate. The fixed rate is one that will remain unchanged throughout the life of the bond, whereas the variable rate will rise and fall in parallel with the consumer price index twice a year. A new rate is set by the Treasury Department every year on May 1st and November 1st.

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Since I bonds are reset twice yearly, investors can make a considerable difference in the amount of return they receive from them if they buy them in the early spring of the year. By purchasing I bonds before the end of April, investors will be able to receive six months at the 6.89% rate they receive at purchase. Then, six months after purchase, they will be taking on the estimated 3.8% rate for the next six months. It is likely that if someone waits until May, he or she will have to pay 3.8% and then a rate that hasn't been determined yet, set for Nov. 1, that will be announced in the following year. 

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George Jameson, owner of Capital Wealth Group in Columbia, South Carolina, believes that if you are planning on holding the bonds for just one to two years, you might be wise to lock in the 6.89% rate for six months, if you only intend to hold them for one to two years. 

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Is there anyone who should wait?

Depending on how the Treasury decides to increase the fixed rate, which remains the same for the life of the bond, this could offset the lower variable rate for some investors. Those investors who decided to wait until May to buy I bonds could benefit from a lower price for the bonds. 

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The normal fixed rate for a 30-year bond is attractive because it won't change over time, and since you'll be locked in for the whole life of the bond, it is very attractive," said Shane Sideris, co-founder of Synchronous Wealth Advisors in Santa Barbara, California.

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Fixed rates for I bonds are currently 0.4%. They increased to 0.0% in November, a shock to many close observers. However, they have fluctuated over the years from zero to as high as 3.6%. It is important to note that the Treasury's formula for calculating the variable rate is provided, but it is quite hard to understand the formula for the fixed rate. 

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I bond speculation abounds, which has led to various notions that the bond relates to X or Y, but in actuality no one knows for sure, according to Jennifer Lammer, founder and host of Diamond NestEgg, an advisory firm based in New York, and host of a YouTube channel devoted to I bond videos. 

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It is Lammer's plan to hedge against the rising fixed rate by buying half of her I bonds in April and the other half once the new rate starts, in case the fixed rate increases in the future. As a US citizen, a US resident, or a government employee, you may purchase up to $10,000 of I bonds every year. You may purchase another $5,000 if you use your federal income tax refunds, which would make the annual limit $15,000.

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Is there anyone who shouldn't buy?

Investing in I bonds can be a very volatile investment for investors. For this reason, Brandon Welch of Newport Wealth Advisors recommends that investors take stock of their financial situation before investing in I bonds.

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A 3.8% yield is nothing compared to a credit card debt rate of roughly 20%, which investors should pay off first, he points out, since the 3.8% yield is so small compared to this. In addition, if employees match their employer's contribution to their 401(k)s, people who invest in I bonds are missing out on free money if they do not max out their company's 401(k)s.

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Shenkman Wealth Management has its own portfolio manager, Jonathan Shenkman, who is a financial adviser and portfolio manager and was quoted by Trade Algo saying that even though I bonds are popular, investors should take a broader view of them.

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Despite all the buzz surrounding inflation and I bonds, one thing that often gets overlooked is that they are not a way to wealth, he added, citing the limited amount of money investors are allowed to invest in the bonds, and that they will likely underperform stocks as inflation returns. If you are interested in investing in I bonds, you need to take a big-picture view when determining whether they would be a good fit for your portfolio.