New I Bond Rates Expected To Fall In May As Inflation Cools – Forbes Advisor

Expecting new Series I bonds with rates above 5%? Don’t count on it.

These savings bonds, with yields linked to the inflation rate, currently earn 5.27%, but the Treasury Department will reset the bonds’ rate on May 1. Now that inflation is easing, some analysts predict the new I bond rates could fall as low as 4.17%.

However, you can still take advantage of the 5.27% rate if you buy existing bonds before May. To avoid complications, make your purchase as soon as possible.

How I Bond Rates Change

I bonds are 30-year bonds designed to protect your investment from inflation and are exempt from state and local taxes. The rate, which combines fixed and inflation-based components, is announced each year on May 1 and November 1 when new bonds are issued. The fixed rate is set at the time of issue, but the inflation-linked rate changes every six months.

The inflation-based rate is currently 3.94% and will fall to 2.96% on May 1. How the Treasury Department will adjust the fixed rate, which is at 1.30%—its highest level since 2007—is still unknown.

If the fixed rate rises for the new round of I bonds, you could ultimately come out ahead if you buy after May 1. But keep in mind that the part of the rate tied to inflation will drop further if consumer prices continue to ease.

“The Fed has declared all-out war against inflation,” says Todd R. Walsh, CEO of Alpha Cubed Investments in Irvine, California. “If you’re buying I bonds strategically, you’re basically saying that the Fed will not be able to get inflation under control,” Walsh contends.

Alternatives to I Bonds

I bonds are a low-risk investment because they are backed by the U.S. government. But other low-risk investments out there may be attractive alternatives, including certificates of deposit, or CDs, and high-yield savings accounts.

“Current top high-yield savings account rates are actually higher than the I bonds rate. I would not lock up money in I bonds unless the rate were over 2% better than I could get in a liquid high-yield savings account,” recommends Rae Hartley Beck, deputy editor of investing for Forbes Advisor.

Buying and Holding I Bonds

There are only two ways to buy Series I bonds. You can purchase up to $10,000 worth of I bonds each year through the government’s TreasuryDirect website. You may also buy an additional $5,000 in Series I bonds with your federal tax refund.

The interest you earn is added to the value of your I bond twice a year. That means the principal on which you earn interest increases every six months, allowing your money to compound over time.

I bonds earn interest over 30 years. You cannot redeem them for at least a year after purchase. If you cash in the bond after two to five years, you’ll lose the last three months’ worth of interest. After that, there is no interest penalty for cashing in your bonds.

Is Now the Time To Buy I Bonds?

If you plan to buy I bonds, should you do it now or wait until the rates are adjusted in May?

“Sooner is better if it’s the right choice for [you],” says certified financial planner Autumn Knutson, founder of Styled Wealth in Tulsa, Oklahoma.

You can base your decision on a known rate, and “buying now starts the clock on the one-year minimum investment before [you] can sell the bonds,” Knutson adds.