Final Week to Buy Series I Bonds Yielding 9.62% — A Great Investment?

This business week is the final chance to purchase Series I savings bonds from the US Treasury that yield 9.62%. The TreasuryDirect site instructs users to complete their purchase by October 28 to ensure issuance by October 31 prior to the new rate taking effect in November.

A lot of people are raving about I Bonds right now. After all, 9.62% is an amazing interest rate. Investors in US Treasury Bonds of any type haven’t seen a rate like that since the late 1980’s.

Are I Bonds a great investment that should have everyone running to max out their $10,000 per person purchase limit (or whatever they can afford) prior to the end of the week when that 9.62% rate slips away? I purchased $10k for myself a couple weeks ago, but I don’t think I Bonds are necessarily the best move for everyone.

First, what are Series I Bonds?

As described on the TreasuryDirect site (the official US government website to purchase bonds on), “Series I savings bonds protect you from inflation.” The bonds earn interest for 30 years unless they are cashed out before then, but they cannot be sold before one year.

The interest rate for I Bonds is computed from two components: a fixed rate, plus a variable inflation rate.

The inflation rate is re-calculated for all Series I Bonds every six months based on the Consumer Price Index for all Urban Consumers (CPI-U) change over the prior six month period. The floor is 0%, so even if we experience deflation the bonds won’t have a negative interest rate meaning they cannot lose value.

You won’t earn 9.62% forever

Series I Bonds are slightly more complex than bonds like the US 10 Year Treasury, where the investor earns the interest rate at the time of purchase for the bond’s duration. This is due to the fact that 10Y Treasury bonds pay a fixed rate, whereas I Bonds pay a combined rate which includes the variable inflation component as described above.

The fixed rate for Series I Bonds issued today is 0%. So any I Bonds you buy today, the combined rate is completely comprised of that adjustable inflation component.

The inflation component will change to 6.48% in November. So Series I Bonds purchased before the end of the week will yield 9.62% for six months, then 6.48% for six months — an average return of 8.05% over the next year. Where the rate goes after that will depend on what happens with inflation over the coming six months.

The purchase limits aren’t really limits

Some articles claim that you can buy $10,000 worth of I Bonds from the TreasuryDirect site and up to $5,000 using your federal tax return, limiting any individual to only $15k in Series I Bond purchases per calendar year.

That’s true but incomplete; the limits are actually per entity and not per person. Sole proprietorships, trusts, and Limited Liability Corporations (LLCs) are all examples of entities that a person could own multiple of and utilize them to purchase many times the individual limit in Series I Bonds.

Additionally one can purchase as many Series I Bonds as they wish as gifts for other people. For example, in a single year one spouse could purchase a gift of $50k in I Bonds intended for their partner, thus locking in today’s 9.62% rate on a larger invested amount. The catch is that the bonds can only be delivered in increments of $10k per year and count towards the recipient’s annual purchase limit. So it would take five years to fully unwind a $50k gift, which may not be a wise move if inflation drops which will take the Series I Bond combined rate right down with it.

Essentially, anyone who is truly determined to load up on many times the colloquially-believed purchase limit per calendar year of I Bonds can easily do so, making them not as restricted and rare as some believe.

Series I Bonds today aren’t an amazing investment because by definition the real return is 0%

As addressed earlier the fixed rate for I Bonds issued today is 0%. Essentially the fixed rate of a Series I Bond at purchase is its real return, since adjusting for inflation requires us to subtract out the adjustable inflation component. So the expected real return of I Bonds purchased today is 0%.

Now this isn’t exact because the inflation adjustment is lagging, for example if you buy the 9.62% I Bonds today (a rate based off older inflation data) and hold them during the next six months where inflation ends up being lower, your real return would be positive. But the longer you hold the I Bonds for, the closer your real return will converge towards the fixed rate of 0%.

Theoretically it would not be wise for example to sell a chunk of your stock investments to purchase I Bonds. You may get lucky in the short-term with timing the market and selling the I Bonds later to buy back into stocks at a lower price. But for a long-term investor this is a suboptimal move on average since stocks have a positive expected real return of 5–7% compared to 0% for I Bonds.

Who should be buying Series I Bonds as part of their portfolio?

The short answer is, anyone who sees a place in their asset allocation for an inflation-protected pseudo-cash-equivalent with a one year lockup. I Bonds will preserve purchasing power over time but with a real return of 0% they are not a tool for building wealth.

If you are holding extra cash in your savings account that you don’t plan to spend in the next year, then I Bonds could be a good option to not lose as much money to inflation with a chunk of your cash.

This is why I purchased $10k in Series I Bonds recently. We had the money we saved for a house down payment sitting in our savings accounts. However with the rising mortgage rates we are waiting for the housing market to price those in so figured it was unlikely we would buy in the immediate future, as well as what we would be willing to spend on a home is lower now that higher mortgage rates make the monthly payment larger.

What we had saved for 20% down plus closing costs was now larger than what we might potentially need. But I still like the idea of having a bit of extra cash sitting around in case we buy a fixer-upper, so the stock market is a bit too risky for that over a time horizon to buy in the next couple of years.

Moving $10k into Series I Bonds will earn me 8.05% over the next year versus 2.35% in my Ally savings account. The savings account is losing money to inflation, so this is a way to lose a bit less on $10k of that which isn’t immediately needed. It’s a difference of over $500 that I wouldn’t have next year if I didn’t buy I Bonds.

Some personal finance hyper-optimizers keep the majority of their emergency fund in I Bonds that have passed the one year lock-up to preserve purchasing power but retain the ability to access the funds in a few days. You can slowly ladder into I Bonds over a year to reduce the risk of the lock-up period impacting your ability to live off of your emergency funds if needed.

When will I sell my I Bonds?

I have already mentioned the one year lock-up period for I Bonds. The other caveat is that if you cash in I Bonds before 5 years, you sacrifice the most recent 3 months of interest.

I probably won’t sell immediately in one year because that would mean losing the final 3 months of 6.48% interest. As long as the I Bonds are yielding more than my savings account, it would make sense to just keep them as part of my emergency fund.

If we end up buying a house that needs some updating I could also sell the I Bonds to finance those renovations, once the lost 3 months of interest felt like a small enough amount to me.

Overall I think I Bonds are a useful tool right now for anyone who has a lot of cash on hand, doesn’t need all of it within the next year, but might need it within the next few years. Otherwise, investors in the accumulation stage should just keep dumping money into index funds for higher expected long-term growth.