Inflation's pushing up I-bond rates again. Is it time to buy?
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Inflation is on the rise again, and that means so are the interest rates on I-bonds.
The rate on the latest I-bonds on sale now through Oct. 31 is 4.26%, up from 4.03% in the prior six months. The interest rate on I-bonds changes every 6 months, based on inflation. The rate includes a fixed and variable rate. The fixed rate remains the same for the life of the bond, and the variable rate moves every six months based on the consumer price index. The latest I-bond rate of 4.26% is comprised of a 0.9% fixed rate and 1.67% variable rate.
The 4.26% rate isn’t as high as the 9.62% the Treasury offered back in 2022 when inflation reached a 40-year high and caused an I-bond buying spree, but it’s competitive with the some of the top rates on certificate of deposits, or CDs. And it can still go higher if inflation continues to rise. Many economists expect the surge in oil prices due the war in Iran will keep gas prices elevated and eventually push up prices of other goods and services.
“That is very good news for I-bond investors,” wrote David Enna, founder of Tipswatch.com, which tracks Treasury inflation-protected securities, or TIPS, and I-bond rates.
Why should investors consider I-bonds?
The current 4.26% rate on the I-bond is better than U.S. treasury bills (T-bills), which yield less than 4% and are competitive with top rate CDs, high-yield savings accounts (HYSA), money market accounts (MMA) and money market funds (MMF).
They’re also low risk because they’re backed by the U.S. government, and the composite rate can never be less than 0%, even during deflationary periods when the inflation rate is negative.
“The value of the investment can never decline with ‘market trends,'” Enna said. “You won’t get rich, but this is a strong investment for preserving capital.”
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There are no state and local income taxes on I-bond interest, and holders can choose to defer federal taxes on the accrued interest for up to 30 years, or when it matures, if you hold it that long.
I Bonds, which were introduced in paper form in 1998, are increasingly popular in their electronic form. More than $17.5 billion in I Bonds were sold via TreasuryDirect during the first half of 2022 through July, according to the Treasury’s data. I Bonds
What are the negatives of I-bonds?
Holders can cash out I-bonds before maturity, but there are some things to keep in mind:
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You must have held them at least a year before you can cash them out
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You’ll also lose the last three months of interest if you redeem them before five years have passed
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An individual can only purchase up to $10,000 worth per calendar year at TreasuryDirect
But even with those negatives, experts say you can’t really go wrong because I-bonds help savers stay ahead of inflation and can complement savings in HYSAs, MMAs or MMFs, they said.
HYSAs, MMAs, and MMFs are safe and provide immediate access to funds “so, they’re useful for emergency funds or saving for short-term expenses,” said Ken Tumin, founder of DepositQuest.com, which tracks the best rates for savers. However, “they generally don’t keep up with inflation.”
“Interest rates have been staying higher for longer than expected,” he said. “The sticky high inflation is one reason for this, and it shows why savers need to make sure they earn as much interest on their savings as they can to stay ahead of inflation.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
This article originally appeared on USA TODAY: I-bond rates are rising again. Will investing ease inflation’s grip?