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What are I Savings Bonds?

Updated: Apr 1, 2023

With inflation at a 42-year high, I’m sure you’ve seen promotional news of the U.S. Treasury I Savings Bonds, which have been yielding quite an attractive rate over the last six months. The interest rate was 9.62% annualized (through October) based on the latest CPI data. Looks good, right?

Update: The annualized rate is 6.89% through April 30, 2023.

So what exactly is an I bond treasury? Let’s take a closer look at these securities and hopefully answer some basics.

U.S. Treasury I Savings Bonds can only be purchased through Treasury Direct. The bond typically combines a fixed rate and an inflation rate for earned interest, resetting the overall rate every six months based on the latest CPI data. The fixed rate on current I Savings Bonds is 0%, meaning holders will earn CPI only. Back in 2000, the fixed rate was 3.5%, so holders were earning 3.5% + CPI. If CPI drops to 2% in 2023, current holders will only earn 2%.

Each bondholder must own the paper for at least one year, with a claw back (one quarter’s interest) for any early redemption before five years. Currently, members of the public may purchase up to $10,000 in bonds (per TIN/SSN) every calendar year. The bonds earn interest for 30 years (the life of the paper) unless you cash them in first.

With current inflation concerns, I Savings Bonds can offer a straight inflation hedge. However, due to the investment size limitations, they can arguably only become a small portion of your overall investment strategy. The bonds are exempt from state and local taxes and have tax advantages if you use the proceeds to finance education. Federal taxes are deferred until maturity. While the 9.6% rate of return can be deceiving, if inflation stays at these levels for several years, these bonds may offer another layer of protection. But 30 years a long time…

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