Series I Savings Bonds… Is the Hype for Real?

The year 2022 has kept us on our toes. Stock market volatility, inflation, and world turmoil have led the way. However, among all the noise, there have been some highlights that are worth exploring. One catching our attention: Series I Savings bonds. But are they worth the hype?

Since February 2022, nearly $11 billion in I bonds have been issued, compared to an estimated $1.2 billion during the same period in 2020 and 2021, per Treasury Department records. One of the main causes for the jump is the fact that Series I Savings bonds are currently offering staggering annual interest payments of 9.6%, based on the bond’s latest inflation rate calculation (tied to March’s consumer-price index). That’s 9.6% annualized for bonds backed by the full faith of the United States government. You will not find a better deal in fixed income right now. So, is the hype for real?

I Bonds are purchased electronically from the government at Treasury Direct, a website which putting it lightly, lacks sophistication. The mind-blowing yield, in a challenging fixed income environment, is computed every six months (May and November) and compounds semi-annually. There is a fixed component (currently 0%) and an inflation-indexed component tied to the CPI, which resets semi-annually.

On top of the opportunity for a risk-free fixed income asset, the tax benefits aren’t too shabby. For all individual investors, I bonds are exempt from state income taxes, while federal income tax can be deferred until redemption. Should an individual elect to use I bonds for Qualified Higher Education Expenses – tuition and fees, books, supplies, room and board higher education costs – interest earned is entirely tax-free.

With every good opportunity lies a limit. Annually, an investment within Series I Savings Bonds are limited to $10,000 per person, and accounts can only be held individually. Although joint accounts are prohibited, spouses for example can open separate accounts to maximize potential. The government does grant opportunity for additional investment, up to $5,000, if an individual uses all or part of their tax return to purchase I bonds directly. The request for bonds via your tax return must be in increments of $50 (any remaining refund amount not used to purchase bonds will be refunded to the individual).

Every rose has its thorn, and I Bonds do have some disadvantages.

As previously mentioned, the Treasury Direct website looks as though it was created in the mid-90s and is not a pleasurable user experience. Arrive to the site with time to spare, and much patience. As compared to other marketable securities, I bonds in particular are difficult to rebalance and are entirely untouchable for the first 12 months. The investor should assume the I bonds are illiquid for the entire penalty-free holding period of five years. Should the investor liquidate early, a penalty of three months’ worth of interest is forfeited. The government prohibits the purchase of I bonds within retirement accounts (IRA’s, 401(k)s), and therefore purchases can only be completed within taxable accounts.

It’s hard to predict how long the near-10% Series I Savings Bond yields will sustain. However, some analysts predict the reset in November will be similar, possibly even an increase. The new rate would apply to any bonds purchased between November 1, 2022 and April 20, 2023.

If you’re searching for unique ways to put to use the excess funds in your savings account, and further diversify your portfolio amid the choppy stock market, you might consider Series I bonds as a safe long-term investment with a reliable return. For the most part, the hype seems to be fully-backed; however, $10,000 at a time.