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This is the third highest rate since I bonds were introduced in 1998, and investors could lock in the rate for six months by purchasing anytime before the end of April.
“The rate of 6.89% is another very competitive rate for the I bond compared to other conservative alternatives,” said Ken Tumin, founder and editor of DepositAccounts.com, which tracks I bonds, among other assets.
Supported by the US Government, I bonds do not lose value and earn monthly interest with two parts: a fixed rate, which remains the same after purchase, and a variable rate, which changes every six months based on inflation.
Although early estimates for the I bond rate was 6.48%, the new rate includes a 0.4% increase for the fixed portion of the rate, based on higher Treasury Inflation Protection Securities yields, Tumin explained.
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You can buy these assets online through TreasuryDirect, limited to $10,000 per calendar year for individuals. You can also use your federal tax refund to buy an extra $5,000 in Paper I bonds.
On Friday, TreasuryDirect crashed as investors rushed to meet the deadline to lock in the 9.62% annual rate for six months. A department spokesperson said the traffic had “significant pressure and strain on the 20-year-old TreasuryDirect application.”
The downsides of I bonds
Although the current I bond rate may be attractive, experts point to some downsides.
One of the trade-offs is that you can’t touch the money for at least one year, and you’ll lose the previous three months of interest if you redeem before five years.
Another drawback is lower future returns, explains certified financial planner Christopher Flis, founder of Resilient Asset Management in Memphis, Tennessee.
Depending on future inflation, the variable portion of the bond interest may adjust down again in May. With a target of 2% inflation, “the Federal Reserve is not going to rest until the number comes down,” he said.
And when interest rates increase, the difference in yields between I bonds and other government-backed assets, such as the 2 years Treasury, becomes smaller. “The relative attractiveness of these assets is dwindling,” Fleiss said.
Even with excess cash still covering other financial priorities — no credit card debt, an emergency fund, and your 401(k) match — Fleiss wouldn’t choose I bonds as the next option.
“Long-term investors, specifically younger ones, should really look to the stock market for the backbone of their portfolio,” he said. “Certainly not I Bonds.”