i Bonds are series I savings bonds that help protect you from inflation.  They include both a fixed interest rate and a variable interest rate that changes due to inflation. This investment tool offers investors a chance to have safety and flexibility. This helps them protect their money, particularly in a volatile environment where inflation is high. In this post, we will discuss what are i bonds, the advantages and disadvantages, when i-Bonds’ rates adjust, i bond rates prediction 2023, and how to invest in them.

What Are i-Bonds?

I-bonds are a type of savings bond that the US government issues and backs. I-Bonds are regarded as a low-risk investments because they are protected by the full faith and credit of the US government. These bonds are made to guard against inflation, and include two types of interest rates, a fixed rate, and a variable rate.  The fixed rate portion of the bond will not change during its existence. The variable will adjust every 6 months to account for changes in the Consumer Price Index (CPI).  The CPI is a proxy of inflation, which lowers the purchasing power of your money.

How Do i-Bonds Work?

i-Bonds are issued through the US Department of Treasury’s website at treasurydirect.gov.  These bonds can be sold for as little as $25 and a maximum of $10,000, which is also the maximum you can purchase in each calendar year.  I-Bonds are sold at face value. This means you if you purchase a bond for $1,000, you will get $1,000 when you sell it.  

As mentioned earlier, the bond has two rates, both fixed rate and variable rate.  The fixed rate is determined by the US Department of Treasury, and will be the same throughout the life of the bond. The variable rate fluctuates depending on what CPI was over the prior 6 months.  Thus, the rate you receive is the sum of both the fix rate and variable rate.  Below I provided an example of i-Bonds that were issued in September 1998.  At that time the fix rate of these i-Bonds was 3.4% (highlighted in dark blue). During every six months, the variable rate had adjusted (highlighted in light blue).

Next, if we compare the fluctuations of the variable rate component of the 1998 issued i-bonds over the past 25 years to the Consumer Price Index (CPI), we will see a very similar pattern. This is because the variable rates of i-Bonds are adjusted every six months to account for the changes in CPI over the prior six months.

What Are The Advantages Of i-Bonds?

Since i-Bonds are supported by the US government, they are considered one of the safest investments available. I-bonds are also not subject to state or municipal income taxes. This makes i-Bonds an option for investors who want to reduce their tax obligations.  Like I mentioned earlier, i-Bonds are inflation protected by its variable rate adjusting every 6 months. So, for example, if CPI from the prior 6 months has increased, you may expect that the variable interest rate will increase as well. 

What Are The Disadvantages Of i-Bonds?

Although there are many benefits to consider for i-Bonds, it’s important to understand the number of limitations. One of the main drawbacks is reduce flexibility.  For example, i-bonds cannot be sold for at least 12 months after being purchased.  Moreover, if you sell your i-Bond within the first 5 years of holding it, you will incur a 3-month interest penalty.  This means that if you sold your i-Bond after 4 years, the last 3 months of interest you earned will be withdrawn from your final payment.  Furthermore, there is a $10,000 annual cap on the amount that can be invested in I-bonds per social security number.  So, before making any final decision, make sure to spend the time and understand both advantages and disadvantages of this investment vehicle.

i Bond Rates Prediction 2023 And When Do i-Bonds Rates Adjust?

Recall, i-Bonds have two rates, a fixed rate and a variable rate.  The fixed rate does not change throughout the entirely of the loan; however, the variable rate does.  I-Bond rates adjust every 6 months, in both May and November.  The next rate change will take effect on May 1^st, 2023. 

According to DepositAccounts.com, the i-Bond rate could fall below 4% in May, assuming the fix rate remains. This makes sense since CPI has gradually decline since October 2022 (illustrated in the chart below).  So if you are looking to capture the April 2023 I-Bonds that are offering 6.89%, you will have to buy by April 27, 2023. This is because it takes a few days for the transaction to settle.  According to a spokesperson for the Treasury’s Bureau of the Fiscal Service, “April 27 is the last day someone can purchase an i-Bond have them issued by April 30”.  If you buy an i-Bond on April 28, it will be issued on May 1 and you will receive the new i-Bond rate, which may be below 4%.

Chart above is CPI (not seasonally adjusted) change over the prior year. Since October 2022, CPI has declined from 7.7% to 5.0%.

How Can You Invest In i-Bonds

The process is relatively easy. The main way is to go directly through the US Department of Treasury’s website at treasurydirect.gov.  Through here you can purchase up to $10,000 of i-bonds electronically.  The first step is to set up an account on their website.  The account setup will require you to enter your social security number and a valid ID.  Further, you will need to link your bank account (you’ll need both the account number and routing number).  Once your account is set up, you can purchase from as little as $25 to $10,000. 

The Treasury Department is phasing out paper savings bonds, but you can still buy some.  The only way to get a paper savings bond is to use your IRS tax refund.  You can buy up to $5,000 in paper i-Bonds, in $50 increments.  That said, if you purchase a large quantity of paper i-Bonds, (e.g. $2,000) the Treasury Department may issue multiple bonds in different denominations to fill your order.

Checklist Before You Decide To Invest

Before making a decision to invest, I wanted us to quickly review a few items.

1. Understand and know your financial goals.  If you have been reading my blog posts, you know that rule #1 is to plan and understand your financial goals.  If you don’t know which direction you are heading, how will you know if i-bonds are right for you?  So lets make sure we understand what our short-term and long-term financial goals are, and whether i-bonds fits that goal.
2. Understand the benefits and pitfalls of i–Bonds.  That advantages include, inflation protection, tax advantages (no state or local taxes), and backed by the US Government.  Whereas the risk include lack of flexibility on when you can pull your money out. As well as the annual cap on how much you can invest on an annual basis.
3. Monitor inflationary indicators.  These include the Consumer Price Index (CPI), the Producer Price Index (PPI), and what the Federal Reserve says about inflation.  If you need to pick one of these three, focus CPI. This is because CPI tends to follow what the variable interest is for i-bonds.  So if you see CPI trend downwards over the past six months, anticipate the i-bond interest rate to drop. Whereas if you see CPI trend upwards over the past six months, then anticipate the i-bond rate to increase. 
4. Look at your broader portfolio and make sure to diversify.  I-bonds may make sense for a portion of your investing portfolio, but you should diversify your holdings to lower risk. For a balanced portfolio, think about investing in a variety of stocks, bonds, and other assets.  The most common diversification is to invest 60% in stocks and 40% in bonds; however, if you are more risk-tolerate, you may decide to be more heavily weighted towards stocks.  Separately, if you more risk-adverse, you may decide to be more weighted towards bonds.

i-Bonds Can Add Value To Your Portfolio With Careful Planning

Overall, i-bonds are an unique savings bond that provide a mix of security, adaptability, and tax advantages that make them an appealing choice for many investors. They might not always have the highest interest rates compared to other bonds such as corporate bonds, but i-bonds can give investors seeking for a low-risk investment a solid combination of safety and protection against inflation. Make sure to conduct your due diligence and research.  Further, its important to understand the constraints and limitations associated with i-bonds if you are thinking about making a purchase. i-bonds can add value to your portfolio with careful planning and a well-balanced investing strategy. 

If you have enjoyed this article and want to learn more about how to invest and gain financial freedom, check out some of my favorite blog posts below.

• Passive Income 101: The Basics + Strategies To Unlock Financial Independence
• Invest Like a Professional With This Simply Dividend Strategy
• 11 Powerful Ways On How To Fight Inflation Today

Live well,

Blue