Should You Buy Series I Bonds? What Investors Should Know Before Buying

Should You Buy Series I Bonds? What Investors Should Know Before Buying

July 28, 2022

A sleepy area of the bond market known as Series I Bonds has exploded in popularity this year, catching the attention of investors with its eye-popping 9.62% current yield. In a year in which most asset classes have delivered negative returns, a stable, predictable government guaranteed savings bond may seem appealing. And yet, while there are real benefits associated with I Bonds, there are also nuisances and limitations that investors should be aware of before getting too excited about investing in them. 

The current record high yield on I Bonds is not apt to last forever. The interest rate has two parts: a fixed rate (which is 0% today and remains the same throughout the life of the bond) and a variable rate that changes every six months based on changes in the underlying inflation rate. Given the decades-high current inflation, I Bonds are offering an unusually high annualized yield of 9.62% if you purchase the bond between now and October. This rate will apply only for the first six months, and then it will change. On November 1st, a new variable rate will be determined based on inflation data from April through September. If inflation decreases, the new variable rate applied to an already purchased I Bond will decrease as well. It is important to remember that I Bonds offer a zero real return: that is, they will keep up with the inflation index, but they are not designed to outperform it.

I Bonds are accrual bonds, which means you do not receive monthly interest payments. The interest gets added to the principal, and you only receive it when you sell the bond or when it matures in 30 years. Importantly, you cannot sell I Bonds within the first year, and if you sell within the first five years, you lose the last three months of interest paid. In other words, they are not as liquid as money market funds or Treasury bills. However, like Treasuries, the interest on I Bonds is exempt from state and local taxes, and it can also be federally tax-exempt for certain investors if used for qualified education purposes.

One of the biggest limitations is that you can only purchase up to $10,000 in I Bonds per calendar year (per person), plus possibly another $5,000 in paper I Bonds in lieu of any federal tax refund. In addition, you can only purchase these bonds directly (and electronically) through the Treasury Direct government website. Some investors have compared this website to spending a day at the DMV! While many may experience a smoother interaction, the website was nonetheless launched in 2004 and has probably not been upgraded much since then. Investors are required to open an account on the Treasury Direct site and provide personal details such as Social Security number and bank account information. These administrative inconveniences and the rather low purchase amount often lead many investors to ultimately pass on buying I Bonds.

If, and hopefully when, inflation and market volatility normalize, I Bonds will likely once again return to their typical quiet corner of the bond market. While I Bonds do offer real benefits of guaranteed principal and inflation protection, in our view, they should not be viewed as a cash proxy or a guaranteed high return in perpetuity. These bonds can be a good way to save for higher education costs and make the most sense for investors seeking safety with excess long-term savings.

Articles and Commentary

Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.


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