Series I bonds now pay 5.51% annual interest through April 30, up from 4.26% on purchases made through October. The variable portion of the rate rose to 4.08%, while the fixed portion increased to 1.40%, its highest level since 2006.
Ken Tumin, founder of DepositQuest.com, called the new I bond rate "very attractive" and noted the bonds look "very competitive" compared to savings accounts and certificates of deposit for the next six months.
The variable rate resets every six months based on the consumer price index. The 1.4% fixed rate remains constant for the life of the bond, potentially appealing to longer-term investors.
Investors can purchase $10,000 of electronic I bonds per person per calendar year through TreasuryDirect. I bond interest is tax-deferred until redemption and exempt from state and local taxes. Money used for qualified education expenses avoids federal taxes.
Significant drawbacks exist. Funds remain locked for 12 months, and investors lose the last three months of interest if redeeming within five years. After five years, redemption occurs penalty-free.
Certified financial planner Eileen Olson said I bonds are "more hassle than they're worth" for most clients due to purchase limits. On a $2 million portfolio, the $10,000 annual limit represents only 0.5% and generates roughly $550 yearly before taxes. Olson prefers Treasury Inflation-Protected Securities, or TIPS, which have no purchase limits and offer five-, 10-, and 30-year terms with yields ranging from about 2.3% to over 3% as of November 2.
Alternatives include Treasury bills with yields over 4%, high-yield savings accounts paying above 4%, one-year CDs offering over 4%, and money market funds yielding around 4% as of November 2.
I bonds paying 5.51%, TIPS with varying maturities, Treasury bills, high-yield savings alternatives, and money market funds are all relevant to investors comparing short- and medium-term cash positions and inflation protection strategies.