Newly purchased Series I bonds currently offer a 5.51% annualized composite interest rate through April 30, up from the 4.26% rate available for purchases made through October. The increase reflects a 4.08% variable rate linked to inflation and a 1.40% fixed rate, the highest fixed component since 2006.
The composite yield is the highest for I bonds since November 2022. Ken Tumin, founder of DepositQuest.com, described the rate as very attractive, particularly for investors comparing short-term cash alternatives such as savings accounts and certificates of deposit.
The variable component resets every six months according to the consumer price index. The fixed component remains unchanged for as long as the bond is held, which may appeal to investors with longer-term goals.
I bonds can be purchased electronically through a TreasuryDirect account, with an annual limit of $10,000 per person. Additional TreasuryDirect accounts for family members or businesses can allow for further purchases. Interest is tax-deferred until the bonds are redeemed and is exempt from state and local taxes. Federal taxes may also be avoided when the proceeds are used for qualified education expenses.
However, the money cannot be accessed during the first 12 months after purchase. Investors who redeem I bonds before holding them for five years forfeit the previous three months of interest. After five years, they can be redeemed without that penalty.
Because of the access restrictions, financial advisers generally suggest using I bonds only as a secondary emergency fund. David Enna, founder of Tipswatch.com, said investors should maintain enough readily available cash elsewhere to cover immediate needs. Advisers typically recommend holding three to six months of living expenses in cash for emergencies.
The annual purchase limit can also reduce the usefulness of I bonds for investors with large portfolios. Eileen Olson, a certified financial planner and founder of Emerald Wealth, said the limit may be too small to have a meaningful impact for many clients. On a $2 million portfolio, a $10,000 purchase represents 0.5% and would earn about $550 over a year before federal taxes at the current rate.
Olson favors Treasury inflation-protected securities, or TIPS, for investors seeking broader inflation protection. TIPS do not have the same purchase limits and can be bought outside TreasuryDirect. As of Nov. 2, TIPS with five-, 10- and 30-year terms had yields ranging from about 2.3% to above 3% for the 30-year term.
For shorter-term cash, experts also point to Treasury bills, high-yield savings accounts and money market funds. Treasury bills have maturities ranging from four weeks to 52 weeks, and some yields were above 4% as of Nov. 2. The top 1% of high-yield savings accounts were paying more than 4%, while some one-year certificates of deposit were also above 4%. Large money market funds were paying around 4% on the same date.
Sources: CNBC Markets.