- Series I bonds currently offer a 6.89% annualized return through April, and the annualized rate could drop below 4% in May, based on the latest consumer price index data.
- While the new yield may be less attractive to shorter-term savers, it could still appeal to investors with a longer timeline, experts say.
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There has been record-breaking demand over the past year for Series I bonds, an inflation-protected and virtually risk-free asset. But rates are falling and yields will drop again in May, experts say.
Newly purchased I bonds currently offer a 6.89% annualized return through April, and the annualized rate could drop below 4% in May based on the latest consumer price index data. Annual inflation rose 5% in March, down from 6% in February, according to the US Department of Labor.
I bond rates below 4% represent “a pretty big drop from past rates,” said Ken Tumin, founder and editor of DepositAccounts.com, a website that monitors these assets. But it’s still “above average” compared to historical returnhe said.
Backed by the US government, I bonds earn monthly interest with two components: a fixed rate, which can adjust every six months for new purchases but remains the same after a purchase, and a variable rate, which changes every six months based on inflation. The US Department of the Treasury announces new rates every May and November.
Based on inflation data from the past six months, Tumin said the variable portion of the I bond rate may drop to 3.38% in May. While the fixed portion of the rate, currently at 0.4%, may rise slightly in May, he does not expect much movement.
If the fixed rate remains at 0.4%, the new annual rate could drop to 3.79%, Tumin said. Of course, the combined annual yield is only an estimate until TreasuryDirect announces the new rates in May.
In November 2021, the annual I bond yield jumped to 7.12%, and reached a record high of 9.62% in May 2022 before falling to 6.89% in November 2022.
David Enna, founder of Tipswatch.com, a website that tracks I bonds and other assets, said the new rate may no longer be attractive for investors “looking for yield just for a year or two.”
While it’s hard to predict when the Federal Reserve might pivot to interest rate hikes, options like Treasury bills or certificates of deposit have emerged as relatively safe alternatives for shorter-term savings.
As of April 12, the top 1% average one-year certificate of deposit was paying 5.19%, according to DepositAccounts. Three-month and four-month Treasury bill yields were also above 5% on April 12.
However, the new I bond yields may still appeal to longer-term savers looking to maintain purchasing power, Enna said.
“A large amount of interest has come from people looking for yield, not inflation protection,” he said. “Now we’re going back to people just looking for inflation protection.”
You can still lock in a 6.89% annualized return for six months by buying I bonds before May, Enna said. For those eager to get the 6.89% yield, he suggests buying the I bond before April 27, a few days before the rate announcement.
