Concerned about rising inflation Nearly risk free I Bonds could soon pay

Concerned about rising inflation? Nearly risk-free I-Bonds could soon pay out 9.62%

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Less risk often means lower returns. But that’s not the case for I-Bonds, an inflation-linked and government-backed asset that could soon pay out an estimated 9.62%.

I-Bonds are currently offering a 7.12% annual yield through April, and the rate could reach 9.62% in May based on the latest CPI data. Annual inflation rose 8.5% in March, according to the US Department of Labor.

“The 9.62% is a staggering number,” said certified financial planner Christopher Flis, founder of Resilient Asset Management in Memphis, Tennessee. “Especially given the performance of other fixed income assets this year.”

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Of course, the 9.62% yield is an estimate until the US Treasury announces new interest rates on May 2. Still, I-Bonds might be worth a look if you’re looking for ways to beat inflation. Here’s what you should know before you buy.

This is how I Bonds work

I-Bonds, which are backed by the US government, do not depreciate and pay interest based on two parts, a fixed and a floating rate that change every six months based on the consumer price index.

Buying I-Bonds through the end of April will lock you in at 7.12% over the next six months, followed by an estimated 9.62% over another six months, for a 12-month moving average of 8.37%, so Ken Tumin. Founder and Editor of tracking these assets.

However, there are only two ways to buy these assets: online through TreasuryDirect, capped at $10,000 per calendar year for individuals, or using your federal tax refund to buy an additional $5,000 in Paper I Bonds. Redemption details can be found here.

You can also buy more I-Bonds through companies, trusts, or estates. For example, a couple with separate businesses can buy $10,000 each per business plus $10,000 each as individuals, for a total of $40,000.

Disadvantages of I-Bonds

One of the downsides of I-Bonds is that you can’t redeem them for at least a year, said George Gagliardi, a CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts. And if you redeem them within five years, you lose the interest of the last three months.

“I think it’s decent, but like everything else, nothing comes for free,” he said.

Another potential downside is lower future returns. The floating portion of I-Bond interest rates can be adjusted downward every six months, and you might prefer higher-paying assets elsewhere, Gagliardi said. But there’s only a one-year commitment with a three-month interest penalty if you choose to cash out early.

Still, I-Bonds might be worth considering for assets outside of your emergency fund, said Resilient Asset Management’s Flis.

“I think the I-Bond is a wonderful place for people to invest the money they don’t need right now,” he said, for example as an alternative to a one-year certificate.

“But I-Bonds are not a substitute for long-term funds,” Flis said.