Off the cuff, it is hard to think of any other investment, where the rate of return earned two decades ago continues to directly influence what they receive today, except for Series I-bonds issued by the U.S. Treasury. Of course, early compound interest earned also impacts later investment growth, but here we are talking about just investment features per se.
Personal Connection
The author, during a recent annual review of her financials, was looking at the current interest that was being paid on her 12 I-bonds purchased between 2001 and 2006: three were paying 12.76%, three, 11.30%, and six, 7.51%…at least for a six-month period. The current rate paid on I-bonds issued through April 30, 2023, is 6.89%, and the current fixed rate component is 0.40%. From May 2020 through October 2022, the fixed rate was 0.0% (zero).
The high embedded fixed rates of a bygone era when I-bonds could be purchased in person at financial institutions instead of through a clunky website are the reason why the author is earning more than the current interest rate paid on newly issued I-bonds. Since I-bonds were first issued in September 1998; the fixed rate has ranged from 0% to 3.6% and is adjusted semi-annually. The earliest I-bond adopters (late 1990s) earned as much as 13.39% from May to October of 2022.
U.S. savings bonds (Series EE) began in 1935, and inflation-indexed I-bonds began in 1998. In 2008, bond purchases became available electronically, and in 2012 paper U.S. savings bonds were no longer issued by financial institutions. Instead, investors were directed to the Treasury Direct website.
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Lending to Government
I-bonds, like any other government bond, are loans to a government entity, in this case, the federal government. They are currently a high-yielding, low-risk investment paying almost twice the interest rate on a 30-year Treasury bond and about 30x the average savings account rate (0.23% on January 25). Interest is earned monthly and compounded semi-annually. Thus, every six months, interest is applied to a new principal value (i.e., old value + interest earned).
The interest (earnings) rate for I-bonds consists of a fixed rate component that remains the same over the life of the bond plus an inflation factor; which is based on the Consumer Price Index (CPI) for the last six months. I-bond interest rates update every six months on May 1 and November 1. Interest on I-bonds is payable for up to 30 years from their purchase date.
Easy to Purchase
Unfortunately, there is no advertising to tell people about I-bonds. Up to $10,000 of I-bonds can be purchased electronically down to the penny (e.g., $178.36) through Treasury Direct, and up to $5,000 (in different increments) of “old school paper I-bonds” can be purchased via a tax refund. Online talk suggests that some people significantly over-withhold income tax to buy paper bonds to avoid online hassles. When purchasing I-bonds online, investors must provide their Social Security number or other taxpayer ID and bank routing/account number.
The rate of return on I-bonds will eventually decrease when inflation decreases, but it will never fall below zero, so investors can’t lose money. I-bonds are not “too good to be true” if you understand how they work and their limitations, such as annual purchase limits and the inability to cash out within a year of purchase. But, undoubtedly, they are an easy-to-understand selection to have among your savings options.
