On November 2, the US Treasury reduced the annualized rate of I Bonds to 6.48%, ending its six-month record-high rate of 9.62%. The latest rate adjustment (which happens every May and November) comes with a caveat: a fixed-rate bump from 0% to .4%. This means purchasers will receive the variable rate until the next change in May, 2023, while they’ll enjoy the .4% rate for the life of the bond.
The last round of I Bonds enjoyed record-breaking sales—unsurprising, considering the typical interest rate for savings accounts from major banks is currently .09%. Consumers are frustrated watching the disparity between bank profits and their own meager interest rates. Global banks achieved record profits in 2021 and are set to see record highs from commodities in 2022, and so Americans are stuck looking for the best places to earn interest on their money.
With dismal interest rates in savings accounts, risk-averse citizens who don’t want to put their faith (and money) in the stock market often turn to safer investments, such as treasury bonds. But are they the best alternative?
Let’s look at how they work.
The US Treasury first released inflation-adjusted Series I savings bonds (I Bonds) in 1998. The interest rate for every bond is based on two components: a fixed rate that remains constant for the duration of the bond’s life (currently .4% for this round of bonds) and a variable rate (currently 6.48%) dependent on inflation and tied to the consumer-price index.
Fixed-rate offerings (or, in the case of I Bonds, a combination of fixed and variable rates) come with certain lockup features. I Bonds must be held for a minimum of 12 months. To receive the full interest rate, however, you must hold it for five years. Selling your bonds before the five-year period results in a loss of three months of interest.
There are also purchase restrictions. Americans are allowed to buy up to $10,000 in electronic I Bonds—this includes bonds purchased and received as gifts—as well as an additional $5,000 in paper bonds. Finally, an additional $10,000 in I Bonds can be bought through a registered trust.
Federal taxes on compound interest do not have to be paid until the bond is cashed out. Interest compounds biannually through the life of the bond, which accrues for up to 30 years.
The question of liquidity
There are advantages to I Bonds, most notably earning a higher interest rate than offered by traditional bank accounts. But consider the following:
- The lockup term is a minimum of one year, which means I Bonds have no liquidity for at least 12 months
- If you cash out before five years, you’ll lose three months worth of interest
- Interest only compounds twice a year
- Treasury bonds are highly liquid after one year, though they’ll have to be sold on a secondary market
Liquidity refers to money and assets that can quickly be turned into cash without losing value. Cash is, of course, the most liquid asset, with treasury bonds, mutual funds, and precious metals all being highly liquid. Turning your baseball cards, jewelry, or even your house into cash takes a lot more work, making them relatively illiquid.
So while I Bonds are highly liquid, they come with a number of caveats. They work especially well in today’s environment, with skyrocketing inflation and extremely low interest rates on offer from traditional banks. But their returns are relative to a playing field that’s tilted toward large financial institutions and not consumers.
Treasury bonds are part of a legacy banking infrastructure that has not yet caught up to the technology available to us. The ability to earn higher interest rates with fully liquid assets—no lockups, investment limits, infrequent compounding or penalties for withdrawing early—now exists.
Everyone deserves better options to maximize their wealth.