By Beth Pinsker
As a harbinger for inflation, these unique government bonds could be signaling trouble again
Series I bonds are a savings investment from the Treasury that provides a hedge against inflation.
Series I bonds are back to being the best game in town for interest rates on cash, and that should probably scare people a little bit.
The conditions that turned I bonds into a phenomenon in 2022-with record sales for returns that topped out at the equivalent of 9.62% for a risk-free investment – might be swinging back around, signaling even worse times ahead.
“It shows that inflation can be unpredictable,” said Ken Tumin, co-founder of Deposit Quest, who has long been an I-bond watcher and buyer. “It makes sense to hedge bets, and then you could get a surprise on the upside in the future.”
If you’re thinking about buckling up for safety, now would be a good time to jump into I bonds, especially if you were late to buy them before and missed the big upswing.
The latest I-bond rate reset on May 1 has a fixed component of 0.9% and a half-year inflation part of 1.67%, which combines for an annualized return of 4.26%. You are locked into an I bond for a year, have a purchase limit of $10,000 per individual per calendar year and lose the last three months of interest if you cash out before five years.
Even with the restrictions, that deal is currently better than a 1-year Treasury bond or a bank CD, which come in at more like 3.75% to 4%, and better than many money market and high-yield savings accounts, which are hovering around 4% with some special deals that can push them higher but have conditions.
TIPS, the other inflation-protected investment offered by the U.S. government, have 5-year terms (and 10 and 30 years), so they aren’t directly comparable, but they sell on the secondary market and via ETFs, so you can get daily pricing. Comparing I bonds to TIPS, the financial adviser Matt McKay of Briaud Financial Advisors said that I bonds come out ahead right now for their simplicity and for their potential pricing after a year.
“TIPS are too far out,” he said, and if they’re not holding to maturity, he doesn’t want clients to get caught short if they have to buy or sell.
Tumin said that when he compares I bonds to TIPS, he sees the pros for I bonds winning most of the time. “With I bonds, you can defer federal income tax on the interest until you redeem or until the 30-year maturity. That’s a pretty significant benefit,” he said. “The main downside is limited to $10,000 per year for individuals. If you have a lot to invest, you need to go into TIPS.”
I bonds as a signal
The reason I bonds leapt to the front of the pack in 2022 is that interest rates were low. And then inflation jumped. That pushed I bonds up, just as other fixed-income products were sinking lower. The best time to buy for aggressive rate seekers was when I bonds on the upswing crossed paths with everything else on the downswing.
Financial adviser Jeremy Keil, author of “Retire Today” and a podcast host, sees potential for this again. “Technically, today’s I-bond rate is the best since the November 2022 rate, relative to 12-month Treasurys,” he said, as he has calculated that I-bond rates are historically 1% higher than 12-month Treasury rates. “I would call today’s I-bond rate a ‘fair deal’ as opposed to 2023-2025 when it was a ‘bad deal.'”
No one knows what will happen next, but if trends continue, with inflation rising and interest rates falling, it creates a situation similar to 2022. Even if things remain static for a while, it means I bonds become a good place to park cash for the foreseeable future.
“I bonds are ‘trending up’ which is similar to 2020, but not the ‘canary in the cave’ that the May 2021 rate was (it was 3.46% better than the 12-month Treasury at the time), which hadn’t been seen since 2008-2009 and 2002-2003,” Keil added.
But another thing that’s different now is that the I-bond fixed rate is nearly a full percentage point, whereas in 2022 it was 0%, and the whole headline phenomenon was caused by inflation. Buyers can get in now at a good rate, and then hold that fixed rate as long as they hold the I bonds they buy now. That means they’ll have 1% plus the inflation rate at every six-month interval, and if inflation rises and interest rates drop, they’ll be getting much more than the other options.
“You won’t get rich, but this is a strong investment for preserving capital,” said David Enna, editor of Tipswatch, a blog that covers fixed-income products, in a recent column.
A savings strategy, not a get-rich-quick scheme
These are not the kind of return numbers that most people are looking for compared with equities, but more than 4% on cash is good for retirees. Most I-bond experts recommend that people be in this for the long haul and develop a layered strategy for their nest eggs that protects the principal.
That might look like a high-yield savings account for the money they need immediately, then the next $10,000 (or $20,000 for a couple) goes into I bonds to serve as a reserve for more than a year out. The rest of the fixed-income portion of their portfolio can go in TIPS, Treasurys or CDs.
“Definitely, high-yield savings accounts and CDs provide safety and simplicity,” said Tumin. “Rates are still high compared with what they have been.”
Looking out longer than three years is hard for McKay. “We’re hyper-short at the moment,” he said, and that’s not just because of the situation with Iran. His firm started to see trouble at the end of 2025 and feared that if anything remotely trembled the market, it would cause aftereffects in the economy: higher inflation and lower interest rates. “Long-term bonds should be up 10%, but they’re not, because we have so much pressure on the debt.”
McKay pointed to a bright side for the overall economy, however, which may push I bonds out of favor in the future for those just seeking the highest yield available at the moment. Long-term savers, however, can always use an extra 1% on top of the current inflation measure.
“With I bonds that have a positive fixed rate, you’re guaranteed to stay ahead of it,” said Tumin. “Like in the last five years, you never know when inflation will jump up.”
Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put “Fix My Portfolio” in the subject line.
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