U.S. Series I savings bonds became the darling of the cash world last year when their inflation-based yield hit high single digits, far outpacing other options. But I bonds issued beginning in May will pay a much more modest 3.38% annual rate for the first six months given the Consumer Price Index’s change from September to March.

The Treasury Department will announce an additional fixed-rate component in May that applies for the life of I bonds purchased between May and October, although it has been 0% for most bonds issued in the last three years. 

A spokesperson for the Treasury’s Bureau of the Fiscal Service was “unable to comment” about how the fixed rate is determined.

While I-bond yields have diminished as inflation has slowed, rates on competing investments have soared since the Federal Reserve began tightening in March 2022.

“It’s tough to recommend buying I bonds in May with the one-year Treasury bill now yielding about 4.7%,” said Jeremy Keil, a financial planner with Keil Financial Partners in New Berlin, Wis., who has recommended I bonds to clients in the past.

Currently-outstanding I bonds will begin paying the 3.38% inflation-based rate, along with any fixed rate they were issued with, when their current six-month interest cycle ends, which is based on the bond’s month of purchase.

I bonds are non-marketable securities with “several restrictions that can limit clients’ flexibility and liquidity compared to other vehicles,” said Wes Moss, managing partner and chief investment strategist at Capital Investment Advisors in Atlanta.

A chief constraint is the $10,000-per person ($20,000 for a couple) annual limit on purchases of electronic I bonds through an account the client establishes with TreasuryDirect.gov; up to $5,000 more in paper bonds can be purchased with a federal income tax refund. (Tax-refund purchases have ranged from 10% to 25% of annual I bond issuance in recent years, according to the Bureau of the Fiscal Service.)

Further, I bonds must be held at least one year. Redeeming them within five years forfeits the last three months’ interest.

Buy In April?
Despite the shortcomings, clients seeking a long-term inflation hedge may wish to purchase electronic I bonds before 11:59 PM Eastern Time on Thursday, April 27, because they will carry a fixed rate of 0.4%. “The client would be assured of earning 0.4% more than inflation for up to 30 years,” the bond’s maturity, Keil said. The client’s first-year return would be 5.41%, Keil said, based on semi-annual compounding and a 6.89% annual rate for the first six months, followed the next six months by an annual rate of 3.79%, both of which include the fixed rate.

Is It Time To Redeem?
Clients who bought I bonds for their formerly great rate and who have met the one-year holding requirement may want to exit, but they shouldn’t immediately redeem bonds less than five years old, Keil said. “Our recommendation is to wait until three months after the I bond has renewed at a low rate, then cash it in. That way you lose three months of low interest.”

Redeem first any I bonds that have a 0% fixed rate, said John M. Scherer, principal and founder of Trinity Financial Planning in Middleton, Wis.

One caveat to redeeming I bonds is the client may not be able to restore the allocation later. “If someone redeems $50,000 of I bonds today, because of the annual limit on purchases they cannot automatically put $50,000 back into I bonds next year if inflation rears up again,” Scherer said.

Another concern is that redemption triggers federal income tax on all the interest earned since the bond’s purchase, unless the client chose to report the bond’s accrued interest each year, which is rare, advisors said.

The interest is state income tax free.

The Advisor’s Challenge And Opportunity
On occasion a client will log into their TreasuryDirect.gov account during an in-person or virtual meeting with their advisor to get some help. But for the most part, clients, not advisors, implement I bond transactions, said Byrke Sestok, co-owner of Rightirement Wealth Partners in Harrison, N.Y.

Add value by making sure busy clients don’t fail to act, he said. 

“The rate could change lower and the client doesn’t get out of their bonds, or doesn’t purchase bonds before the rate changes,” Sestok said. “You have to help clients stay on top of it.”