Should I buy I bonds at the end of the month?
The Treasury Department says that you will still get a full month's worth of interest no matter if you purchase your I bond on the first or last business day of the month. However, there are a few big caveats. For one thing, I bonds can't be cashed out within the first year.
Keep in mind that you don't earn interest on your I Bonds until you complete the month, so cash out early in the month. If it's near the end of the month, plan to cash out after the 1st of next month so you get the interest you've earned.
The interest rates for I bonds, as they're commonly called, are on the rise again. The Department of the Treasury announced Tuesday that the new rate for I bonds issued between November 2023 and April 2024 is 5.27%. The previous annualized rate for bonds purchased over the last six months was 4.30%.
§ 359.16 When does interest accrue on Series I savings bonds? (a) Interest, if any, accrues on the first day of each month; that is, we add the interest earned on a bond during any given month to its value at the beginning of the following month.
That rate is currently set at 3.94%, annualized, for six months. It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased. The current composite rate is 5.27% annualized for six months for purchases through April 2024.
Unless you are set on holding your bonds until maturity despite the upcoming availability of more lucrative options, a looming interest rate hike should be a clear sell signal.
The answer is both yes and no, depending on why you're investing. Investing in bonds when interest rates have peaked can yield higher returns. However, rising interest rates reward bond investors who reinvest their principal over time. It's hard to time the bond market.
November 1, 2023. Series EE savings bonds issued November 2023 through April 2024 will earn an annual fixed rate of 2.70% and Series I savings bonds will earn a composite rate of 5.27%, a portion of which is indexed to inflation every six months.
The combined rate changes every 6 months. It can go up or down. I bonds protect you from inflation because when inflation increases, the combined rate increases.
The initial yield is only good for the first six months you own the bond. After that, the investment acts like any other variable vehicle, meaning rates could go down and you have no control over it. And if you wait until, say, 2025 to buy an I bond, the initial rate could be well below current levels.
Can I buy $10000 worth of I bonds every year?
There is generally a $10,000 limit per year for purchasing I Bonds, but there are a few ways to get around this limit.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
More about savings bonds
The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.
The worst-case scenario for purchases in February 2024 is you earn 5.27% interest for the 6 months after you buy your I bond, followed by 0%. While unlikely (it's only happened twice out of 52 inflation rate resets), it is possible that inflation is negative, which could cause your next 6-month renewal rate to be 0%.
Another advantage is that TIPS make regular, semiannual interest payments, whereas I Bond investors only receive their accrued income when they sell. That makes TIPS preferable to I Bonds for those seeking current income.
Economists expect the consumer-price index, or CPI, already down to 3.1% from its June 2022 high of 9.1%, to fall to 2.4% by the end of 2024. Since the inflation-linked component of I bonds' interest is adjusted each May 1 and Nov. 1, it will likely end the year lower.
If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk.
The fixed rate rose to 0.4% in November 2022 so any I bond purchased after that date should be held. Likewise, you may want to hold on to I bonds issued between May and October 2023. Those I bonds have a fixed rate of 0.9%, which is the highest fixed rate in 16 years.
Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
During times of high inflation, bonds yielding fixed interest rates tend to be less attractive. Not all bonds are affected by interest rates in the same way. Bonds with a longer maturity are more sensitive to changes in interest rates, and therefore, more affected by inflation.
Is it a good time to buy bonds when inflation is high?
Inflation is a bond's worst enemy. Inflation erodes the purchasing power of a bond's future cash flows. Typically, bonds are fixed-rate investments. If inflation is increasing (or rising prices), the return on a bond is reduced in real terms, meaning adjusted for inflation.
Interest rates and bonds often move in opposite directions. When rates rise, bond prices usually fall, and vice versa. Learn the impact this relationship can have on a portfolio. As an investor, it's important to understand the relationship between bonds and interest rates.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.
You can cash in an I bond after a year, but if you withdraw sooner than five years, you'll pay a penalty of the last three months' interest. Because your rate changes every six months, it's smart to withdraw when your penalty will be based on a lower rate—and avoid cashing out when you'd be forfeiting a high rate.
I-bonds are a good investment as long as inflation remains high, Papadimitriou said. But if the Fed continues to pause its interest rate hike like it did in September, the lure of I-bonds could vanish, he said. "It's very hard to predict the future," Papadimitriou said.
