What are I Bonds and How Do They Fit in My Portfolio?

April 25th, 2022 | | AEGIScoop

What are I bonds?

I bonds (U.S. Treasury Inflation Adjusted Bonds) are US Treasury Bonds that earn interest based on a combination of a fixed rate and an inflation rate. The fixed rate is an interest rate that stays the same for the life of the bond. The variable rate is based on the consumer price index (CPI). The variable rate is updated twice per year. I bonds can earn interest for 30 years and must be held for a minimum of 12 months. If an I bond is redeemed within the first five years, the investor will lose the previous three months of interest. For example, if an I bond is redeemed after 21 months, an investor will receive the first 18 months of interest. Limits for the purchase of I bonds is $10,000 per calendar year per person.

How can I purchase I bonds?

I bonds can only be purchased and redeemed directly from the US Treasury.  I bonds are purchased electronically via TreasuryDirect.gov but may also be purchased via mail when you file your federal tax return.

Why are I bonds an attractive short-term option?

When compared to other types of bonds, including the 10-year Treasury Bill (T-Bill), I bonds offer an attractive interest rate. We use the 10-year Treasury Bill as a comparison because it is a common indicator of broader investor confidence. Currently, the 10-year yield on a T-Bill is around 2.8%. The current I bond guaranteed rate is 0%, which has been the current rate since May 2020. The current variable rate on an I Bond is 7.12%. This is based on the CPI number from November 2021. This dramatic increase in I bond rates have made them an attractive short-term option for some investors.

Further information on I bonds can be found on the TreasuryDirect website at treasurydirect.gov.

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