Rising inflation may increase yearly rates for I bonds. Here’s what to know

If you’re rattled by soaring prices, I bonds, a popular inflation-protected and nearly risk-free asset, may soon become even more appealing, experts say.

While I bonds currently pay 7.12% annual returns through April, that rate may jump to 9.62% in May, according to Ken Tumin, founder and editor of Depositaccounts.com, who tracks these assets.

I bond returns have two parts: a fixed rate and a variable rate, changing every six months based on the Consumer Price Index.

The next change, linked to March data, will reflect an 8.5% growth in annual inflation, the latest numbers released by the U.S. Department of Labor on Tuesday.

Of course, the 9.62% rate is an estimate. The U.S. Department of the Treasury will officially announce I bond rates for the next six months on May 2, Tumin said. This chart shows the history of both rates.

However, purchasing I bonds in April offers a unique “12-month view” of earnings, he said. If you buy in April, you’ll lock in 7.12% annual returns for six months, followed by an estimated 9.62% rate for another six months.

Backed by the federal government, I bonds are a relatively safe portfolio option because the value doesn’t decline and rates won’t ever drop below zero.  

“The main ‘gotcha,’ though, is that you’re limited in terms of how much you can invest,” Tumin said.

You may purchase $10,000 per calendar year, plus an extra $5,000 in paper bonds through your tax refund. However, individuals may buy more through separate tax IDs for businesses, trusts or estates. 

Another downside is the lack of flexibility, making I bonds less attractive for emergency savings you may need to access in a pinch.  

“You absolutely cannot access it for a year,” said certified financial planner Tricia Rosen, principal at Access Financial Planning in Andover, Massachusetts. “It doesn’t matter how badly you need it or what horrible situation you’re in.”

Moreover, if you cash in I bonds within five years, you’ll lose the previous three months of interest, she said.   

Still, selling I bonds after one year and giving up three months of interest may be more lucrative than a savings account or one-year certificate of deposit, Tumin said.

Savings accounts and one-year CD rates at the largest retail banks are currently averaging 0.06% and 0.15%, respectively.

“The benefits of I bonds are really coming into play,” he added, explaining how there haven’t been other periods of high inflation since the Treasury introduced I bonds in 1998.