As the annual rate for newly purchased Series I bonds is expected to fall below 5% in May, many long-term investors are considering their options. The current interest rate stands at 5.27% for new I bonds purchased before May 1, but experts are predicting a drop to around 4.27% based on inflation trends. However, investors still have the opportunity to lock in six months of the current 5.27% rate by purchasing new I bonds before the deadline, given they have not exceeded the annual purchase limit for 2024.
The U.S. Department of the Treasury revises I bond rates every May and November, consisting of a variable and fixed-rate portion. Based on the latest inflation data, the variable portion is set to decrease from 3.94% to 2.96% in May. Predicting the fixed-rate portion is more challenging, with experts suggesting it could stay close to 1.3%. The allure of the 1.3% fixed rate lies in its stability post-purchase, making I bonds an attractive option for long-term investors seeking consistent returns.
David Enna, founder of Tipswatch.com, advises investors to consider purchasing I bonds before the end of April to lock in the higher rate for the next six months. By buying before April 30, investors can benefit from a 5.27% annual interest for the initial six months and the new rate from May onward. Enna projects a fixed rate of 1.2% to 1.3% in May based on real yields for 5- and 10-year TIPS. However, there is a risk of disappointment for long-term investors if the Treasury announces a higher fixed interest rate in May following an April purchase.
While I bonds may be enticing for long-term investors, short-term investors are urged to consider other avenues for their cash. According to Ken Tumin, founder of DepositAccounts.com, I bonds are no longer a sure bet compared to online certificates of deposit or savings accounts. As of April 19, the top 1% of average one-year CDs were yielding about 5.5%, while high-yield savings accounts were offering around 5%. Short-term investors may also look into U.S. Treasurys or money market funds, with most Treasury bills paying well over 5% and two-year Treasury notes around 5% as of mid-April. Additionally, some of the largest money market funds were providing close to 5.4% returns, according to Crane Data.
The decision to invest in Series I bonds should be based on a careful analysis of your investment goals and risk tolerance. While long-term investors may find I bonds appealing for their fixed rates, short-term investors may discover more lucrative options elsewhere. Ultimately, it is essential to weigh the potential returns and stability of various investment vehicles before making a decision.