Inflation has been rising, making more attractive what was formerly considered a humdrum investment: federal savings bonds.
Series I savings bonds - the I stands for "inflation"- are low-risk bonds that pay a fixed rate set for the life of the bond, plus a rate that varies based on inflation, as measured by the Consumer Price Index. The rate resets twice a year, in May and November.
The fixed rate on new I bonds has been zero for more than a year - not much to get excited about. But the annualized inflation rate is 3.54% for bonds issued from May through October.
That's an eye-catching number, especially compared with rates on basic savings accounts and certificates of deposit insured by the Federal Deposit Insurance Corporation. The average interest rate on a savings account is 0.13%, with average rates of about 0.5% available through online banks, according to the website DepositAccounts.com.
It is true that buying an I bond now, with a zero base rate, means you may earn less if inflation falls and the bond's variable rate falls along with it when rates reset. While no one can predict whether inflation will continue to rise, prices have been increasing as the economy rebounds from the pandemic - so hedging against further inflation may make sense.
"If inflation stays elevated, it's a bit of a no-brainer," said Andy Mardock, a fee-only financial planner in Bend, Oregon, and a member of the National Association of Personal Financial Advisors.
Plus, even if the inflation rate drops, you'll get back your initial investment - the face value of the bond when you bought it - when you eventually redeem it. The bonds also protect you against deflation: The overall rate on the bonds can never fall below zero.
"The earnings rate can't go below zero, and the redemption value of your I bonds can't decline," the Treasury website says.
Savers bought I bonds totaling $127.6 million in May, compared with $13.4 million a year earlier, according to Treasury Department data analyzed by Ken Tumin, founder and editor of DepositAccounts.com. In addition to possible concerns about inflation, some of the sales in May could have been the result of this year's delayed income tax filing deadline, Tumin said; bonds typically purchased with tax refunds in April may have been bought a month later. (Purchases of I bonds tend to spike in January of each year, the data shows, but the amount bought this spring was markedly higher than in January of this year and last year.)
There are some details about the I bonds to keep in mind.
First, there's a limit on how much you can invest. You can buy up to $10,000 per year, per person, in digital I bonds through Treasury Direct, a website operated by the Bureau of the Fiscal Service, which is part of the Treasury Department. (Savings bonds can no longer be bought at bank branches.)
You can also buy an extra $5,000 in paper I bonds each year using your income tax refund. (Buying with a tax refund is the only way left to buy traditional, nonelectronic savings bonds).
A couple, then, could buy up to $30,000 in I bonds for themselves annually. They could also buy more to give to someone as a gift.
Another downside: You must hold a bond for 12 months. The government won't redeem it earlier. So be careful before putting your entire emergency fund into I bonds, Mardock said - you can't convert them to cash for a year.
"The catch is, it's not as liquid as a savings account," Tumin said.