September 20, 2022

Over the last few months, personal finance news has been encouraging readers to purchase I-bonds. Much like a certain British spy they can be really attractive, but are not without some risk.

So, what is an I-bond?

I-bonds, or more formally, “Individual – Series I Savings Bonds” from the US Treasury, are government bonds that anyone can buy and redeem directly from  They are sold at “face value;” for example, it costs $100 for a $100 bond.

There is no “secondary market” for these, which means there is nowhere else to get them.  You buy and sell directly from and to the US Treasury. This face value is fixed, and a new interest rate is applied to your bond every six months from the issue month. Interest is accrued to the US Treasury’s ledger every month on the first day, not to your bank account.

After six months, the principal value of the bond is adjusted upward, to include your principal plus all the accrued interest over the previous six months. Moving forward, new interest is earned on this new principal.  There is no option to receive cash or a GoldenEye (that one was a stretch) in lieu of a “reinvestment.” With I-bonds, interest is paid in one giant lump sum at redemption along with the return of principal (what you originally paid for the bond).

The Attraction

What makes I-bonds so attractive, is the 7.12% interest rate. Part of this interest calculation is based on inflation, which makes these savings bonds an attractive option for investors seeking to hedge inflation risk. A high interest rate can really help or completely offset the erosion of purchasing power.  Allowing your purchasing power to Die Another Day.

I-bonds are considered fairly “liquid” investments, which means they may be redeemed almost any time at or before maturity, but with certain stipulations.

  • The 12% interest on these bonds is actually the lowest rate that these bonds have ever paid going back to 1998. Though this rate has been on a gradual decline, it will Die Another Day given that the Fed is signaling rate hikes this year and next.  We see a lot of support for 7.12% with prospects of this going higher.
  • Most I-bonds are electronic, which means at the end of 30 years, the US Treasury will automatically redeem the bond and pay cash.

The Risks

Clients are calling our office, eager to take advantage of this opportunity. We are exercising caution for now because we do not understand the sense of urgency.

  • The biggest draw back is the low limit. In a calendar year an individual can only purchase $10,000 in electronic I-bonds.  They may also purchase an additional $5,000 in paper I-bonds IF they are purchased with their federal income tax refund.
  • In terms of interest, I-bonds are priced by the government, not the market, which means they are not subject to the same supply and demand forces that would normally variate prices. These bonds are traded in primary markets only, between you and the US Treasury. They will not experience capital gains and capital losses when they are bought and sold.  Making them more secure, but not as exciting as a Casino Royale.
  • I-bonds have a one-year minimum holding period and a three-month interest penalty if redeemed before five years.
  • While they do accrue interest for 30 years, they will stop accruing interest at that time.
  • If you are managing inflation risk with an I-bond, you must stay current on prevailing inflation rates to determine if the investment is working for you.

Should investors buy?

While I-bonds are attractive to more risk averse clients who want to be prepared for the Skyfall, the lack of any real profitability, and the low limit, makes it a bad fit for those seeking growth in their portfolio.

As always, if you have any questions or comments, particularly about using I-bonds as a personal savings option, please contact Align and schedule an appointment!