Consider I-Bonds as Part of Cash Reserve

April 28, 2022

With black clouds having circled the stock and bond markets during what has felt like a very bumpy 2022 so far given the war in Ukraine, inflation, and the continuing impact of Covid-19 around the world, a silver lining has developed for those seeking higher interest rates on their cash reserves. 

Given higher inflation numbers, US government-issued I-Bonds have made headlines lately and are potentially a place to stash some of one’s cash reserves.  I-Bonds offer interest rates based on a combination of a fixed rate that stays the same for the life of the bond and an inflation rate that adjusts twice a year.  While the fixed rate for bonds issued through April is 0.00% (and hasn’t been over 0.5% for over a decade), the interest based on the inflation rate is currently 7.12% (annualized).  The annualized inflation rate for I-Bonds purchased beginning in May is expected to be an eye-popping 9.62%.

With I-Bonds being a nearly risk-free investment, why on earth wouldn’t everyone put all their money into these instruments!?  For one - each person is limited to a $10,000 purchase annually.  Purchases must be made directly from the government via the website, and I-Bonds cannot be redeemed for 12 months.  Redeeming I-Bonds within five years of purchase will result in a penalty equal to 3 months of interest.

Many anticipate an easing of inflation in the second half of 2022, so it’s quite possible the interest rate reset in November on I-Bonds will come down.  However, it’s reasonable to anticipate I-Bond rates will remain better than bank savings or CD rates following such reset.  Because I-Bonds are only available through Treasury Direct, we’re unable to hold them in client accounts.  However, if you don’t mind navigating the government’s website to open an account and make a purchase, and you have excess cash reserves such that you won’t need access to these funds for a minimum of twelve months, I-Bonds are worth a look.