The annual rate for newly purchased Series I bonds could potentially drop below 5% in May, causing concern among investors. Currently, individuals earn 5.27% annual interest on new I bonds purchased before May 1. However, experts are predicting that the new rate could decrease to around 4.27% based on inflation and other economic factors. Despite the expected decrease, there is still an opportunity to lock in six months of the 5.27% yearly rate for new I bonds before May 1, provided that the purchase limit for 2024 has not been exceeded.
The Adjustment Process
The U.S. Department of the Treasury adjusts I bond rates, which include a variable and fixed-rate portion, every May and November. The variable portion of the rate is based on the last six months of inflation data and is expected to fall from 3.94% to 2.96% in May. On the other hand, the fixed-rate portion is more difficult to predict, with experts speculating that it could remain close to 1.3%. This fixed rate makes I bonds an appealing option for long-term investors as it remains the same after purchase.
Financial experts suggest that individuals interested in purchasing I bonds should consider doing so before the end of April to take advantage of the higher rate for the first six months. By buying before April 30, investors can secure a 5.27% annual interest rate for the initial half-year period and transition to the new May rate for the following six months. It is advisable to make the purchase a few days before the end of April to maximize the benefits.
While long-term investors may find I bonds appealing, particularly due to the fixed interest rate, short-term investors may have better options for their cash investments. Financial experts recommend exploring alternatives such as online certificates of deposit or savings accounts, which may offer higher returns. As of April 19, the top 1% average one-year CDs were paying about 5.5%, and high-yield savings accounts were yielding around 5%.
Other Investment Options
In addition to the traditional savings and CD options, short-term investors may also consider U.S. Treasurys or money market funds as viable alternatives. As of April 19, most Treasury bills were offering returns well over 5%, while two-year Treasury notes were averaging around 5%. Similarly, some of the largest money market funds were paying close to 5.4%, providing investors with potential avenues for maximizing their returns in the short term.
While the upcoming decrease in interest rates on Series I bonds may impact the appeal of these assets to investors, there are still opportunities to capitalize on the current higher rates before the end of April. Whether investors choose to pursue long-term investments in I bonds or explore other short-term options, careful consideration of the financial landscape and potential returns is essential for making informed decisions. It is critical for investors to weigh the benefits and drawbacks of each investment opportunity to align with their individual financial goals and risk tolerance.
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