The U.S. Treasury Series I Savings Bonds are 30-year instruments whose interest rate is reset every six months and are a way to help protect one from inflation. The rate is a combination of an inflation calculation over a six-month timeframe and a fixed rate determined by the Treasury Secretary. With inflation increasing this year to multi-decade highs, the inflation calculation for I Bonds bought until April 30, 2022, pay 7.12% for six months.

While the 7.12% rate is only guaranteed for six months, even if the second six months rate falls to 0% and the bonds are redeemed after one year (and lose the last three months of interest) they will still return 3.56% for the year. This compares to a one-year U.S. Treasury Bill paying 0.26% per year and the highest one-year CD on bankrate.com paying 0.67%.

**There are some “drawbacks” to Series I Bonds**

While 7.12% is a phenomenal rate in the current environment, there are some drawbacks or limitations to them.

- Money is committed for one year
- Can be withdrawn after one year but lose the last 3 months of interest
- But if held for five years there is no penalty for redeeming them
- Maximum investment of $10,000 per calendar year per person (couple can buy $20,000 per year in separate accounts)
- You have to buy them directly from the U.S. Treasury
- Can invest an additional $5,000 per person per year directly from a tax refund but a physical bond will be delivered vs. using an online account
- Interest income is deferred until redeemed
- Interest rate can move lower but never less than 0%
- Note that the May 2020 start date tranche, which was just over a year ago, had a rate of 1.06%, the lowest rate since 2007
- However, there have only been two six-month timeframes over the past 11 years where the rate was below 2%

**There are definitely some positives**

The Series I Bonds are definitely a very safe way to invest cash that is not needed for a year. And until interest rates increase enough, they are a way to “park” excess cash. Some positives are:

- Current 7.12% rate is very high for essentially risk-free bonds
- Value can never go below what you invest, even if deflation occurs
- Can invest as little as $25 and up to $10,000 per person per calendar year
- Exempt from State and Local taxes (still pay Federal taxes)
- Federal taxes on interest is deferred until redeemed
- Can hold them for up to 30 years
- $0 cost to buy or redeem
- Interest is compounded since it is not paid out until redeemed
- Know what the next six-month return will be. New rates are announced on May 1 and November 1.

**Forecasting the second six months on I Bonds bought today**

The inflation rate for Series I Bonds is based on the Consumer Price Index, or CPI, calculated by U.S. Bureau of Labor Statistics. It is released every month so the first two months for the May 1, 2022, interest rate calculation has been announced. They show an increase of 1.33% for the two months, so unless prices move lower on a sustained basis for the next four months there should be a positive rate announced on May 1.

**Worst-case scenario is a return of 3.56% for a year**

The worst-case scenario is that inflation disappears and prices move lower over the next four months. This would mean prices fall back to September 2021 levels. While this is highly unlikely, these will still be a very nice rate of return if I Bonds are bought by April 30, 2022. Using $10,000 for the example:

- First six months return: $356 or one-half of 7.12% on $10,000
- Second six months return: $0 of interest for a total of $356
- Year return: 3.56%

If the bonds are redeemed after one year there is a three-month interest penalty. However, since there was $0 earned in the last three months the return is still 3.56%.

**Next worse case is no inflation for four months**

As noted above, the first two months of inflation data is available for the May 1 interest rate reset. If there is no inflation for the next four months the new annualized rate would be 2.66% or double the 1.33% six-month increase. The total return for bonds bought by April 30 next year would be:

- First six months return: $356 or one-half of 7.12% on $10,000
- Second six months return: $138 of interest for a total of $494
- Year return: 4.94%

If the bonds are redeemed after one year there is a three-month interest penalty. The penalty would be $69 (half of the $138) for a total return of $425 or 4.25%.

**Reasonable 3% rate for the May 1 reset equals a 4.34% return**

There are a lot of moving parts to inflation, especially when energy and food costs are included. In running various scenarios I believe it is reasonable to expect the May 1 reset could have an annualized rate of at least 3%. At 3% this would make the year-over-year inflation rate 5.1% in March 2022. The total return calculation is:

- First six months return: $356 or one-half of 7.12% on $10,000
- Second six months return: $155 of interest for a total of $511
- Year return: 5.11%

If the bonds are redeemed after one year there is a three-month interest penalty. The penalty would be $77 (half of the $155) for a total return of $434 or 4.34%.

And if inflation is higher than what I’m using the return would be higher than 4.34%.

**Check out TreasuryDirect.gov for more info**

Below are three U.S. Treasury sites to provide more information and to create an account.

This site provides a good overview of Series I Savings Bonds.

This site provides more in-depth information and historical interest rates.

This site is where one can open an account.