Why It Might Be Time To Sell the I Bonds You Bought

In 2022, I Bond, AKA Series 1 savings bonds, paid 9.62% due to inflation hitting a forty-year high. According to the US Treasury, “bonds were created to protect investors by changing their interest rates every six months, based on inflation.” That’s great when inflation goes up, but when inflation goes down, as in this current climate, this means that one is now getting a third of that. What does that mean to the average investor? It may be time to sell the I Bonds and look at different investments.

Why has the rate changed?

Back in 2022, both inflation and interest rates were down, making it prime to purchase the I Bond. Since then, the Federal Reserve has increased interest rates several times, most recently in early December. That, combined with lower inflation and a stable unemployment rate of 4.9%, has made other investments better options than the I Bond.

If you were to purchase an I Bond now, earnings would be at 5.27%, according to the Treasury. That’s a pretty big drop from 9.62% interest. Concurrently, CD rates are hovering between 4.45% and 5.30%, and Treasuries are about the same. While the interest rate will change in six months, the higher interest rate, combined with other economic factors, means that the I Bond rate will either stay steady or go lower. Switching investments at this time could bring in a higher yield.

However, the I Bond rates have dropped even more if you took advantage of that 9.26% rate from 2022 as the new six-month rate sits at 3.94%. So if you're still holding those bonds, you could earn more money by selling and taking advantage of the current rates, or by investing in several other assets. 

What to buy now

There are ways to diversify your holdings. You could, for example, invest in a short-term CD. Some CDs, at present, have a higher interest rate than the I Bond. You could also move your money into a money market account. According to the Consumer Financial Protection Bureau, they’re designed to “pay you higher interest rates than other types of savings accounts.” 

Another option is to choose a top high-yield savings account. Many online savings accounts offer higher interest rates than traditional bank accounts.

If you want to stay with the I Bond, remember that the 5.27% rate is locked in until April 2024, when it will either go up or down depending on inflation and interest rates. Instead of buying a variable rate I Bond, you could purchase a fixed rate I Bond. At present, fixed-rate I Bonds are at 1.3%, the highest rate for I Bond fixed rates in the past 17 years.

Another way to work with I Bonds is to sell what you already have at a 0% fixed rate and then purchase new I Bonds that have a 1.30% fixed rate and a 3.97% variable rate.

Lastly, investing in Treasuries is a safe place to store money. Risk-free government bonds, when held for the length of their term, can offer a 3% to 4% gain in price when sold. However, that means that a bond, whatever the length of its term, cannot be touched until its term is completed.

The right investment for you will depend on your situation and what you're trying to accomplish. You may want to consult with a financial advisor or investment professional to know what the right choice will be. 

In conclusion

Purchasing I Bonds and Treasuries is akin to playing a long game. Once you start investing in either, nothing can be touched until the term is completed. For I Bonds, that's at least a year. If attempting to redeem an I Bond within the first five years, you’ll incur a three-month interest penalty. Which means you’ll lose money when trying to access it.

If you plan on selling your I Bonds and want easy access to funds, reinvest into a short-term, six-month high-yield CD. After the term of investment is over, it’s easy to either reinvest the combined money and interest into an I Bond with a higher interest rate or another secure investment that offers a high and steady interest rate. 

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