Is it Time to Cash in your I-Bond?

Market Memo

November 2023 – By Kyle Rohrwasser

Many of us utilized I-Bonds recently during the most inflationary time since 1980 when the inflation rate topped 13%. This time around the US inflation rate topped out at 9.1% in June of 2022. Many rushed to the I-Bonds with the promise of a high rate should inflation stay elevated. At the time it was almost too good to be true, with elevated inflation generating large yields with minimal to no risk since it is a US Government Bond. Rarely do you see such advantageous situations, but from time to time certain products sway in the favor of the consumer.

With inflation running hot the Federal Reserve stepped in and raised the federal funds rate from 0% to 5.25%-5.50% in less than 20 months. This was to intentionally slow the economy and limit borrowing, which in turn slows spending and thus curbs inflation. As inflation declined, the yield on I-Bonds fell from a peak of 9.62% to 3.94%. Should inflation continue to fall, the yield on I-Bonds could reset even lower come May 2024.

If you purchased an I-Bond the past few years chasing a high rate you may want to revisit your position and see what other options are available considering opportunity cost and reinvestment risk.  With inflation cooling and rates expected to be cut in the next year or so, the opportunity set within broader fixed income is becoming more attractive relative to I-Bonds or cash.  After years of low rates, higher yields are finally compensating investors for the risk taken to invest in this part of the market.  Staying in I-Bonds as yields come down would increase an investor’s reinvestment risk, the risk of reinvesting cash flows at increasingly lower rates resulting in a diminished real return. 

If you do plan to redeem your I-Bond, just be sure to redeem it at the beginning of the month since you will not accumulate interest intra-month. If you were to redeem the bond on the last day of the month you would objectively lose that entire month of interest (plus a penalty of 3 months of interest for redemptions made before 5 years). There is an element of timing with these investment vehicles, so we recommend you reach out to your advisor with any questions regarding the potential redemption of your I-Bonds. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information are gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry the risk of loss including loss of principal. Past performance is never a guarantee of future results.