The Value of Holding I-Bonds Has Diminished Following a Remarkable Two-Year Run

In December 2021, Lincoln Capital wrote about Series I Savings Bonds (“I-Bonds”) being a compelling investment opportunity for several reasons. I-Bonds are government issued, inflation protected bonds that earn interest monthly (compounded semiannually). The interest rate is reset twice a year based on current inflation rates plus a fixed rate component that is constant over the life of the bond.

At the time of the writing two years ago, I-Bond interest was 7.12% (which increased to 9.62% at the following reset in May 2022), an extremely attractive alternative to bank deposit rates, money-market funds, and CD’s*. As a comparison, a five-year CD was yielding a mere 1.35% at the time, so it was hard to ignore the opportunity to earn over 7% on an investment backed by the full faith and credit of the U.S government and with zero mark-to-market risk.

Short-Term Returns Impacted by Fed Inflation Measures

The yield for I-Bonds has decreased as the Federal Reserve has aggressively combated inflation by raising the Fed Funds Rate. As of the latest update (November 2023), new I-Bonds can be purchased with a yield of 5.27%. Investors who purchased in December 2021 had their rate reset to 3.94% last fall. Currently, you can purchase a 1-year Treasury yielding 4.8% or a 3-month Treasury Bill at 5.4%.

Long-term returns on I-Bonds are unknown due to the changing inflation landscape. From 1998 through 2019, the average inflation component was 1.07% versus today’s level of 1.97% (these are 6-month inflation rates)*. The inflation component of I-Bonds is heading lower with inflation tamed by the Fed. Therefore, while long-term returns on I-Bonds are uncertain, it is apparent that their investment appeal has waned since our prior recommendation.

Penalty Considerations When Redeeming I-Bonds

I-Bonds have a minimum holding period of 1-year before redemption and, if redeemed between years 1-5, the owner forfeits the last three months of interest. For investors purchasing closer to our original I Bonds update in December 2021, the penalty is likely to be approximately 0.85%. For bonds purchased more recently, through October 2022, the penalty could increase to 1.05%. Investors who purchased during these time periods should incur the penalty and sell. For bonds purchased after October 2022, the bonds are either still within the 12-month sales restriction period, or the last 3 months of interest is too high to justify incurring.

Final Thought: Consider a Treasury Bond Ladder

This will be our last writing about I-Bonds for the foreseeable future. For investors that may be uncertain on whether to sell their I-bonds, we suggest following the process Lincoln Capital does with all investments━analyze and understand the potential rate of return, as well as the diverse types of risk, then compare them to alternative investments on a risk-adjusted basis.

For investors that hold I-Bonds, we much prefer a Treasury bond ladder to I-Bonds.  Lincoln Capital’s one year treasury bond ladder was yielding 4.9% net of fees as of January 22.  For clients who wish to join our Treasury bond ladder program, we offer this service at a reduced rate of 0.25% (25 basis points; $100,000 minimum).

Contact us if you want to implement a Treasury Bond Ladder or if we may be of assistance in any manner.

*Treasury bond yields, including I-Bond’s and inflation data, are compiled from the website of the U.S. Department of the Treasury


The views expressed represent the opinions of Lincoln Capital Corporation as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed. Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. Past performance is not a guarantee of future results.