Bond Rates Falling: Buy Now to Protect Your Savings

Looking for a way to protect the value of your savings from inflation? Let’s consider bonds.

Experts say government savings bonds still offer attractive rates for long-term savers, especially if the goal is to counteract soaring prices. Right now, I bonds boast an interest rate of 5.27%, but that will change on Wednesday based on the latest inflation trends.

The overall rate on I bonds changes every six months. Because inflation has eased, the new rate for I bonds purchased in May will almost certainly be lower than the current rate. Those who buy I bonds before the new rate is announced, however, will be able to lock in today’s attractive rate and can ensure their savings beat inflation for the next 30 years.

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“We are at the limit for buying I-bonds,” Dave Enna, an I-bond expert who runs the financial website TIPS Watch, says in an email. “I would say Monday, April 29 is the last ‘safe’ day to place an order” and get the 5.27% rate, he adds.

That’s because bonds purchased on Tuesday may be at risk of technically being issued by the U.S. Treasury Department after maturity.

How to beat 1.3% inflation for 30 years

Shaky government savings bonds became wildly popular two years ago, when their interest rate topped 9% for the first time in government bond history. The rate rose in response to the highest levels of inflation the United States has seen since the early 1980s. While I bonds have declined in popularity as inflation moderates, financial experts say they are still a great long-term option for protecting your money from soaring prices.

This is by design. Bonds have two distinct interest rates: a variable rate that changes every six months based on inflation and a fixed rate that is locked in for up to 30 years at the time of purchase. Together they constitute the so-called “composite” rate, equal to 5.27%.

What makes today a unique time to buy bonds is the 30-year fixed rate: 1.3%. It hasn’t been this high since 2006. Starting in May, both variable and fixed rates are expected to decline.

Enna expects the new composite rate to be around 4.27%, with a slightly lower fixed rate.

Although rates will change in May, people who get I bonds before then can get the 5.27% rate for six months from the month of purchase. Once these six months have passed, Bond I will move to the newly announced variable rate (expected to be 2.96%) in May in addition to the guaranteed fixed rate of 1.3%.

“They are very useful for fighting inflation,” says Randall Watsek, a financial advisor at Raymond James. “The 1.3% fixed rate is basically what you earn above the rate of inflation.”

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What to know about bonds I

While some financial experts refer to Bonds as essentially an inflation-protected savings account, Bonds have quirks unlike most savings accounts at financial institutions.

First, people are limited to $15,000 per year for purchasing bonds. Of this, there is a $10,000 limit for electronic bonds. The only way to reach the $5,000 limit for paper bonds I is with tax refund money that must be allocated at the time of filing.

Another important caveat is that money invested in I bonds cannot be withdrawn for a year (despite the emergency). Bonds withdrawn within five years of purchase are hit with an early withdrawal penalty equal to the last three months of interest, similar to certificates of deposit (CDs).

Electronic Bonds I can only be purchased through the US government-operated TreasuryDirect website.

That said, I bonds are tax deferred, meaning no taxes are due until they are cashed. Additionally, they are exempt from state and local taxes. Federal taxes may also be waived if the money goes toward qualifying higher education expenses.

Alternatives insulated from inflation

Given that inflation has been hovering around 3.5% lately, savers have several options to beat inflation in the short term. Many high-yield savings accounts and money market accounts boast rates between 4% and 6%. You can still find short-term CDs with similar rates as well.

Watsek says he expects those rates to remain stable for the foreseeable future, but once the Federal Reserve lowers interest rates, financial institutions offering such accounts can (and likely will) lower their rates in tandem.

“It could change overnight,” he says.

By comparison, I bonds have predictable rate changes every six months and offer a fixed rate that won’t move for 30 years (or until the I bond is cashed).

In terms of government-backed inflation protection, I bonds really have only one peer, Watsek says. These are TIPS, or inflation-protected Treasury securities. Because TIPS are not subject to the purchase limits of I bonds, he says they are a solid option for people who want to protect more than $10,000 a year from inflation.

While the goal is the same for both TIPS and I bonds – to protect your investment from inflation – the underlying mechanisms are different. According to Enna, from TIPS Watch, TIPS are much more involved and the final return is determined by market forces. Interest is paid every six months depending on inflation (or deflation). The term is five, 10 or 30 years, although they can be sold on a secondary market before maturity.

“First of all, I want to state out loud that TIPS are about preserving wealth, not creating it,” Enna wrote on TIPS Watch, noting that bonds tend to be the most accessible option for most savers and of investors.

Watsek also points out that I bonds have a “set it and forget it quality” that makes them attractive.

Ultimately, Watsek emphasizes that when choosing where to put savings depends on the individual’s situation: in particular, he says: “Do you need liquidity now?”

If the answer is yes, it’s important to keep at least some emergency savings accessible, ideally in a high-yield savings account. Once this base is covered, Enna says I bonds can serve as a “super-safe” second-tier emergency fund.

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