I-bonds are just as good a deal now as they were 5 years ago, and it will be the same in 5 years. The only difference is that they compare more favorably to other risk-free investments now than they used to. They always cause you to lose buying power over any time period, depending on your tax rate.
While shorter-term bond yields have declined significantly since 2023, yields on longer-term bonds are trending higher as 2024 ends. Investors appear focused less on recent Federal Reserve (Fed) interest rate cuts, and more on continued solid economic data and inflation trends.
With the November 2024 update, I bonds now carry: New Fixed Rate of 1.20%
In summary, bond investors generally prefer when prices go up, as this leads to capital appreciation, while rising yields (and falling prices) can negatively impact their investment value.
While bonds are commonly used to manage risk in portfolios, high inflation can affect their performance. This is because the income some bonds pay will normally be fixed at the time it's issued.
In every recession since 1950, bonds have delivered higher returns than stocks and cash. That's partly because the Federal Reserve and other central banks have often cut interest rates in hopes of stimulating economic activity during a recession. Rate cuts typically cause bond yields to fall and bond prices to rise.
Cons of I Bonds
This cap makes I Bonds unsuitable for those looking to invest larger sums. Early withdrawal penalty: If you cash in your I Bonds before five years have passed, you lose the last three months of earned interest. This penalty may impact liquidity for those who need their funds sooner.
The 4.28% composite rate for I bonds issued from May 2024 through October 2024 applies for the first six months after the issue date. The composite rate combines a 1.30% fixed rate of return with the 2.96% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
Despite the recent rate cut, now is still a good time to buy bonds, according to Ryan Linenger, a Chicago-based financial advisor with Plante Moran. “High-quality bonds offer attractive yields today compared to the extremely low-rate environment we were in just a couple years ago,” Linenger says.
Global growth forecasts are largely unchanged from last quarter, with the pace of economic expansion in 2024 slowing moderately in 2025. Easing inflation, resilient consumers, and a broadening of central bank rate cuts underpin our expectations for a soft landing.
Unlike I-bonds, TIPS are marketable securities and can be resold on the secondary market before maturity. When the TIPS matures, if the principal is higher than the original amount, you get the higher amount. If the principal is equal to or lower than the original amount, you get the higher original amount.
November 1, 2024. Series EE savings bonds issued November 2024 through April 2025 will earn an annual fixed rate of 2.60% and Series I savings bonds will earn a composite rate of 3.11%, a portion of which is indexed to inflation every six months.
An expected boost from bond coupons
Sources: Vanguard calculations, based on data from Bloomberg as of June 30, 2021, and June 30, 2024. Bond yields at midyear 2021 were a paltry 0.25% for the 2-year and 1.45% for the 10-year, compared with midyear 2024 yields of 4.71% for the 2-year and 4.36% for the 10-year.
At an initial rate of 3.11%, buying an I bond today gets roughly 1% less compared to the 4.26% 12-month Treasury Bill rate (December 20, 2024). You could say that buying an I Bond right now is a 'fair deal' historically compared to 2021 & 2022 when I Bond rates were much higher than comparable interest rate products.
If you hold the bond for less than five years at the time when you cash it in, you will lose the last three months of accrued interest. On the other hand, you can avoid the I Bond withdrawal penalty by holding onto your bonds for the long haul.
Must I pay tax on what the bond earns? You choose whether to report each year's earnings or wait to report all the earnings when you get the money for the bond. If you use the money for qualified higher education expenses, you may not have to pay tax on the earnings.
I-bonds are also attractive because investors bear almost no risk of losing their principal. The composite rate can never be less than 0%, even during deflationary periods when the inflation rate is negative.
I bonds have earned their reputation as an inflation-fighting tool for retirees. As of May 2024, I bonds are returning 4.28%, which is lower than the same period in 2023 but still well ahead of the inflation rate of 3.5%. The previous I bond rate stood at 5.27%, set in November 2023.
Bottom line. I bonds, with their inflation-adjusted return, safeguard the investor's purchasing power during periods of high inflation. On the other hand, EE Bonds offer predictable returns with a fixed-interest rate and a guaranteed doubling of value if held for 20 years.
Bonds usually go up in value when the stock market crashes, but not all the time. The bonds that do best in a market crash are government bonds such as U.S. Treasuries.
1. Saving Accounts. There's a good chance you already have a savings account. Like checking accounts, they're federally insured and are generally the simplest and safest place to keep cash in good times and bad.
Fixed Income and Treasurys
Treasurys are considered to be virtually risk-free because they're backed by the full faith and credit of the U.S. government. Here's why they're valuable during market crashes: Low risk: Treasurys have minimal default risk, making them a reliable safe haven.