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Portfolio > Economy & Markets > Fixed Income

I Bonds Rise to 5.27%. Should Clients Invest Now?

By Dinah Wisenberg Brin

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What You Need to Know

  • Advisors suggest clients have more appealing choices.
  • I bonds are attractive but have limits, they note.
  • The bonds may offer clients peace of mind.

Investors may be eager to buy inflation-linked Series I Savings Bonds now that the new composite rate has risen to 5.27% for bonds issued for the next six months.

The more appealing rate — up from the 4.30% composite rate for I bonds issued from May  through October 2023 — doesn’t necessarily make these U.S. government securities the best choice for clients, however.

To be sure, low-risk I bonds offer attractive features. Designed to protect investors from rising prices, they combine an inflation-adjusted interest rate that the Treasury Department updates every six months and a fixed rate good through the bond’s 30-year maturity date.

The new fixed rate for I bonds issued from Wednesday (Nov. 1) to April 30, 2024, was set at 1.30%, an increase from the 0.90% for those issued in the previous six months.

These securities, though, also come with drawbacks, market experts note, including purchase limits, a one-year minimum holding time and loss of the last three months’ interest if selling before five years.

While the new composite rate “sounds great” and may seem a panacea to inflation problems, “a prudent investor needs to dig a little deeper and see if anything is appropriate to be included in their portfolio,” Jamie Battmer, chief investment officer at Creative Planning, told ThinkAdvisor in an interview Wednesday.

The bonds do adjust with inflation and sometimes offer “extraordinary, eye-popping numbers,” he said. (In 2022, amid soaring inflation, buyers flocked to purchase I bonds at a 9.62% rate.) “It is a very easy story to tell at the 10,000-feet level.” But “you have to weigh a whole host of additional considerations.”

Based on a client’s risk profile and portfolio needs, there may be a place for I bonds, Battmer suggested, although Creative Planning typically prefers to be owners, through equities, rather than creditors — even with stock risk premiums compressing.

 “If this will somehow allow an investor to sleep better at night” and reduce the risk that they’ll hit the panic button when markets are volatile, “then we would absolutely be comfortable with it,” Battmer said. 

In any year, an individual can buy a maximum $10,000 in electronic I bonds and, by using their tax refund, up to $5,000 in paper bonds.

For clients with big portfolios, the purchasing restrictions may limit I bonds’ ability to make a big difference, Battmer said. Those with smaller portfolios could take on some financial stress if I bonds accounted for 10% or more, given rules that can limit liquidity, he added.

I bonds aren’t as liquid as other conservative instruments, which can create risk for people across the socioeconomic landscape, according to Battmer, who suggested there are more effective instruments to generate higher, long-term returns.

The 60% stock, 40% bond portfolio “is more alive than ever,” he said, noting that great, high-quality, investment-grade bonds are available in the market more broadly, as well as high-rate certificates of deposit. 

Bonds, both corporate and government, are yielding returns that can be built into an effective withdrawal strategy, rather than simply acting as shock absorbers, as they have in the past, Battmer said. These instruments are huge positives for investors in the long run, and more attractive today than they were 18 to 24 months ago, he said.

It’s much easier to get access to money in a low-cost aggregate bond ETF, which isn’t as dramatically attached to inflation, Battmer said.

In general, Creative Planning prefers to take its risks on the stock side, not the riskier end of the bond market, the CIO said.

Advisors noted that I bonds’ floating-rate component, unlike the fixed rate, isn’t locked in beyond six months from the purchase date.

“If inflation falls — especially gas and food prices — the interest received goes down,” Carson Group’s Sonu Varghese, global market strategist, told ThinkAdvisor via email Wednesday.

Carson Group recommends Treasury bills, with even 6-month T-bills now offering a higher yield around 5.5%, he said. “They’re also more liquid, since I bonds lose the last three months of interest if you sell within five years.”

With the Fed likely to hold off on rate cuts, this is also a good time to take advantage of high short-term rates, Varghese said.

Luskin Financial Planning owner John Luskin suggested I bonds may not warrant the effort involved in buying them.

“I bonds are perfectly fine. Yet, I’m not sure if the juice is worth the squeeze. There’s only so much you can buy. And, adding bonds to your portfolio is not going to radically impact your investment return,” he told ThinkAdvisor by email Wednesday.

“Moreover, you’ve got the complexity of having to manage another account — and the funky Treasury Direct website,” Luskin said. “Finally, most folks I work with have much more urgent and important projects than buying I bonds, such as doing their estate planning or buying umbrella insurance. Since time and energy are limited, I’d rather they do those more pressing projects first.”

Image: Adobe Stock

Dinah Wisenberg Brin

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