Bonds start to lose attractiveness, as inflation slows

I bonds currently being sold carry an interest rate of 6.89%, compared to 3.65% for a 30-year Treasury bond.

Series I savings bonds have received a lot of hype over the past two years, and they certainly have performed well.

The I bonds currently being sold carry an interest rate of 6.89%. But the rate may not be as attractive going forward. There are two components to the total interest rate for I bonds: a fixed rate and a rate that's adjusted every six months to match inflation.

The bonds available now through April have a fixed rate of 0.4%. The inflation-matching rate is 6.49%. That rate is calculated each May 1 and Nov. 1, using the consumer-price index for the past six months. Combining the two interest rates gives you 6.89%.

When inflation was rising, until June, that was a good deal for I bond holders, as their inflation-adjusted rate soared. But after peaking in June at an annual 9.1% rate, CPI inflation slid to 6.5% by December.

And the 6.49% inflation-matching interest rate for I bonds captured some of that decline. It compares to 9.62% for the six months through October.

Future Inflation is the Key Issue

So now the issue is what happens to inflation going forward. With a fixed interest-rate of just 0.4%, the current bond is almost completely dependent on the inflation-matching interest rate to provide decent yield.

Inflation appears likely to continue sliding, so the bond's interest payments are likely to keep sliding too. Of course inflation is falling gradually, so the yield might stay attractive for some time.

I bonds last for 30 years, and the current 6.89% total interest rate compares to 3.65% for a 30-year Treasury bond – not much of a contest.

Also, you can redeem your I bonds after holding them for a year. If you redeem them before five years, you will lose your last three interest payments.

But the only reason to redeem them would be if your interest payments drop precipitously. So in that case, you wouldn't be losing much interest money anyway.

I bonds remain attractive for many investors, but they are getting less so. I bought I bonds myself in 2021 and 2022.

But I won't buy more, partly because of the issue I've just raised and partly because I want to put my investable cash into a retirement account instead.