In November 2021, inflation was high, and prevailing interest rates were low. Money market funds and cash sitting in the bank were earning close to zero. There weren't a lot of low-risk investments earning positive expected real returns. However, for smaller investments ($10,000/year/person) Series I bonds were posting 7.12% rates of return!
Now, inflation has cooled, and rates that can be earned on short-term cash have increased. These two dynamics require us to re-evaluate if it still makes sense to hold Series I Bonds purchased in the past few years or to purchase new ones.
Understanding Two Rates - Fixed and Variable
Series I Bonds are linked to inflation and adjusted every 6 months. They are comprised of two different rates, one fixed, and one variable. Back in November 2021. the fixed rate was 0% and the variable rate was 7.12%.
The most recent November 2023 Series I Bond rate is 5.27%, comprised of 1.3% fixed and 3.94% variable. (The few hundredths of a percent difference result from compounding effects).
At first glance, this new rate seems comparable to current money market rates which are hovering just over 5%. At the same time, the previously issued Series I Bonds purchased in November 2021 are not yielding this same (all-in) rate. Since the fixed portion of these older bonds was 0% at issue, the only yield is from the variable portion of interest, which is also at 3.94%. As such, the total expected return on these bonds is 3.94%, which is more than 1% below current money market yields.
My Own Experience?
I purchased Series I Bonds in 2021, as well as in 2022. Because of the recent change in rates, I chose to cash out these holdings and put them into a Money Market Fund earning ~5%. Since I had held the Series I Bonds for over a year, but less than the penalty-free 5-year required holding period, I forfeited 3 months of interest earnings. For me, this was not a major concern since that money was reinvested into something with a higher expected yield.
In Summary
Using Series I Bonds over the last few years has allowed investors to earn extra interest on some of their cash reserves. However, with the Series I Bond variable rate now at a lower rate, most investors would benefit from cashing in these bonds and redeploying these funds into a Money Market Fund or High Yield Savings account.
It is worth noting that when cashing in these older bonds, the interest earned will be taxed federally (and not at the state level). You should also expect to forfeit the last 3 months of interest earned if held less than 5 years. Also, much like the variable rate on I-Bonds, money market rates may decrease in the future.
Investopedia recently published an even more in-depth article with detailed calculations and scenarios. The article can be found here: Have I Bonds? Your New Rate Is Likely 3.94%—Not the 5.27% You Read About