Here's What I Bonds Are Paying Today. Are They a Good Investment Right Now?

Inflation has been a nagging problem for consumers since 2021. And while it's not nearly as rampant these days as it was in mid-2022, a lot of people are still struggling with higher housing, transportation, grocery, and utility costs. But there's one silver lining to inflation being elevated -- it can lead to higher interest rates for I bonds. 

I bonds are government-backed securities. The interest rate I bonds pays is a combination of a fixed rate and a variable rate, and the latter is tied to inflation.

Right now, I bonds are paying 5.27%. And that rate will remain in effect through April 30, 2024.

You may be tempted to make I bonds part of your investing strategy because 5.27% is a pretty decent return for an asset that's generally considered to be low risk. But you may want to look at a different low-risk solution for your money instead.

Consider just putting your money in the bank

Over the past 50 years, the stock market has generated an average annual return of 10%. So when we compare that to the interest rate I bonds are paying today, the former seems like a far more lucrative investment.

Stocks, however, are way more risky than I bonds. So really, it's not fair to compare the returns of these two asset classes because they're so different. A more equitable comparison is I bonds and certificates of deposit, simply because CDs have the potential to be risk-free provided you stick to an FDIC-insured bank and limit your deposit to $250,000. 

With that said, it's easy to make the argument that CDs are a better place to put your money right now than I bonds.

With a CD, you commit to leaving your money where it is for a given term. But that term can be as short as six months.

I bonds need to be held for at least a year before you cash them out. And if you redeem your I bonds before having held them for five years, you'll face a financial penalty. 

Meanwhile, there are plenty of 12-month (and shorter term) CDs paying a comparable interest rate to what I bonds are paying today. Capital One, for example, has a 12-month CD paying 4.80% interest. That's much less of a commitment than putting your money into I bonds.

Should you invest in I bonds?

If you're looking for a minimal-risk investment and you already have a bunch of cash in CDs, then it could pay to put a small sum of money into I bonds. But otherwise, you may want to look at other assets that give you more flexibility with your money -- ones that don't have a one-year minimum commitment and require five years of commitment to avoid penalties. 

Remember, I bonds may be paying 5.27% today. In a year from now, they might be paying much less. 

Now, the same can be said for CDs. But with a CD, you don't have to commit to a five-year term to avoid a penalty the way you do with I bonds. So for that reason, you may want to look at CDs in the near term if you're eager to do something with your money but aren't willing to take on very much risk.