Pundits say Series I bond yields could fall below 4% in May

The past year has seen record-breaking demand for Series I bonds, an inflation-protected and near-risk-free asset. But rates have fallen and yields will fall again in May, experts say.

Newly purchased I-Bonds are currently offering a 6.89% annual yield through April and the annual rate could fall below 4% in May based on the latest CPI data. Annual inflation rose 5% in March, compared to 6% in February, according to the US Department of Labor.

An I-Bond rate below 4% would mean “a pretty big drop from previous interest rates,” said Ken Tumin, founder and publisher of DepositAccounts.com, a website that does this tracks these assets. But it’s still “above average” compared to historical returnshe said.

With U.S. government support, I-Bonds pay monthly interest in two parts: a fixed rate that can be adjusted every six months on new purchases but remains the same after purchase, and a floating rate that changes every six months based on the inflation changes. The US Treasury announces new interest rates every May and November.

Based on inflation data for the past six months, Tumin says the floating portion of the I-bond rate could fall to 3.38% in May. While the fixed part of the interest rate, which currently stands at 0.4%, may see a bit of a hike in May, it doesn’t expect a big move.

If the fixed rate stays at 0.4%, the APR could drop to 3.79%, Tumin said. Of course, until then, the combined annual yield is only an estimate TreasuryDirect announces new interest rates in May.

David Enna, founder of Tipswatch.com, a Website tracking I-Bonds and other assets said the new rate may no longer be as attractive to investors “who are only looking for yield for a year or two.”

While it is difficult to predict when the Federal Reserve will start raising interest rates, options such as Treasury bills or certificates of deposit have emerged as relatively safe alternatives for short-term savings.

On April 12, the top 1% of one-year certificates of deposit paid an average of 5.19% deposit accounts. 3-month and 4-month government bond yields were also above 5% on April 12th.

However, the yields on the new I-Bonds could still be attractive for longer-term savers looking to preserve their purchasing power, Enna said.

“The tremendous interest came from those looking for yield rather than inflation protection,” he said. “Now we’re back with people who are only looking for inflation protection.”

You can still lock in a 6.89% annualized return for six months by buying I-bonds before May, Enna said. For those looking to lock in the 6.89% yield, he recommends buying I-bonds before April 27, a few days before the rate announcement.