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I bonds are paying 7.12%. Rising inflation may increase yearly rates.

I bonds are paying 7.12%. Rising inflation may increase yearly rates.

Ryan Glenn | E + | Getty Images

Experts say that if you’re wary of rising prices, bonds, a popular inflation-protected and virtually risk-free asset, could soon become more attractive.

While I’m currently paying 7.12% annual returns through April, that rate could jump to 9.62% in May, according to Ken Tumin, founder and editor of Depositaccounts.com, which tracks these assets.

Bond yields consist of two parts: a fixed rate and a variable rate, which changes every six months based on the consumer price index.

The next change, tied to March data, will reflect 8.5% growth in annual inflation, the latest figures released by the US Department of Labor on Tuesday.

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Of course, a rate of 9.62% is an estimate. Tomin said the US Treasury will officially announce bond prices for the next six months on May 2. This chart shows the history of both prices.

However, buying I bonds in April offers a “unique 12-month view” of earnings, he said. If you buy in April, you will yield annual returns of 7.12% for six months followed by an estimated rate of 9.62% for another six months.

Backed by the federal government, bonds are a relatively safe portfolio option because the value does not fall and rates will never fall below zero.

“The main problem, though, is that you are limited in terms of how much you can invest,” Tommen said.

You can buy $10,000 for each calendar year, plus an additional $5,000 in paper bonds with a tax refund. However, individuals can purchase more through separate tax IDs for corporations, trusts, or real estate.

Another downside is the lack of flexibility, which makes bonds less attractive for emergency savings that you may need to access when necessary.

“You can’t get to it for a year at all,” said certified financial planner Tricia Rosen, director of Access Financial Planning in Andover, Massachusetts. “It doesn’t matter how badly you need it or the terrible situation you’re in.”

Furthermore, if you cash out your I bond in five years, you’ll lose interest over the previous three months, she said.

The benefits of I bonds really come into play.

Ken Tomin

Founder and Editor of Depositaccounts.com

However, selling I bonds after one year and giving up three months of interest may be more profitable than a one-year savings account or certificate of deposit, Tommen said.

The average savings accounts and one-year deposit rates at the largest retail banks are currently 0.06% and 0.15%, respectively.

“The benefits of I bonds are really coming into play,” he added, explaining how there have been no other periods of high inflation since the Treasury introduced I bonds in 1998.

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