Inflation: Why I bond interest is soaring in response

Yahoo Finance's Jennifer Schonberger breaks down the latest return rate data on I bonds.

Video Transcript

- If market volatility and rising rates have you wondering where on Earth is a safe place to put some cash, the federal government has the short term answer in the form of a nearly risk free investment that returns nearly 10%. Jen Schonberger here with the details. And there must be some fine print here, Jen.

JENNIFER SCHONBERG: Hey there, Dave. There always is fine print, right? There's no free lunch. But if you are looking to beat inflation on your investments, the US government just reset the rate on a savings bond known as the I bond to 9.62% on the back of rising prices. That's the highest level on these bonds since they were launched back in 1998.

Now I bonds earn a monthly interest based on two parts, a fixed rate that stays the same for the life of the bond and an inflation rate that resets every six months. For I bonds issued in May through October, the variable rate has been reset to 9.62% based on the March consumer price index, which clocked inflation at 8 and 1/2%. Now the fixed rate has been 0% since March, 2020, though it was as high at its peak of 3.6% back in May, 2000.

As you mentioned though, there are a couple of downsides here. You can't redeem them for at least one year. So your money's tied up for a whole year if you cash in on them before five years, you lose the previous three months of interest and the variable rate could adjust downwards depending on the rate of inflation. Now Wilmer Stith, the bond trader with Wilmington Trust, tells me he expects inflation pressures to recede and the economy to cool down a bit as we go through the year as the Federal Reserve looks to raise interest rates he expects 350 basis point rate hikes for the next three fed meetings, implying that perhaps that variable rate based on inflation could move downwards in six months in October.

Still, compare that 9% rate and change to what else is on the market right now. And if you look at a CD that yields 1.2% for one year from Capital One or Goldman Sachs' Marcus, that's still a paltry yield. Or stack that against the 10 year Treasury which hit 3% today for the first time since late 2018.

Now if you're interested in purchasing these bonds there's two ways to do it. You can go to TreasuryDirect.gov and buy up to $10,000 worth of bonds per calendar year. Or you can use your refund from your federal taxes. Dave.