Investing in Series I savings bonds: Pros and cons of inflation-linked securities
When inflation rears its ugly head, it’s hard to find anything—stocks, bonds, even “junk” bonds—with a yield that keeps pace with rising prices. One investment that does is Series I savings bonds, also known as I bonds, issued by the U.S. Treasury. The yield on I bonds is adjusted every six months to the rate of inflation, and in mid-2022 that yield spiked to its highest level in decades, at 9.62%.
That eye-popping yield led millions of investors rushing to TreasuryDirect.gov to set up an account and start watching the interest payments roll in. But as inflation began to ebb, Treasury dialed back the yield. As of November 2025, I bonds are paying a muted 4.03%.
There’s a lot to love about I bonds, especially during periods of high inflation. But they’re not the ultimate investment solution, and they’re not for everyone. As with any investment, they even have a few risks.
Key Points
- Pros: I bonds have a high interest rate during inflationary periods, are low-risk, and help protect against inflation.
- Cons: Rates are variable, a lockup period and early withdrawal penalty apply, and there’s a limit to how much you can invest.
- Availability: I bonds can be purchased only through taxable accounts, not in IRAs or 401(k)s.
How I bonds work
I bonds are inflation-protected instruments offered by the Treasury that are designed to protect investors from rising prices. Why was the yield so high?
- I bonds are regularly adjusted for inflation.
- The rate is calculated twice a year and based on changes in the nonseasonally adjusted U.S. Consumer Price Index for All Urban Consumers (CPI-U) for all items, including food and energy.
- When inflation surges, as it did in 2022, the I bond rate goes up, making it a more powerful investment tool.
Why I bond rates rise and fall
The main reason many investors rushed into I bonds in 2022 was soaring U.S. inflation, which briefly pushed their yields above 9%. I bond rates reset every six months based on changes in the Consumer Price Index. As inflation eased in the mid-2020s, new I bond rates fell as well.
When the latest rate took effect in November 2025, comparable Treasury yields stood at about 4%. After several years of outpacing Treasuries, I bond rates have settled back in line. As of November 2025, the rate for bonds purchased through April 2026 is 4.03%.
The takeaway for investors? The initial yield is only good for the first six months you own the bond. After that, the investment acts like any other variable vehicle, meaning rates can go up and down and you have no control over it.
Variable interest rates are another risk to consider when buying I bonds, since you can’t simply sell when the rate falls. You’re locked in for the first year, unable to sell at all. Even after that, there’s a penalty of three months’ interest if you sell before five years. So if you think you’ll need any of the money before that, I bonds may not be for you.
Should you buy I bonds?
I bonds come with both advantages and drawbacks, and understanding them can help you decide if they fit your portfolio.
I bond pros
- Competitive interest rate during inflationary periods. When inflation is high, I bonds can pay more than many other low-risk investments.
- Low risk. Because they’re backed by the U.S. Treasury, I bonds offer reliable interest payments and protection of your principal.
- Portfolio diversification. Most financial advisors recommend that you balance your portfolio between riskier, more aggressive investments like stocks and less risky investments like government bonds.
- Inflation hedge. The bond’s interest will grow at around the same rate as inflation, meaning your savings won’t lose their buying power.
- Potential tax break for kids. If you buy I bonds using your child’s Social Security number, the interest is taxed at the child’s rate—often very low or even zero if they have little income.
I bond cons
- Variable rate. The initial rate is only guaranteed for the first six months of ownership. After that, the rate can fall, down to a fixed-rate component, which stood at 0.9% as of November 2025.
- One-year lockup. You can’t get your money back at all the first year, so you shouldn’t invest any funds you’ll absolutely need anytime soon.
- Early withdrawal penalty. If you withdraw after one year but before five years, you sacrifice the last three months of interest.
- Opportunity cost. Having too much of your portfolio in government bonds could mean missing big gains in the stock market. From 2015 to 2019, the combined interest on I bonds never exceeded 2% annually. Meanwhile, the S&P 500 had several years of double-digit annual gains.
- Annual investment limit. The maximum amount you can invest annually in an I bond is $10,000 per person. Couples can each purchase the full amount.
- Interest is taxable. The interest on I bonds is subject to the federal income tax, which varies by income level. For many investors, the federal income tax rate is higher than the rate on capital gains.
- Not allowed in tax-deferred accounts. You can’t buy I bonds inside an Individual Retirement Account (IRA), 401(k) plan, or 529 plan—they must be held in taxable accounts.
I bond investing strategies—for better or worse
For many savers, the annual $10,000 maximum investment cap isn’t a problem—that’s a lot of money to have available, after all your expenses are paid and your tax-advantaged retirement savings have been funded for the year. If you’re fortunate enough to have more than $10,000 ready to invest, you’ll have to find other investments whose risk-adjusted return may not be as attractive.
That’s why for many investors, I bonds are a helpful hedge, but not a panacea for inflation.
How I bond interest grows
A key feature of I bonds is that their interest compounds automatically. Every six months, the interest you earn is added to the principal balance, so you’re earning interest on an ever-growing pile the longer you keep your money invested. The bond earns interest for 30 years or until you cash it, whichever comes first.
The variable rate is another risk. If inflation drops back to roughly 2%, as it did from 2010 to 2020, your I bond yield will fall with it. The initial rate is guaranteed for only six months, and later adjustments can be much lower—down to the fixed-rate component. You must hold the bond for at least one year, and if you cash out before five years, you forfeit three months of interest.
Also, don’t over-invest in I bonds if it would deplete your savings. Ensure your emergency fund is adequately funded before putting money into any investment with a lockup period. Say you put $5,000 into an I bond and lose your job two months later. If you need that cash, you won’t be able to access those funds for 10 months.
The bottom line
I bonds are a convenient, relatively safe investment that helps protect savings from the effects of inflation. But they aren’t the answer to all your inflation problems, and there are risks associated with tying up your money in an investment with cash-out restrictions. Weigh the risks along with the benefits before you buy.
References
- I Bonds | treasurydirect.gov