US stock market traders

Friday’s inflation print shocked investors.Xinhua News Agency/Getty Images

  • The 2022 boom in I-Bonds appears set to end as interest rates tied to the security plunge.

  • I-Bonds are expected to pay an interest rate of just 3.8% next month as inflation cools down.

  • I-Bonds will be less appealing to investors due to its long lock-up period and higher interest rates at money market funds.

The 2022 boom in I-Bonds appears poised to end as the interest rate offered by the securities are set to plunge next month to levels below most money market funds and high-yield savings accounts.

Interest rates for I-Bonds are estimated to fall to 3.8% in May as inflation continues to ease. The Treasury bond resets its interest rate every six months based in part on the latest inflation data.

The past six-month period for I-Bonds offered investors an attractive interest rate of 6.89%, and before that the security offered a rate of 9.62%.

The surge in I-Bond interest rates to levels that were competitive with stock market returns attracted more than $40 billion of inflows last year, according to the Treasury Department. That’s a sky-high figure given that I-Bonds have a $10,000 annual purchase limit and require buyers to navigate a website that appears to not have been updated since 1999.

A significant swing in inflation to 40-year highs, after more than a decade of subdued prices, helped give investors good reason to opt for the bond.

But as long as inflation continues to cool down, I-Bonds should are likely to attract fewer buyers as plenty of cash-equivalent securities offer a higher interest rate without the long lock-up period that I-Bonds require.

For example, Apple’s launch of a high-yield savings account this week offers its customers an annualized yield of 4.15, while some money market funds and high-yield savings accounts offer yields as high as 5%.

That’s significantly higher than the expected I-Bond rate of 3.8%, and offers much more flexibility than the securities, which have a minimum one-year holding period. Additionally, any I-Bonds that are redeemed within five years of purchase will forfeit three months of interest.

Unless inflation sees a big rebound in the coming months, I-Bonds are likely to continue to lose their luster with investors as cash gravitates towards higher-yielding money market funds and even, potentially, back to the stock market.

Read the original article on Business Insider

Source: finance.yahoo.com