The annual rate for newly purchased Series I bonds is expected to decrease below 5% in May, but despite this decline, experts believe that these assets may still be attractive to long-term investors. Currently, investors are earning a 5.27% annual interest on new I bonds purchased before May 1st. Some experts are predicting that the rate could potentially drop to around 4.27% based on inflation and other contributing factors. However, there is an opportunity for investors to lock in six months of the 5.27% yearly rate for new I bonds before May 1st, as long as they have not exceeded the purchase limit for 2024.

The U.S. Department of the Treasury makes adjustments to I bond rates every May and November, which comprise of both variable and fixed-rate portions. Based on the last six months of inflation data, the variable portion of the rate is set to fall from 3.94% to 2.96% in May. The fixed-rate portion is more challenging to predict, but experts suggest that it could remain close to 1.3%. This fixed rate of 1.3% makes I bonds particularly appealing to long-term investors, as the rate remains constant after purchase.

According to Ken Tumin, founder of DepositAccounts.com, the variable rate of I bonds remains the same for the first six months after purchase, following which it is adjusted to the next announced rate by the Treasury. Tumin recommends taking advantage of the higher rate by purchasing I bonds before the end of April, as this allows investors to earn a 5.27% annual interest for the initial six months and the new May rate for the subsequent six months. David Enna, founder of Tipswatch.com, proposes purchasing I bonds a few days before April 30th to secure the higher interest rate for the following months. He anticipates that the fixed rate in May will range between 1.2% to 1.3%, based on the average real yields for 5- and 10-year TIPS.

While long-term investors may find the fixed rate of I bonds appealing, short-term investors may have better alternatives for their cash investments, according to experts. Ken Tumin highlights that I bonds are no longer a guaranteed success compared to options such as online certificate of deposits (CDs) or high-yield savings accounts. As of April 19, the top 1% of one-year CDs were paying approximately 5.5%, and high-yield savings accounts were offering around 5%. Additionally, short-term investors may also explore other options like U.S. Treasurys or money market funds. Treasury bills, for instance, were paying well above 5%, and two-year Treasury notes were yielding around 5% as of April 19th. Some of the leading money market funds were also providing a close to 5.4% return.

Enna emphasizes the uncertainty surrounding short-term rates and suggests locking in investments for at least a year to secure returns. The fluctuating nature of I bond rates, along with the potential for higher rates in alternative investments, highlights the importance of thorough consideration before making an investment decision. Ultimately, investors must weigh their options carefully based on their financial goals and risk tolerance to ensure the most suitable investment strategy.

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