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'Nearly risk-free' I bonds now pay 6.89%—here's why they 'could still be a good investment'

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The U.S. Department of the Treasury on Tuesday announced Series I savings bonds — also known simply as I bonds — will pay a 6.89% annual interest rate through April 2023, down from the 9.62% the paid to those who purchased from May through the end of October.

It's the third-highest rate since I bonds debuted in 1998, but that may feel like a bit of a consolation prize for those who attempted to lock in the 9.62% rate last-minute. Investor traffic flooded and ultimately crashed TreasuryDirect — the site that exclusively sells these bonds — in the days leading up to the interest rate change, which occurs every six months.

But if you missed out, all is not lost. In fact, buying these bonds could still be a wise choice for you, even at the lower rate, says Naveen Neerukonda, a certified financial planner with PVA Financial in Chicago, Illinois.

"[I bonds] could still be a good investment for the short- to medium-term," he says. "Even though most people expect inflation to come down, they still offer attractive yield given their nearly risk-free nature."

Here's what you need to know.

Why I bonds are still worth considering for your portfolio

A quick refresher on I bonds: These inflation-adjusted bonds pay a fixed rate throughout the life of a bond coupled with an inflation rate pegged to the consumer price index. The latter adjusts each November and May. Whenever you buy, you'll lock in the current rate for six months.

Unlike other bonds, I bonds aren't available to buy and sell on the secondary market, so their value won't fluctuate based on investor demand or movements in interest rates. Typically, bond prices and interest rates move in opposite directions.

And because these bonds are issued by the U.S. government, they carry very little risk of defaulting. Historically, Uncle Sam has yet to welch on his debts.

Taking that into consideration, I bonds' 6.89% yield looks plenty healthy. You'll earn 4.27% on a similarly risk-free 5-year U.S. Treasury. And if you're willing to take on the associated risks risks, you'll find a 4.98% yield on an index tracking the broad U.S. bond market. 

Beware of I bonds' drawbacks

Before you invest, it's important to be aware of a few rules that come with investing in I bonds. The biggest red flag for short-term investors: You can't redeem these bonds for a year after you purchase them, and you'll owe a penalty equal to three months' interest if you cash out any time over the first five years of owning the bond.

That means you'd be wise to avoid sinking cash into I bonds unless you have a well-funded emergency fund, says Neerukonda. "If there is any chance you need this money within the next 12 to 15 months, then you need to think very cautiously about this," he recently told CNBC Make It

You can generally buy no more than $10,000 worth of I bonds per person per calendar year, though you can buy an additional $5,000 worth using money from your tax refund if you file Form 8888.

And remember that website that was crashing in late October? That's still the only place to buy I bonds, and even when the site is up and running, it's no picnic, Bret Stephens, a CFP with AdvicePoint in Wilmington, North Carolina, previously told Make It.

"It's a huge hassle to open the account and navigate the website," he said. "Imagine if the DMV had an online store — that's what this experience is like."

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