The U.S. consumer price index, or CPI, rose by 8.5% in March, its highest inflation reading since 1981. For Americans concerned about falling stock prices and soaring inflation, U.S. I bonds may be an increasingly attractive option.
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The U.S. Department of the Treasury recently announced that I bonds will pay a 9.62% interest rate through October 2022, their highest yield since they were first introduced back in 1998. These I bonds are protected against inflation and backed by the U.S. government, making them essentially risk-free investments — the only way these investments fail is if Uncle Sam doesn’t pay his debts. A practically risk-free 9.62% yield may seem too good to be true, but there are several things investors should understand before going all-in on I bonds:
— What are I bonds?
— What investors need to know about I bonds
— Are I bonds right for you?
What Are I Bonds?
Series I savings bonds are bonds issued by the U.S. Treasury that earn interest based on combining a fixed rate and an inflation rate. The fixed interest rate on the bonds remains the same for the life of the bond. The fixed rate is announced twice a year by the secretary of the treasury and is applied to all I bonds issued over the following six months. These I bond fixed rates are announced on the first business day of May and November each year.
The inflation rate for I bonds is also set twice a year in May and November. The inflation rate is based on the most recent CPI reading.
The fixed rate on I bonds has been 0% since May 2020, but it has been as high as 3.6% back in May 2000. Investors can see the entire history of both fixed and inflation I bond rates in this chart on the Treasury’s website.
I bonds earn interest for 30 years, but investors can cash them any time after they are 12 months old. If an investor cashes an I bond before five years, the investor will lose the last three months of interest.
Americans can buy electronic I bonds online through the TreasuryDirect website or purchase paper I bonds when they file their federal tax returns. The maximum purchase limit per person for electronic I bonds is $10,000 per year, and the maximum purchase limit for paper I bonds is $5,000 per year.
In early May, the Treasury announced that the composite rate for I bonds issued from May 2022 through October 2022 is 9.62%. Those bonds have a 0% fixed rate and a 9.62% inflation rate.
What Investors Need to Know About I Bonds
Lawrence Gillum, fixed income strategist for LPL Financial, says I bonds are an excellent opportunity for investors and currently have a far greater yield than other nearly risk-free assets, such as certificates of deposit and high-yield savings accounts insured by the Federal Deposit Insurance Corporation.
“Investors need to be sure they can hold these bonds for at least one year, but preferably five years though, as there are penalties for selling I bonds early (if sold within five years, investors lose the last three months of interest),” Gillum says.
[SEE: 7 Best ETFs for Inflation.]
In addition, he says buying and cashing in I bonds may be a bit more complicated than buying and selling stocks or other bonds in the secondary market.
“The other consideration is that you can only buy I bonds through the Treasury (with limitations on amounts), and cashing an I bond is a bit more involved than calling your broker and asking to liquidate a position,” Gillum says.
Finally, Charlie Ripley, senior investment strategist for Allianz Investment Management, says the combination of a minimum holding period and a variable interest rate creates a certain degree of uncertainty for all I bond investors.
“The rate adjusts every six months, so there is no guarantee that investors will earn the same rate over the life of the investment,” Ripley says.
Are I Bonds Right for You?
Once investors understand the risks and requirements associated with I bonds, Ripley says some investors may see them as an excellent way to hedge the purchasing power of their cash during periods of rising or high inflation.
“A recent study conducted by Allianz Life concluded that nearly eight out of 10 people expect inflation to get worse over the next 12 months, and I bonds could serve a purpose for individual investors looking to mitigate some of the risks associated with high inflation,” Ripley says.
Lindsey Bell, chief money and markets strategist for Ally Invest, says I bonds may be a particularly attractive option for investors searching for yield and those looking to minimize risk in their portfolios.
“This is a win for individuals that are closer to or in retirement. It also could be a better choice for people stashing money in a checking/savings account for intermediate-term financial goals,” Bell says.
[See: Will the Stock Market Crash in 2022? 10 Risk Factors.]
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I Bonds: Lock in Nearly 10% Yields as Stocks Plunge originally appeared on usnews.com
