Earlier this year, the Treasury Department announced a 9.62% annual rate for their Series I Savings Bonds.
Given the recent volatility in the stock market and a stubbornly high inflation rate, I bonds are drawing renewed interest. We examine the pro’s and con’s of i-Bonds below.
What is an I bond?
An I bond is a savings bond issued by the US Government that earns interest based on the prevailing inflation rate. Historically, federal savings bonds haven’t offered high yields. Given today’s elevated inflation rate, I Bonds appear to be an attractive source of high predictable income.
To be clear, as the inflation rate rises, I Bonds will adjust their rate accordingly. Thus, the higher the inflation rate, the higher the yield on an I Bond, and vice versa.
Pros
- I Bonds are backed by the US Government.
- At a current rate of 9.6% annually, I Bonds are yielding significantly more than other high-grade, short-term bonds.
- Since each person can buy I bonds of up to $10,000 in a calendar year a family of 5 may be eligible to invest a combined $50,000.
Cons
- $10,000 is the maximum that can be invested in an I Bond.
- An investor must hold the bonds for at least 12 months and may forfeit some or all of the accrued interest if sold prematurely.
- Variable Inflation Rate: given the variable nature of the inflation rate, I Bonds next year could be more or less attractive than they are today.
- Administratively, accounts must be opened directly with the US Government and cannot rest within traditional banking/investment accounts. Investors have to go out of their way to set up, fund, monitor, and ultimately access their I Bonds.
Is it Worth It?
- If used to meet a short-term objective, a $10,000 investment in an I Bond could be worthwhile – that is if you don’t have to invade the principal ahead of time.
- If used to fund a long-term objective such as retirement, the $10,000 maximum investment may not move the needle for you long-term.
- Moreover, given the causes of inflation and related economic uncertainties, the equity market appears to be favorably positioned for long-term appreciation. Thus, if your investment time horizon is truly long-term and inflation eventually recedes, it’s possible equities, real estate, or other growth-oriented investment vehicles could outperform I Bonds despite their current yields.
The Bottom Line
While past performance is not a guarantee of future results, the chart below adds historical context, illustrating how the equity market has responded in periods of major growth scares and bear markets. As noted, in the following 12 months after a tumultuous economic period, the equity market has experienced a period of positive market performance.
In our view, investors who remain invested and diversified may ultimately reap the profits when the fog dissipates and economic/market conditions rebound. While it is impossible to predict the future, the best way to plan for the uncertainty is to maintain a proper short-term reserve to cover short-term needs and invest your long-term retirement assets according to a long-term growth-oriented portfolio consistent with your goals.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.