By chance, I came across something that hadn’t been on my radar screen for a very long time. Enticed by the rate of return I saw in this current yield-starved environment, I saw 7.12%. Must be a junk bond or something that has significant default risk, right?
Wrong! The current yield of 7.12% is in none other than Series I savings bonds through the U.S. government. For review, “I” bonds pay two different rates, one tied to a fixed rate (which is currently a whopping 0%), and the other tied to the inflation rate. These are based on a 30-year term, with some liquidity provisions I will explain below.
As inflation has increased, I bond rates have significantly increased, with the most current rate being the second-highest rate in history according to TreasuryDirect.
THE DETAILS & SOME FAQs ABOUT SERIES I SAVINGS BONDS
How often are interest rates set?
Semi-Annually. When I say “7.12% interest rate”, it means you are receiving an annual interest rate equivalent to that percentage, but the rate changes after that six-month period. (It could stay the same, but it is unlikely). The new rate is then set and you earn interest at that rate. For example, if you had $10,000 invested in the current bonds, you essentially would earn one-half of the 7.12% after six months. If you buy the November issue, the new rate starts May 1st.
Can I get out before 30 years?
Just because it is a 30-year bond does not mean you must keep it in that long. You cannot withdraw any money in the first year. After that, if you cash it in prior to holding it for five years, you will forfeit the latest three months of interest.
How do I buy them?
You can buy them without any fees directly at TreasuryDirect.
How much can I buy?
For electronic bonds, you may buy up to $10,000 each calendar year per social security number. This is also a way to buy $5k more in paper bonds utilizing your tax refund. See TreasuryDirect for more information on that.
Why should I consider this in my portfolio?
Everyone’s situation is unique. For many of us, we are looking for some places that are conservative that just keep pace with inflation and don’t carry stock market risk. While it’s likely a very small amount for many of our clients, it still may help beat CDs or other short-term fixed income investments. Furthermore, as a general rule when interest rates rise, bond values fall. This is not an instrument that trades like that, so the prospect of higher rates will not affect this investment.
If this inflation does end up being more “transitory”, or short-term, you can always cash out with the interest penalty after one year, so it’s quite liquid and flexible.
Why didn’t my financial advisor mention this to me?
First, is your financial advisor a fiduciary and acting in your best interests at all times? If so, perhaps they should have at least discussed the topic with you. Second, if your advisor is compensated with assets under management, perhaps they didn’t want to reduce their fees by seeing assets leave their doors. Last, if they are compensated on commissions it’s highly likely that they would rather sell you something and get paid instead of offering suggestions that are pro bono.
If you have any questions related to the topics listed above, do not hesitate to contact me at [email protected] or leave a comment and we will get back to you.