There is a bond that pays 9.62% interest and is guaranteed by the US Treasury. Investors should be aware of certain limitations and conditions before investing, but as inflation has topped 8% since March 2022, this could be an attractive option for the fixed income portion of your portfolio. Consider working with a financial advisor as you seek capital appreciation or capital preservation in a high inflation environment.
Don’t miss news that could affect your finances. Get news and tips to make smarter financial decisions with SmartAsset’s semi-annual email. It’s 100% free and you can unsubscribe at any time. Sign up today.
What are iBonds?
Known as Series I Savings Bonds, or iBonds for short, the Treasury Department created them in 1998 as a way to help savers deal with inflation. They come in terms ranging from one year to 30 years. This bond has two interest rates: a fixed rate, which is always zero, and an inflation rate, which is linked to the Consumer Price Index for All Urban Consumers (CPI-U). Interest earned every six months is added to the principal value of the bond. Also, in May and November, the Treasury adjusts the inflation rate of this bond according to the most recent reading of the CPI-U.
Together the interest rate and the inflation adjustment on iBonds, which are sold at face value, are called the “compound rate”. The compound interest rate on such a bond can never fall below zero, even in the rare event that deflation would otherwise drag a bond’s compound interest rate into negative numbers.
Advantages of iBonds
There are several aspects of these bonds that make them attractive:
They currently have one of the highest interest rates available. From May 2022 to October 2022 these bonds pay 9.62% interest. That’s hard to ignore when the Bloomberg Aggregate US bond index has paid a negative 9.4% so far in 2022.
Series I Savings Bonds are not subject to state or local taxes.
They have the security of a US government guarantee.
Series I savings bonds are easy to buy. You can buy up to $10,000 worth of them online. You can also purchase an additional $5,000 in bonds using your federal income tax refund.
Possible disadvantages of iBonds
These bonds carry certain terms and restrictions that may reduce their appeal to some fixed income investors. First, their future returns may be reduced since they are tied to the CPI-U. Only US citizens, legal residents, or civilian employees of the US government (regardless of citizenship or residency) may purchase iBonds. There is no market for your iBond. Finally, iBonds also carry these terms:
Within one year of purchase: You cannot redeem the bond.
Within one year and five years of purchase: You can redeem the bond, but you will lose the previous three months’ interest payments. This is known as early redemption.
Five years or more: If you want to avoid a sentence, you must wait at least five years.
After 30 years of purchase: The bond stops paying interest and thus becomes vulnerable to inflation.
Why Other High-Yield Bonds Are Less Attractive (Right Now)
Series I savings bonds are an exception to the wariness currently expressed by financial experts about other higher yield bonds.
Charles Schwab, for example, says credit spreads, the difference in interest rates between corporate bonds and government bonds of similar maturity, are small. Corporate bonds pay more than government bonds to reward investors for the risk of lending to a private business that could go bankrupt. But currently the difference in interest rates between the two is still too small to justify buying higher yielding corporate bonds.
Schwab also notes that corporate earnings growth is slowing, citing inflation, supply chain issues and borrowing costs. “Increasing borrowing costs through higher interest payments can hurt corporate profits,” the company said. “Meanwhile, wage gains are good for consumers, but could be a pain point for companies as another rising input cost.”
Finally, the yield curve does not look favorable for high-yield bonds – except for iBonds. A yield curve is a curve on a chart that tracks the performance of bonds of various durations. Normally, shorter-dated bonds yield less than longer-dated bonds, and the total returns of high-yield bonds relative to Treasurys have been stronger when the yield curve is steep (longer-dated bonds pay more than shorter-dated bonds). However, since May 2022, the 2-year and 10-year Treasury yields have been very close, and in fact last month the 2-year actually outperformed the 10-year, which is called a reversal. This weighs on the profitability of high-yield bond issuers such as banks.
Series I savings bonds are a strong downwind anchor, financially speaking. They are low-risk savings bonds issued by the US government that pay a very high interest rate. By October 2022 they were paying a whopping 9.62%. You can either buy them online through TreasuryDirect (up to $10,000) or you can use your IRS tax refund to buy paper Series I bonds (up to $5,000). By combining online and paper purchases, you can purchase up to $15,000 of Series I bonds each year. Note that there is no secondary market for these.
A financial advisor can help you manage your portfolio’s fixed income as interest rates rise and inflation rages. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Check out SmartAsset’s free inflation calculator to help you determine the purchasing power of a dollar over time in the United States.
Photo Credit: ©iStock.com/niphon, ©iStock.com/Weekend Images Inc., ©iStock.com/FG Trade
The post Want a Guaranteed 9.62% Return? Seriously, Try This item appeared first on SmartAsset Blog.