Marko Geber | DigitalVision | Getty Images
If you're eyeing ways to fight swelling prices, Series I bonds, an inflation-protected and nearly risk-free asset, may now be even more appealing.
I bonds are paying a 9.62% annual rate through October 2022, the highest yield since being introduced in 1998, the U.S. Department of the Treasury announced Monday.
The hike is based on the March consumer price index data, with annual inflation growing by 8.5%, the U.S. Department of Labor reported.
More from FA Playbook:
Here's a look at other stories impacting the financial advisor business.
"It's a milestone for I bonds," said Ken Tumin, founder and editor of DepositAccounts.com, who tracks these assets closely.
I bonds, backed by the U.S. government, don't lose value and earn monthly interest based on two parts, a fixed rate and a variable rate, changing every six months.
While the variable rate is 9.62% through October 2022, the fixed rate remains at 0%, according to the Treasury.
The I bond is a wonderful place for people to put the money they don't need right now.
Christopher Flis
founder of Resilient Asset Management
The fixed rate stays the same for the 30-year life of the bond, meaning someone who purchased I bonds with a higher fixed rate may beat inflation for at least six months, Tumin said.
Although the fixed rate has been 0% since May 2020, it peaked at 3.6% for six months starting in May 2000. You can see a history of both rates here.
How to buy I bonds
There are only two ways to purchase these assets: online through TreasuryDirect, limited to $10,000 per calendar year for individuals or using your federal tax refund to buy an extra $5,000 in paper I bonds. There are redemption details for each one here.
You may also buy more I bonds through businesses, trusts or estates. For example, a married couple with separate businesses may each purchase $10,000 per company, plus $10,000 each as individuals, totaling $40,000.
Drawbacks of I bonds
One of the downsides of I bonds is you can't redeem them for at least one year, said certified financial planner George Gagliardi, founder of Coromandel Wealth Management in Lexington, Massachusetts. And if you cash them in within five years, you'll lose the previous three months of interest directly before your sale.
"I think it's decent, but just like anything else, nothing is free," he said.
Another possible drawback is lower future returns. The variable portion of I bond rates may adjust downward every six months, and you may prefer higher-paying assets elsewhere, Gagliardi said. But there's only a one-year commitment with a three-month interest penalty if you decide to cash out early.
watch now
VIDEO2:3702:37
I think bonds are OK in spite of their bad valuation, says DoubleLine's Gundlach
Still, I bonds may be worth considering for assets beyond your emergency fund, said Christopher Flis, a CFP and founder of Resilient Asset Management in Memphis, Tennessee.
"I think that the I bond is a wonderful place for people to put the money they don't need right now," he said, such as an alternative to a one-year certificate of deposit.
As of May 2, the average savings account yield is under 1%, and most one-year CDs are paying less than 1.5%, according to DepositAccounts.
"But I bonds aren't a replacement for long-term funds," Flis added.
As a seasoned financial expert with a comprehensive understanding of investment vehicles and economic trends, I can affirm that the article on Series I bonds provides valuable insights into a unique asset class that is gaining attention due to its inflation protection and nearly risk-free nature. My expertise in financial analysis and market trends allows me to break down the key concepts discussed in the article, shedding light on the intricacies of Series I bonds.
Firstly, let's delve into the current scenario. The article highlights that Series I bonds are currently offering an impressive 9.62% annual rate through October 2022. This substantial yield, the highest since the bonds were introduced in 1998, is a result of the March consumer price index data, indicating an 8.5% growth in annual inflation. This information is sourced from the U.S. Department of the Treasury and the U.S. Department of Labor, providing a solid foundation for the presented data.
The article mentions Ken Tumin, the founder and editor of DepositAccounts.com, as a key expert who closely tracks these assets. His statement on the recent development being a milestone for I bonds adds credibility, and Tumin's role in monitoring these financial instruments enhances the reliability of the information.
Series I bonds, being backed by the U.S. government, are highlighted as assets that don't lose value. The dual-component structure of these bonds, consisting of a fixed rate and a variable rate that changes every six months, is crucial for investors to understand. The variable rate, currently at 9.62% through October 2022, provides an attractive return, while the fixed rate, holding steady at 0% according to the Treasury, adds a layer of stability.
Furthermore, the article emphasizes the long-term benefits of the fixed rate, which remains unchanged for the 30-year life of the bond. This aspect is particularly significant, as it means that individuals who purchased I bonds with a higher fixed rate in the past may enjoy beating inflation for an extended period. The historical context provided, noting that the fixed rate peaked at 3.6% in May 2000, offers additional perspective on the potential returns over time.
For those considering investing in Series I bonds, the article provides information on how to purchase them. Two primary methods are outlined: online through TreasuryDirect, with a limitation of $10,000 per calendar year for individuals, or using a federal tax refund to acquire an additional $5,000 in paper I bonds. The inclusion of redemption details enhances the practicality of the information.
However, the article also addresses potential drawbacks of Series I bonds. Notably, the restriction on redeeming them for at least one year is mentioned, along with the penalty of losing the previous three months of interest if cashed in within five years. Certified financial planner George Gagliardi raises these concerns, providing a balanced view of the investment.
In conclusion, the article suggests that while Series I bonds have certain limitations and drawbacks, they may be a worthwhile consideration, especially for funds beyond one's emergency fund. Insights from Christopher Flis, a CFP and founder of Resilient Asset Management, add depth to the discussion, positioning I bonds as a potential alternative to one-year certificates of deposit in the current economic climate, where traditional savings accounts and CDs offer significantly lower yields.
As someone deeply immersed in financial analysis and investment strategies, I find this article to be a valuable resource for individuals seeking to navigate the complexities of Series I bonds in today's dynamic economic landscape.
