Ask your financial adviser about I-bonds | Opinion
“Where is the best place to invest my money right now? This is perhaps the most dreaded, if not hated, question investment advisors ask us on a regular basis. I know it’s definitely for me. I’ve always compared it to asking a doctor “what’s the best pill I can take these days?” Hmm, I don’t know. It depends… on a lot!
But sometimes the stars align and there is a place to put your money that is, albeit for a short time, the ultimate no-brainer. Enter bonds I.
I-bonds are a version of savings bonds, which are a direct issue from the US Treasury Department. This means they carry no market risk and your capital is guaranteed. You can’t buy them through guys like me or other financial institutions. Your bank can’t sell them, and there’s no secondary market (meaning you can’t trade them like stocks or other traditional bonds). All of that, by the way, is why this little article is probably the first you’ve heard of.
Here’s how they work: you must buy them directly from the US Treasury Department at Treasurydirect.gov, and purchases are limited to $10,000 per year per person (plus an additional $5,000 in paper bonds if you received a refund tax). Their interest rate is a combination of a fixed rate (currently zero) which remains the same throughout the life of the bond and an inflation rate (derived from CPI-U) which is adjusted twice a year. This is called the “composite rate” and it is compounded semi-annually. Currently, the composite rate sits at 7.12% until the end of April 2022. Last week it was announced that effective May 1, the new rate will likely be 9.6% . Yes, you read that right.
Like everything exciting, there is a catch. In the case of I-bonds, you cannot access your money for a year. Period. There are no exceptions to this rule. So once you buy an I-bond, you don’t get your money back for at least 12 months. After one year, but before five years, you can redeem them, but you will lose the previous three months of interest. After five years, you get 100% of your money back on redemption. Also keep in mind that interest on I-bonds is subject to federal income tax when the bonds are redeemed, unlike zero-coupon bonds. The above information, along with more details, can be found on the Treasury’s website (www.treasurydirect.gov).
Now, if I may add a little bit of guesswork, you might want to consider buying them before the current rate changes next week. Indeed, when you buy an I-bond, your rate is blocked for six months. After six months, it will adjust to the new rate shown. For example, if you bought an I-bond in April, you will receive 7.12% until October. Then your rate would adjust to 9.5% until April 2023, giving you an overall 12-month rate of 8.3%. Even with the three month penalty, returning an I-bond will destroy any CD or money market rate offered by your bank.
We have no idea what inflation will unfold on the next reset date of November 1st. But we do know that the Federal Reserve has made it clear that it is laser-focused on controlling inflation and that it will continue to raise the federal funds rate to do so. Therefore, in my mind, it is only a matter of time before I-bonds experience a reduced rate as our national inflation recedes to healthier levels. Nobody knows exactly when, but it probably happens. This is why I find it preferable to lock in the current 7.12% and the upcoming 9.6% for next year.
So, at least for a little while, be encouraged to ask your advisor where to park your money. This might be one of those extraordinarily rare occasions when he or she happily provides a straight answer.
Matthew Trivett of Johnson City is an investment advisor.
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