By now you’ve probably seen several articles or heard news stories about I-bonds and the fantastic investing opportunity they currently offer. I-bonds are specialized bonds issued by the US Treasury that are designed to adjust their yield semi-annually with the rate of inflation. The inflation adjustments occur each year on April 1 and November 1, which means you have until next Friday (10/28) to buy I-bonds at their current interest rate of 9.62%.
No, that’s not a typo. Current I-bonds are yielding almost 10%! So, should you rush out and buy some I-bonds before next Friday? Maybe.
Unfortunately, most “fantastic” opportunities in the investing world are a little less exciting when you look into the details. If you are thinking about adding I-bonds to your portfolio, here are a few key points to keep in mind:
- The maximum purchase amount for I-bonds is limited. You can buy up to $10,000 per year, per account owner. That means you are limited to $20,000 per married couple, or possibly as much as $30,000 per family if you have a Trust.
- I-bonds cannot be purchased in qualified retirement accounts, such as IRAs, 401ks, SEPs, or Roth IRAs. You must use available cash in a taxable account to purchase your bonds.
- I-bonds cannot be redeemed within the first year, and you will lose 3 months of interest if the bond is redeemed during years two through five.
- You can only buy I-bonds directly from the US Government at http://treasurydirect.gov/
You will not earn 9.62% for a full 12 months, since the rate is adjusted every six months. Here is how the math works out for each $10,000 account:
October 2022 through April 2023: $10,000 x 9.62% (4.81% over 6 months) = $481
May 2023 through October 2023: estimated rate of 6.48% (3.24% over 6 months) = $340
Total for 12 months = $821, or 8.21%, which is still a great return. Your net return would be 6.51% when factoring in the loss of 3 months of interest if you sold after year 1. For comparison, a 1-year US Treasury bond is currently yielding 4.7%.
In sum, I-bonds are not liquid for the first year and have limits on how much and in what types of accounts you can buy them. You must buy the bonds directly from the US Treasury and hold them in separate accounts at TreasuryDirect. Finally, although I-bond yields are well above traditional bond yields currently, we expect their excess return to shrink rather quickly as the Federal Reserve continues fighting inflation with higher rates.
If you have extra cash (not your emergency reserve) sitting in a checking or savings account that you don’t mind tying up for 12 months, I-bonds could be a good option for increasing your investment return over the next year.
Keep in mind, it’s likely your Schwab portfolio already owns short-term and long-term inflation-protected bond funds. These mutual funds invest in a particular type of bond called treasury inflation-protected securities (TIPS) that behave similarly to I-bonds. We typically invest 20% of your bond portfolio in inflation-protected bonds.
As always, please give us a call if you have questions about your portfolio or want more information on how to purchase I-bonds through Treasurydirect.
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