iPod, iPhone, iPad… now the “I Bond”

Similar to the steady stream of successful products developed by Apple, it seems the US government hit a homerun with the “I Bond”.  Although this US government savings instrument is not a new product, popularity is spiking (along with inflation) in 2022.  Through mid-June the government sold $14.4 billion of I Bonds, which is 40x more than was sold in all of 2020!  We are receiving a number of questions about “I Bonds”.  As interest rates and inflation increase in 2022, the headline attractiveness of this product is enhanced.

So what is a “Series I Savings Bond”?  What should investors know about this product?

A Series I Bond is an “adjustable rate” security that earns interest based on both a fixed rate (currently 0%) plus an inflation rate (CPI-U) that is set twice per year.  From the date of purchase, it will earn varying interest amount for up to 30 years, or until you cash out, whichever comes first.  Here is the information link for I Bonds: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

I Bonds are currently paying an attractive guaranteed return of 9.62%; it applies for 6 months after the initial purchase.  Rates are reset every 6 months based on current inflation data.  One “catch” – each taxpayer is limited to purchase up to $10k of I Bonds per year. This limit is per person, so a married couple could purchase up to $20k, but each individual needs to establish their own account on the Treasury Direct website.  As with many government ran services (think BMV), the process to setup an account and purchase I Bonds can be quite cumbersome, but not totally unworkable.

Since the issuer, the United States Government, is considered risk-free, those inquiring about this savings vehicle are often seeing it as a potential replacement for cash savings at the bank where yields are very little by comparison.  While the return potential and security are certainly attractive given the eye-popping inflation numbers over the last 6 months, we offer caution against viewing I Bonds as a rainy-day emergency savings account.  There is a no-exception to the one year minimum holding period for each purchase, effectively limiting the liquidity aspect of this investment.  In addition, if the I Bond is redeemed within 5 years, investors forfeit the previous 3 months of interest (similar penalty exists for many bank CDs).

Finally, if the Fed accomplishes its mission of stamping out inflation, rates would fall to more historic levels (target of 2.0~2.5%), in which case traditional fixed income securities would likely provide similar or better total return (and offer more immediate liquidity).  Over the long term, I Bonds will, by definition, never beat inflation, and after federal taxes are collected, investors may actually lose some purchasing power.  Traditional stock market exposure is still your best vehicle to combat the enemies of taxes and inflation over time… especially with valuations more attractive now than entering the year (forward return expectations are improved).

With that said, I Bonds can be a suitable investment vehicle when matching  their use to a known purpose occurring within a time horizon of one to three years.  For example, if you have money ear-marked to support college expenses in two years, placing  money in I Bonds might be appropriate (up to the $10K limit per taxpayer) to earn higher returns.

Remember, as with most things in life and certainly true with investing, there is no free lunch.  I Bonds may deserve a place in your financial big-picture, but investors are encouraged to consider the purpose and time-horizon of the money being deployed.  We are happy to help clients explore this option and welcome additional questions or comments.

-Jordan Ranly | Nvest Wealth Strategies

Posted in Blog Post, Personal Finance.