Their profits are substantial, and their dangers are few. They perform best during periods of inflation, and they may appear too good to be true to some investors. However, there is a catch: the time to get the most out of I bonds for the coming year may be running out.
The popularity of US Treasury Series I savings bonds has skyrocketed in recent months. In March, the Treasury released $1.4 billion, following months of record sales that began late last year.
Their popularity is due to inflation. The consumer price index in the United States increased by 8.5 percent last month, the highest level since 1981, and bond yields are rising in tandem. So, starting May 1, the yield on Series I savings bonds should rise to 9.62 percent, based on March's price levels versus September's. That is a significant increase from the current rate of 7.12%.
"It might be a once-in-a-lifetime opportunity," David Sterman, president of Huguenot Financial Planning in New Paltz, New York, said. "A guaranteed rate of return like this will not be found anywhere else."
Should investors hoping for a bigger return wait for the rate reset in May? Probably not. Contrary to popular belief, locking in the current 7.12 percent rate today could result in a greater overall yield over the next year. Bloomberg News spoke with financial advisers around the United States who have been recommending I bonds to their clients to explain how this is feasible.
Their strategies are as follows:
It is critical to understand how bonds function before diving in. (This is true of any investment, regardless of risk.)
Since 1998, the government has started selling Series I bonds for a maximum of $10,000 per individual every calendar year. Because they are guaranteed by the United States, they are considered extremely low risk. They were designed to protect Americans' money against inflation. To that goal, their interest rate is divided into two parts: a fixed rate of return and a variable rate that is determined twice a year and fluctuates in line with the headline consumer price index.
On the first business day of May and November, the Treasury Department sets this variable rate. According to TreasuryDirect, the government's electronic marketplace, the rate on an investor's bond varies every six months from the date it was purchased.
According to the Treasury's plan, a Series I bond purchased in April would keep the effective rate for that month — which was determined on the first business day of last November — until October 1. The bond would then be pegged to the rate determined on May 1 for the next six months.
Given this quirk, someone who bought in April at the 7.12 percent rate would be locked in for around six months. The rate established on May 1 — which is expected to be 9.62 percent — would take effect for the next six months on Oct. 1. This equates to around 12 months of guaranteed high yields.
In comparison, someone who waits until the 9.62 percent kicks in will lose money. Yes, until November 1st, that buyer would have a higher guaranteed rate of 9.62 percent instead of 7.12 percent. However, on the first business day of November, the variable rate changes. If inflation continues to rise, the rate could rise even more. However, if inflation falls by then, as some forecast, that investor risks locking in a lower rate for the next six months.
"I would sign up for the April rate and get six months at that rate, then sign up for the May-to-November rate and get six months at that rate because you are pretty much guaranteed at least 12 months of seven-plus percent return," said John Crumrine, founder of Brunswick Financial in Ocean Isle Beach, North Carolina.
He does not expect inflation to fall considerably in six months, but he also does not rule out the potential that the November adjustment will reduce the Series I variable rate to 3% or 4% if the US Federal Reserve suddenly acts more actively and manages to bring inflation under control.
Do not take money from your emergency fund.
Tempting as it may be — and given the short window to lock-in that 12-month rate guarantee — advisors warn investors to avoid buying I bonds with cash they might need for unexpected expenses.
"It makes no sense to take advantage of some of these investments to the point where you are cash poor and then have to start selling things at the wrong time," said Huguenot Financial Planning's Sterman.
One reason is that bonds must be kept for at least one year, and selling them before five years risks forfeiting the last three months of interest.
"This is money you will not need anytime soon," Sterman explained. "This is a really long-term commitment."
Several investors and advisers who tried to buy I bonds on TreasuryDirect.gov, the department's website, have noticed the same thing. "The site itself feels very 1990s," Sterman explained.
With bulleted listings that resemble Craigslist, the design is reminiscent of a vintage Lycos or AltaVista search engine page.
"Half the individuals I recommended [I bonds] to loathed the website and got out of them the first chance they got," says Buz Livingston, founder of Livingston Financial in Santa Rosa Beach, Florida, who has been buying the bonds since 2001.
The site's design, according to Livingston, should not repel prospective investors. He claims that he is occasionally thrown off after using the "back" button, which he believes is a security function. Some of his clients have also expressed difficulty linking their bank accounts to the website and have been perplexed as to why they must. However, Livingston claims that this makes purchasing and then redeeming the bonds simply.
Using the clumsy site, according to advisors, is an acceptable price to pay given the high rewards. If you want to learn more about stuff like this, here’s an article about Overwork: Is it Good or Bad?