A Government Bond Yielding Almost 10%!?
By Zeke Anders on April 25, 2022
Written by: Zeke Anders
It exists. U.S. Treasury Series I Bonds are government bonds that track inflation, like TIPS (Treasury Inflation-Protected Securities). Currently, the annualized yield on I Bonds is 7.12%. That rate is guaranteed for six months from the purchase date. Beginning in May the rate will be adjusted, and the expectation is that it will be 9.6%. Any bonds purchased in April will yield 3.56% for six months, and then 4.8% for the next six months, for a total yield of 8.36%. Not bad! Even better, unlike TIPS, I Bonds are not tradable; thus, they do not go up and down in value like TIPS and won’t have a negative real yield. The only risk is the risk of U.S. government default.
Here are the catches. I Bonds can’t be redeemed within a year. They are like a CD, but for the first year there’s no way to redeem or sell for cash. So, you really need to be sure you won’t need those funds for a year. If you redeem them within five years, there’s a three-month interest penalty. This means you lose the last three months of interest you would have earned, had you not redeemed the bonds. In the example above, if you redeemed after one year, your total yield would be 5.96% after the penalty. Still pretty good! Individuals can only buy $10,000 per year in I Bonds, though you can get up to $5,000 more if you elect to receive a tax refund in paper I Bonds. A married couple, for example, could buy $20,000 per year combined. Lastly, you can only buy and hold I Bonds on TreasuryDirect.gov. Because they are not traded on any market, you can only get I Bonds directly from the U.S. Treasury via their website. You must set up an account and buy them there.
Despite these drawbacks, I Bonds are very compelling. I think of them as an alternative to CDs or a savings account. If you don’t need the funds for at least a year, you can earn a much greater yield than on any other savings account or CD. One additional benefit of I Bonds is that the taxes on the interest can be deferred until redemption. You can hold I Bonds for 30 years before they must be redeemed. In the future, the yield will hopefully be lower (because inflation has receded) and you may not want to hold them until maturity. But inflation has only gotten worse over the past year and may stick around a while. If you have cash you won’t need for a year, I Bonds might be a good way to protect your purchasing power.
Disclaimer
Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.
