One of the best current deals in the bond market—Treasury Series I savings bonds—is likely to get less attractive in November when a new rate on the popular investments is set.
Individual investors may want to snap up the inflation-linked I bonds before the end of October to get the current 9.6% interest rate for the first six months. The new rate, applying to bonds purchased in November, is likely to be closer to 6%, របស់បារុន estimates, based on the formula used by the U.S. Treasury to calculate the semiannual rate.
The main drawback of I bonds is that individuals can purchase only $10,000 a year, although an additional $5,000 can be bought using proceeds from federal tax refunds. And Americans who own certain businesses can purchase $10,000 annually in I Bonds through those entities. The I bonds need to be bought directly from the Treasury through its TreasuryDirect program.
The rate on I bonds, based on the U.S. consumer price index, hit a record 9.6% for bonds purchased starting in May and continuing through the end of October because of the inflation surge in late 2021 and early 2022. But price increases have moderated in recent months with the main CPI index up 0.1% in August. Treasury has been selling I bonds since 1998.
“You should buy now,” says John Scherer, the founder of Trinity Financial Planning in Middleton, Wis. He says the current rate compares very favorably to bank CDs.
I bond rates reflect both an inflation component based on the CPI index and what the Treasury calls a fixed rate, which now is zero. The inflation rate is set twice a year in early May and November and applies to bonds purchased in the ensuing six months. The fixed rate also will be reset in November and likely will be at or near zero.
The May interest rate of 9.6% was based on the CPI index from September 2021 through March 2022.
Treasury uses the non-seasonally adjusted CPI index, which is slightly different from the more prominent seasonally adjusted CPI that garners headlines each month. The non-seasonally adjusted CPI rose 4.8% from September 2021 through March 2022. That amount is multiplied by two to arrive at the 9.6% rate, which applies to bonds bought from May through October of this year.
The new rate, to be announced in early November, is based on the CPI index from March through September. របស់បារុន calculates that consumer prices were up 3% from March through August, the most recent report. Assuming little change in September prices, the new rate should be around 6%.
Investors who buy I bonds before Nov. 1 will get the 9.6% rate for the first six months they hold the bonds and then the new rate for the next six months.
“I bonds are a definitely a great safe investment to supplement your emergency funds,” says Ken Tumin, founder and editor of the Bank Deals Blog.
I bonds need to be held for a minimum of a year and bonds redeemed before five years incur a penalty of one quarter’s interest. Tumin views the interest penalty as modest relative to bank CDs, which usually carry early-withdrawal penalties.
Two nice features of I bonds are that investors can defer paying taxes on the interest payments until maturity—I bonds can be held for 30 years. And I bond interest, like that on other Treasuries, is exempt from state and local taxes, a contrast with bank CDs and corporate bonds.
A risk with I bonds is that inflation declines and results in lower interest rates in the coming years. That is a distinct possibility with the markets discounting inflation of about 2.5% over the next five and 10 years. But if inflation stays stubbornly high, I Bonds will look particularly good.
Investors who want inflation-linked bonds also can purchase Treasury inflation-protected securities (TIPS), which are auctioned regularly by the Treasury and available through TreasuryDirect and banks and brokerage firms. They are issued with maturities of five, 10 and 30 years. TIPS aren’t subject to caps on purchases by individuals.
An advantage of TIPS over I Bonds is that they now offer a real, or inflation-adjusted interest rate, of about 1%, meaning holders get the inflation rate plus 1%. Prices of TIPs, however, can fluctuate and have fallen this year as real yields have moved from negative 1.5% to positive 1%. The real yield on I bonds is now zero.
A lower risk way to own TIPS is through ETFs like the
iShares 0-5 ឆ្នាំ TIPS Bond ETF
(ticker: STIP) that now carries a total yield of nearly 10% based on a calculation using Securities and Exchange Commission guidelines. Its real yield is about 1.5% and that is supplemented by the inflation adjustment.
សរសេរទៅលោក Andrew Bary នៅ [អ៊ីមែលការពារ]