This asset has a 9.62% yield guaranteed

SmartAsset: Investing in Series I Savings Bonds (iBonds)

SmartAsset: Investing in Series I Savings Bonds (iBonds)

There is a bond that pays 9.62% interest and is guaranteed by the US Treasury. Investors should be aware of some limitations and conditions before investing, but with inflation above 8% since March 2022, this could be an attractive option for the fixed income portion of your portfolio. Consider working with a financial advisor as you seek capital appreciation or capital preservation in a high inflation environment.

Don’t miss news that could affect your finances. Get news and tips to make smarter financial decisions with SmartAsset’s semi-weekly email. It’s 100% free and you can unsubscribe at any time. Sign up today.

What are iBonds?

Also known as Series I Savings Bonds, or iBonds for short, the Treasury created them in 1998 as a way to help savers cope with inflation. They come in durations from one year to 30 years. This bond has two interest rates: a fixed interest rate that is always zero, and an inflation rate that is linked to the Consumer Price Index for All Urban Consumers (CPI-U). The interest earned every six months is added to the principal value of the bond. Additionally, in May and November, the Treasury Department adjusts the inflation rate on this bond according to the latest CPI-U reading.

Together, the interest rate and the inflation adjustment on iBonds that sell at face value are called the “composite rate.” The compound interest rate on this type of bond can never fall below zero, even in the rare event that deflation otherwise, it would pull the bond’s compound interest rate into negative numbers.

Advantages of iBonds

There are several aspects of these bonds that make them attractive:

  • They currently have one of the highest interest rates available. From May 2022 to October 2022, these bonds pay 9.62% interest. That’s hard to ignore when the Bloomberg US Aggregate Bond Index has paid a negative rate of 9.4% so far in 2022.

  • Series I savings bonds are not subject to state or local taxes.

  • They are backed by a US Government Guarantee.

  • Series I savings bonds are easy to buy. You can buy up to $10,000 worth of them online. You can also purchase an additional $5,000 in paper bonds using yours federal income tax recovery.

Potential disadvantages of iBonds

SmartAsset: Investing in Series I Savings Bonds (iBonds)

SmartAsset: Investing in Series I Savings Bonds (iBonds)

These bonds carry several conditions and restrictions that may reduce their appeal to some fixed income investors. For one thing, their future returns may decline because they are tied to the CPI-U. Only US citizens, legal residents or civilian employees of the US government (regardless of citizenship or residency) may purchase iBonds. There is no market for your iBond. Finally, iBonds also carry these deadlines:

  • Within one year of purchase: You cannot cash the bond.

  • Within one year and five years of purchase: You can cash the bond, but you’ll lose the previous three months’ interest payments. This is known as early redemption.

  • Five years or more: If you want to avoid a penalty, you have to wait at least five years.

  • After 30 years of purchase: The bond stops paying interest and that’s it vulnerable to inflation.

Why Other High-Yield Bonds Are Less Attractive (Right Now)

A Series I savings bond is an exception to the caution currently expressed by financial experts about other higher-yielding bonds.

Charles Schwab for example says credit spreads, the difference in rates between corporate bonds and government bonds of similar duration, are small. Corporate bonds pay more than government bonds to reward investors for taking on the risk of lending to a private enterprise that might default. But right now, the interest rate differential between the two is still too small to justify buying the higher-yielding corporate bonds.

Schwab also noted that corporate earnings growth is slowing, citing inflation, supply chain issues and borrowing costs. “Rising borrowing costs through higher interest payments could eat into corporate profits,” the firm said. “In the meantime, rising wages are good for consumers, but could be a sore point for corporations as it’s another rising input cost.”

And finally, on yield curve it does not look favorable for high yield bonds – except for iBonds. A yield curve is a graph curve that tracks the yield of bonds of different durations. Typically, shorter-duration bonds yield less than longer-duration bonds, and the total return of high-yield bonds relative to government bonds is strongest when the yield curve is steep (long-duration bonds pay more than short duration bonds). However, as of May 2022, the 2-year and 10-year Treasury yields were very close, and in fact the previous month, the 2-year actually outperformed the 10-year, which is called an inversion. This puts a strain on the profitability of high-yield bond issuers such as banks.

Bottom row

SmartAsset: Investing in Series I Savings Bonds (iBonds)

SmartAsset: Investing in Series I Savings Bonds (iBonds)

Series I savings bonds are a powerful anchor to the wind, financially speaking. They are little risk savings bonds issued by the US government that pay a very high interest rate. Until October 2022, they were paying a high 9.62%. You can buy them either electronically through TreasuryDirect (up to $10,000), or you can use your IRS tax refund to buy Series I paper bonds (up to $5,000). By combining electronic and paper purchases, you can purchase up to $15,000 of Series I bonds each year. Note that there is no secondary market for them.

Investment advice

  • A financial advisor can help you manage the fixed income portion of your portfolio while interest rates rise and inflation rages. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisor matches for free to decide who is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • See SmartAsset’s free quote inflation calculator to help you determine the purchasing power of a dollar over time in the United States.

Photo: ©, © Images Inc., © Trade

The message Want a 9.62% Guaranteed Return? Seriously, try this asset first appeared on SmartAsset Blog.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *