December 2021 – Scott Rosenquist, CFA®
Investors continue to search for yield as interest rates remain low and inflation remains high. One place to look is directly from the U.S. Treasury with the Series I Savings bond. The I bond is a savings bond issued by the U.S. Treasury that offers inflation protection. Investors have to purchase I bonds from the U.S. Treasury since they are not marketable securities and do not trade like other bonds issued by the Treasury. The interest rate on an I bond is adjusted twice a year (May and November) based on the Consumer Price Index (CPI). The rate announced last month was 7.12% and applies to bonds bought between November of this year through April 2022. This is attractive relative to other savings alternatives from banks such as certificates of deposit and savings accounts.
While the current rate is elevated with the rise in inflation, there are a few things to consider before investing in I bonds. There is a purchase limit of $10,000 per year electronically and an additional $5,000 bond limit using your federal income tax refund. I bonds are issued with a 30-year maturity and cannot be redeemed within one year of purchase. If redeemed within the first five years, the last three months of interest will be lost. Interest is earned monthly and compounded semiannually. The interest rate of an I bond has two components, the fixed rate which is known when purchased and an inflation rate calculated semiannually. The current fixed rate portion is zero with the inflation portion that is adjustable twice a year making up the entire yield. From a tax perspective, interest tax is at the federal level and not state and local level. More information is available at TreasuryDirect.gov.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal. Past performance is never a guarantee of future results.