I Bonds, The New Craze?

When I hear something 3 times, I know I have to write about it.  I got a text from two different buddies and a client ask me about I Bonds.  Of course, in each situation, it was a friend of a friend that told them how wonderful these investments are.  With that said, why not take a moment to demystify the growing popularity of I Bonds.

I Bonds

Series I bonds are essentially government-issued Inflationary Bonds.  Naturally, the big hubbub about them these days is everyone is in a tizzy about inflation.  The way these investment vehicles work is they will earn interest for 30 years, but investors can cash them in after one year.

There are generally two portions to their interest.  The first portion is the fixed portion.  That portion never changes and is announced when you initially purchase the bonds.  Right now, that fixed portion is, wait for it, 0%.  The second portion is variable, however, and clearly what is on people’s minds.  The variable piece on interest is announced every six months and moves with Consumer Price Index (CPI) changes.  Clearly, investors are fearing high inflation and expecting it to creep even higher.  **** Remember, these variable interest rates reset every 6 months for the entirety of the I Bonds 30-year term. 

Sounds somewhat decent so far, right?  Well, let’s dig deeper, shall we?  Also, worth noting are a few very important distinctions with I Bonds.  For starters, the maximum investment in them is $10,000 (an additional $5,000 from your tax return) per calendar year.  So, if you were considering cashing in your 401(k) for these bad boys, you may want to hold off.  The minimum hold for these bonds is 12 months.  Not only that, if you hold them for less than 5 years you will lose the last three months of interest.  Ruh-Ro Scooby!  Now, these are extremely safe investments as they are government-backed so the risk of default is extremely low. 

Few other worthy mentions.  The interest on these is state and federal tax-exempt.  Thus, if you own them make sure to do so not in a retirement plan, rather hold them in a taxable investment account.

Our Thoughts on I Bonds

Our thought here at Diversified is they aren’t worth all the fuss.  Yes, inflation readings are high today, although we believe it will temper over the mid-term here.  We look at the long-term interest rate of these bonds to be in line with the Fed’s inflation target of 2-2.5%. There is no real viability in these types of bonds in our investment accounts due to minimums and restrictions.  Thus, when we look at inflation hedges, from a bond point of view, we think TIPS are a very comparable play.  From our perspective, we don’t see several years of high inflationary pressures so fundamentally this isn’t an area that we’re focusing our bond portfolios. It is our belief, since the dawn of time, the best hedge against inflation in the long term, is and always will be good old stocks!

Are I Bonds Worth It?

I know I know I just poo-pooed your cousin’s big investment recommendation, and for that, I am truly sorry.  But I feel a fiduciary obligation to all to properly educate when appropriate. That said, I am not so sure the juice is worth the squeeze.  They are very restrictive, maximum investment of $10,000 in a calendar year, and we expect inflation to temper over the next year so you might find yourself questioning why you’re hedging that risk so much. 

That said, if you’ve got $10,000 sitting around and are itching to buy some I Bonds, certainly have at it.  Just be patient and don’t expect the initial 7.12% stated interest rate to become your long-term expectation for this type of investment. When inflation moves back down to the long-term expectation, so will the interest you’re earning every six months. 

Alright, make this year a great one and as always stay wealthy, healthy, and happy. 

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