One of the best current deals in the bond market — the Series I Treasury savings bonds — is likely to become less attractive in November when a new rate on popular investments is set up. create.
Individual investors may want to purchase an inflation-linked I bond before the end of October to receive the current 9.6% yield for the first six months. The new rate, applied to bonds bought in November, is likely near 6%, Barron’s estimated, based on a formula used by the U.S. Treasury Department to calculate semiannual rates.
The main drawback of an I bond is that individuals can only buy $10,000 a year, although an additional $5,000 can be purchased with proceeds from federal tax refunds. And Americans who own certain businesses can purchase $10,000 annually in Bond I through those institutions. Bond I needs to be purchased directly from the Treasury through the Treasury Direct program.
Rates for I bonds, based on the US consumer price index, hit a record 9.6% for bonds purchased starting in May and continuing through the end of October as inflation picked up. in late 2021 and early 2022. But price gains have been corrected in recent months with the main CPI rising 0.1% in August. The Treasury has been selling Bonds I since 1998.
“You should buy now,” says John Scherer, founder of financial planning Trinity in Middleton, Wis.
Investors have reacted with record Series I yields since the 9.6% rate was set in May. The total value of I’s bond issuance reached $12.7 billion from May through August, including record monthly sales of $5 billion in May, according to Treasury data.
During the previous six-month period from November 2021 to April 2022, the total value of Treasuries I issuance reached $12.9 billion at a rate of 7.1%. Average monthly issuance is $2.7 billion so far in 2022 compared to monthly sales of just $30 million in early 2021 when the rate was just 1.7%.
The I bond yield reflects both CPI-based inflation and what the Treasury calls a fixed rate, currently 0. The inflation rate is set twice a year in early May. and November and applies to bonds purchased over the next six months. The fixed rate will also be reset in November and will likely be at or near zero.
The May interest rate is 9.6% based on CPI from September 2021 to March 2022.
Treasury uses a non-seasonally adjusted CPI, which is slightly different from the more prominent seasonally adjusted CPI that has attracted monthly headlines. The non-seasonally adjusted CPI rose 4.8% from September 2021 to March 2022. That amount is multiplied by two to arrive at a rate of 9.6%, which applies to bonds purchased from May to October this year.
The new rate, to be announced in early November, is based on the March-September CPI. Barron’s calculated that consumer prices rose 3% from March to August, most recently reported. Assuming September prices are slightly changed, the new rate will be around 6%.
Investors who purchase Bond I before November 1 will receive a 9.6% interest rate for the first six months they hold the bond and then a new interest rate for the next six months.
Ken Tumin, founder and editor of the Bank Deals Blog, said: “Bonds are definitely a great safe investment to add to your emergency fund.
Bond I needs to be held for a minimum of one year, and bonds redeemed before five years incur a one-quarter interest penalty. Tumin considers the interest penalty to be modest compared to bank CDs, which often impose an early withdrawal penalty.
Two nice features of bond I are that investors can defer paying taxes on gains until maturity — bond I can be held for 30 years. And my bond interest, like interest on other Treasuries, is exempt from state and local taxes, as opposed to bank CDs and corporate bonds.
The risk to Bond I is falling inflation and resulting lower interest rates in the coming years. That’s a distinct possibility from the markets discounting inflation by about 2.5% over the next 5 and 10 years. But if inflation remains high, I Bonds will be especially good.
Investors who want inflation-linked bonds can also purchase Treasury inflation-protected securities (TIPS), which are regularly auctioned by the Treasury and available through the Treasury and other banks and public brokerage firm. They are issued with maturities of 5, 10 and 30 years. TIPS is not subject to restrictions on individual purchases.
One advantage of TIPS over Bonds I is that they now offer a real or inflation-adjusted interest rate, around 1%, meaning holders receive an inflation rate plus 1%. However, the price of TIPs could fluctuate and fall this year as real yields have moved from negative 1.5% to positive 1%. The real yield on Bond I is now 0.
A lower risk way to own TIPS is through ETFs like
iShares 0-5 Year TIPS Bond ETF
(ticker: STIP) currently offers a total yield of close to 10% based on a calculation following the Securities and Exchange Commission guidelines. Its real yield is around 1.5% and that is complemented by inflation adjustment.
Write to Andrew Barry at firstname.lastname@example.org