Update: What Are Treasury I Bonds & Whether You Should Consider Owning Them?
It has been awhile but we thought it was an ideal time for an I Bond update.
For those who don't know: US Series I Savings Bonds or simply "I Bonds" are bonds that the US Treasury Department sells to Americans looking to protect their savings from inflation.
They are backed by the full faith and credit of the US government and can be bought via the famously creaky Treasury Direct website.
There are no transaction fees at least....
We have written on this subject several times. Our primer can be found here and another follow up here.
There are two reasons for the update:
The Treasury Department set the new rate for I-Bonds this past week.
It is likely a good time to explore whether buying them was a good idea in the past and whether it still is today.
First, the basic news around the rate.
The interest rate for I Bonds over the next 6 months is 5.27%.
The interest rate combines two elements:
A fixed component set by the Treasury Department. It is little discussed but this has risen from beneath 1% to now 1.3%.
And an inflation adjustment calculation based on economic data.
The latter is obviously the important part and while 5.27% is obviously far lower than the 9.62% highs of 2022 but is is also:
above inflation and
still very elevated
5%+ risk and partially tax free is nothing to sniff at!
Going forward please keep in mind that inflation has already proved difficult to get back to the Federal Reserve's 2% target and has even strengthened in the last few months.
That stubbornness is important when considering investing in I Bonds or adding to your previous I Bond investment.
The argument that above 2% inflation could actually stay with us for the foreseeable future and certainly through the first half of 2024 isn't far fetched at all. That would keep the returns on I Bonds very attractive relative to other options through most of 2024 at the very least.
So, the big question might be whether they were a good buy back in 2021/2022 and whether they are still a good investment at this point in time?
The former is looking very astute. If you bought I Bonds in 2021 or 2022 then a certain section of your savings have been protected from both inflation AND the volatility of many other assets classes for the last 2 years+.
Furthermore, today those same savings are still compounding and also doing so exempt from state and local taxes.
If inflation rises from here you are nicely protected, if it stays stubbornly high you are also fine. The only scenario where holding them wouldn't be great is if inflation falls sharply and growth accelerates from here.
That could happen but seems very unlikely in the next 6+ months and if it does you could then consider selling your I Bonds, paying the slight penalty (3 months interest) and redeploying the capital into other assets.
Lastly, it is worth pointing out that if you already have some I Bonds it may be worth adding more depending on both your savings, appetite for risk and how you are allocated elsewhere in your portfolio.
As a reminder, in terms of logistics, you can purchase up to $10,000 in I Bonds every year and also, in a new wrinkle, use up to $5000 of your federal tax refund for that purpose.
The tougher question right now might be: if you don't own any, should you purchase any today?
The short answer is we think you could as an inflation hedge to offset other assets but there are also other very competitive options out there at present.
The big thing you lose with I Bonds is flexibility.
Remember that you have to hold them for at least a year and if you cash out before 5 years you lose 3 months of interest.
That may not seem like that big a deal but keep in mind that you can get nearly the same rate (5%) and the same tax benefits from short term Treasury Bills now.
These aren't the only option either. For slightly less flexibility and considerable more risk you could buy government bonds that yield similar amounts and could do well if a recession comes in the new year.
What I Bonds are still great at, are protecting your wealth from a surge in inflation. So, if you either just worried about it or would like to protect yourself from that risk, they are still a great investment. But even then we would suggest waiting till April.
The one exception to all this might be if you don't mind locking up your capital AND would like to do so to the tune of at least $20,000. In that case you could buy $10,000 now for 2023 and also buy another $10,000 in January (or wait for April and see what inflation does) and protect yourself to double the usual amount in a short space of time.
$20,000 is a lot of capital to hedge a tail risk but your own individual context might require it or you might like to "set it and forget it" for some of your hard earned savings and not have to worry about inflation silently eroding your buying power.
Above all, these I Bonds are a great and still under appreciated and little known asset class. We thought it might be worth raising them to the attention of the many clients and subscribers who have joined since we last wrote about them.
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