What Are I-Bonds, And Can They Help You Benefit From High Inflation?
As you know, fixed income (bonds) and equities (stocks) each have a critical place in your portfolio. The equity market focuses on long-term growth, and fixed-income investments offer a safer, more consistent cushion when the equity markets take a tumble. Given the current financial climate, like record-breaking inflation and wobbly markets, investors seek strategies to weather this storm. While inflation has forced many fixed-income investments into the red, there’s one type still in the black that could be a strategic hedge against inflation: Series I-Bonds. What’s an I-bond, and could it have a place in your portfolio?
What Is An I-Bond?
An I-Bond is an Inflation-Protected Savings Bond backed by the U.S. government. I-Bonds are unique in that they pay two types of interest rates:
A fixed, 30-year interest rate (currently 0%)
A variable semi-annually adjusted interest rate tied to inflation (currently 7.12%)
So, you can expect a return and inflation protection by investing in I-bonds. Here’s a bit more on how they work. You can buy up to $10,000 worth of I-Bonds electronically each calendar year per individual (married couples can buy $20,000 total). You could also purchase another $5,000 per person via your tax refund. A typical breakdown may look like this,
Up to $10,000 in electronic I-Bonds via TreasuryDirect
Up to $5,000 in paper I-Bonds using your federal income tax refund
I-Bonds can be an excellent option for individuals who tend to be slightly more conservative and want an efficient way to benefit from high inflation. Additionally, I-Bonds offer a productive solution when fixed-income or online savings account yields are low and an investor has excess cash on hand.
Understanding Holding Periods and Interest For I-Bonds
There are a few additional rules and considerations to keep in mind. First, I-Bonds earn interest for 30 years unless you cash them out. When can you cash them out?
There’s a 12-month holding period, so you can’t sell until you own it for at least one year.
If you redeem I-Bonds before a holding period of 5 years, you will lose three months of interest.
You can redeem the total present value if you hold the I-Bond for at least five years.
You can buy I-bonds from TreasuryDirect. But here’s the thing: you can’t purchase I-bonds in a retirement account, meaning you couldn’t buy it via your 401(k) or IRA. So, if you have cash sitting in a checking or savings account, this is a good way to put that cash to work.
Why Consider Investing In I-Bonds Now?
Remember, I-bonds pay investors a variable interest rate based on inflation, which could offer investors another reliable form of inflation protection. Get this: if you invest before the end of April 2022, you can lock in a 7.12% interest rate for 6 months. That’s a more competitive interest rate than any other “safer” account on the market—bank account, high-yield saving accounts, CDs, money market accounts, etc. Plus, I-Bonds are backed by the U.S. government, providing the “gold standard” of security for your investment. With rapid inflation, idle cash simply loses value. Even though the Fed announced plans to increase interest rates, even high-yield savings accounts hover at around 0.60%—a far cry from the 7% inflation rate. While investing in stocks is an excellent long-term solution to outpace inflation, it’s essential to think creatively and strategically about how your short-term dollars can still work hard for you, and investing in I-bonds is one consideration.
I-Bonds And Inflation
I-Bonds present investors who have a little cash to spend with a unique opportunity to benefit from historic inflation levels. By investing, you can take advantage of higher inflation and comfort knowing that the investment is backed by the full faith and credit of the U.S. government. I-Bonds are low-risk investments that could also be a nice supplement to your cash reserve. But while I-bonds benefit investors when inflation is high, what happens when inflation is low? Remember, I-bonds have two interest rates, fixed and variable. Presently, the fixed interest rate on a 30-year I-bond is 0%—not an overly enticing offer, to be sure. But by investing before the end of April, you lock in the 7.12% inflation-adjusted interest rate for at least six months. You may not know what the interest rate will be six months from now, but 7.12% is a solid short-term promise. The bottom line: if inflation drops, so too will the variable interest rate. But that’s not the case today, making it a strong short-term contender.
No Matter The Market Condition, Invest Holistically
I-Bonds have many advantages for the right investor, but they aren’t suitable for everyone. Like any investment decision, a purchase should make sense for your holistic financial plan. Before you buy, ask yourself:
Are you interested in I-bonds because they’ve been in the news or because they could positively impact your portfolio?
Do you have excess cash you could put to work?
What’s your risk tolerance and capacity?
What is your asset allocation? Do you already have a decent percentage invested in fixed income, or do you want more exposure?
Reach out today to see if I-bonds could be an excellent addition to your balance sheet.
This commentary reflects the personal opinions, viewpoints, and analyses of The Dala Group, LLC employees providing such comments. It should not be regarded as a description of advisory services provided by The Dala Group, LLC or performance returns of any The Dala Group, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The Dala Group, LLC manages its clients’ accounts using various investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.