Their returns are high, their risks almost nil. They perform best during bouts of inflation and to some investors, they may simply sound too good to be true. But there’s a catch: Time to take best advantage of I bonds for the next year may be running short.
Series I savings bonds from the U.S. Treasury have exploded in popularity over the past few months. The Treasury issued $1.4 billion in March, in line with months of surging sales that began late last year.
Inflation explains their appeal. The U.S. consumer price index surged last month by 8.5%, the most since 1981, and I bond yields rise with inflation. So based on March’s price levels relative to September’s, the yield on Series I savings bonds should increase to 9.62% beginning May 1. That’s a big jump from the current rate of 7.12%.
“It’s potentially a rare moment in time,” said David Sterman, president of Huguenot Financial Planning in New Paltz, New York. “You’re just not going to find a guaranteed rate of return like this anywhere else.”
Should investors seeking higher returns wait for that May rate reset? Possibly not. Counterintuitively, locking in the current 7.12% rate now may ensure a higher overall yield for the next 12 months. To explain how that’s possible, Bloomberg News spoke with financial advisers across the U.S. who have been recommending I bonds to their clients.
Here are their strategies:
Mind The Six-Month Cycle
Before dashing into I bonds, it’s important to understand how they work. (Such is the case with any investment, no matter the risk.)
The government has been selling Series I bonds since 1998, up to a maximum limit of $10,000 per person each calendar year. They are considered extremely low risk because they are guaranteed by the U.S. They were intended to help Americans protect their savings from inflation. To this end, their interest rate is made up of two components: a fixed rate of return, and a variable rate which is set twice a year and rises and falls with the headline consumer price index.
The Treasury Department sets this variable rate, on the first business day of May and November. The rate for an investor’s bond changes every six months from the date it was purchased, according to TreasuryDirect, the government’s electronic marketplace.
The Treasury’s schedule shows that a Series I bond purchased at any point in April would maintain that month’s effective rate — which was set on the first business day of last November — until Oct. 1. At that point, the bond would assume the rate set on May 1 for the next six months.
Given that idiosyncrasy, someone who purchased in April at the 7.12% rate would lock that in for around six months. On Oct. 1, the rate set on May 1 — which is likely to be 9.62% — would then take effect for the next six months. That amounts to roughly 12 months of guaranteed, elevated yields.
Contrast that with someone who waits until the 9.62% kicks in. Yes, that buyer would have a higher guaranteed rate until Nov. 1 of 9.62% instead of 7.12%. But the variable rate changes on the first business day of November. If inflation continues to climb, that rate might end up even higher. But if, as some predict, inflation declines by then, that investor runs the risk of clocking in a lower rate for the next six months.