Markets are slumping. Crypto has cratered. Yet one corner of the financial world continues to offer investors strong, low-risk returns: Humble I bonds.
Sales of US Series I savings bonds remained elevated in June at $3.4 billion, surging more than 950% compared to the same month last year, according to Treasury Department data published Thursday. Droves of Americans have snapped up the government bonds that offer inflation-adjusted yields in recent months, with June’s tally dipping slightly from April and May.
“You are currently receiving an annual interest rate of 9.62%, which is very competitive with the long-term S&P 500 returns,” said Elliot Pepper, a financial planner and director of tax at Northbrook Financial in Baltimore. “But unlike the S&P 500, which year-to-date is down 20% or so, you don’t have any sort of downside risk because the I bond is issued by the US government.”
Low-risk, high-return options are few and far between for investors right now. In June, the Federal Reserve raised interest rates by 75 basis points — the biggest increase since 1994 — on concerns about inflation, which is at a 40-year high. This has hammered both stocks and bonds, and made any asset that rises alongside inflation look particularly attractive.
Here’s what financial advisers say investors should know about I bonds now:
Transitory Appeal
Obscure during times of low inflation, I bonds were created more than two decades ago to help Americans protect their savings from rising prices. Their interest rate is made up of two components: a fixed rate, which remains constant, and a variable rate set twice a year that rises and falls with the 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 online marketplace. Because CPI has surged this year, it’s translated into unusually high rates for I bonds, which currently promise 9.62% returns. Bonds purchased until the end of October will have this rate for the subsequent six months.
A new rate will go into effect for bonds purchased in November. (That rate will, in turn, be applicable for six months from the purchase date.) If inflation decreases before then — which is the primary goal of the Federal Reserve right now — the rate will almost certainly be lower.
Still, Pepper calculates that in an unlikely worst-case scenario of the government setting the I bond rate for November at 0%, someone who purchased the debt now would still earn 4.8% over the course of a year.
“You can’t point to a bank account, a CD or any other cash-style investment that’s going to get you returns like that,” he said.