This asset has a yield of 9.62%, guaranteed

This asset has a yield of 9.62%, guaranteed

SmartAsset: Investing in Series I Savings Bonds (iBonds)

SmartAsset: Investing in Series I Savings Bonds (iBonds)

There is a bond that pays an interest rate of 9.62% and is guaranteed by the US Treasury. Investors should keep in mind some limitations and conditions before investing, but as inflation has surpassed 8% since March 2022, this could be an attractive option for the fixed income portion of your portfolio. Consider working with a financial advisor when seeking capital appreciation or preservation in a high-inflation environment.

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What are iBonds?

Known as Series I Savings Bonds, or iBonds, the Treasury created them in 1998 as a way to help savers deal with inflation. They come in durations ranging from one year to 30 years. This bond has two rates: a fixed rate, which is always zero, and an inflation rate, which is linked to the Consumer Price Index for All Urban Consumers (CPI-U). Interest earned semiannually is added to the principal amount of the security. In addition, in May and November, the Treasury adjusts the inflation rate of this security according to the latest IPC-U reading.

Together, the interest rate and monetary correction of iBonds, which are sold at face value, are called the “compound rate”. The compound rate on such a bond can never fall below zero, even in the rare case that deflation drags the compound rate on a bond into negative numbers.

Pros of iBonds

There are several aspects of these bonds that make them attractive:

  • They currently have one of the highest interest rates available. From May 2022 to October 2022, these bonds pay 9.62% interest. This is hard to ignore when the Bloomberg US Aggregate bond index has paid a negative 9.4% rate so far in 2022.

  • Series I Savings Bonds are not subject to state or local taxes.

  • They have the security of a US government guarantee.

  • Series I savings bonds are easy to buy. You can buy up to $10,000 from them online. You can also purchase an additional $5,000 worth of paper bonds using your federal income tax refund.

Potential disadvantages of iBonds

SmartAsset: Investing in Series I Savings Bonds (iBonds)

SmartAsset: Investing in Series I Savings Bonds (iBonds)

These bonds have certain conditions and limitations that may lessen their appeal to some fixed income investors. On the one hand, their future returns may decrease as they are pegged to the CPI-U. Only US citizens, legal residents or US government civil servants (regardless of citizenship or residency) can purchase iBonds. There is no market for your iBond. Finally, iBonds also have these deadlines:

  • Within one year of purchase: You cannot discount the title.

  • Within one year and five years of purchase: You can cash the bond, but you will miss interest payments for the previous three months. This is known as early redemption.

  • Five years or more: If you want to avoid a fine, you will have to wait at least five years.

  • After 30 years of purchase: The bond fails to pay interest and therefore becomes vulnerable to inflation.

Why Other High Yield Bonds Are Less Attractive (Right Now)

A Series I Savings Bond is an exception to the caution currently expressed by financial experts about other higher yield bonds.

Charles Schwab, for example, says that credit spreads, the difference in rates between corporate bonds and government bonds of similar duration, are small. Corporate bonds pay more than government bonds to reward investors for taking the risk of lending to a private company that might default. But currently the rate difference between the two is still too small to justify buying the higher yielding corporate bonds.

Schwab also notes that corporate profit growth is slowing, citing inflation, supply chain problems and borrowing costs. “Rising borrowing costs through higher interest payments can eat into corporate profits,” the company said. “Meanwhile, salary gains are good for consumers but can be a pain point for corporations as it’s another rising cost of entry.”

Finally, the yield curve does not look favorable for high-yield bonds – except for iBonds. The yield curve is a curve on a graph that tracks the yield of bonds of various durations. Shorter-duration bonds typically yield fewer longer-duration bonds, and total returns on high-yield bonds relative to Treasury bonds have been stronger when the yield curve is steep (long-term bonds paying more than short-term titles). However, in May 2022 the 2-year and 10-year government bond yields were very close, and in fact, the previous month, the 2-year yield surpassed the 10-year one, which is called an inversion. This hurts the profitability of high-yield issuers such as banks.

Final result

SmartAsset: Investing in Series I Savings Bonds (iBonds)

SmartAsset: Investing in Series I Savings Bonds (iBonds)

Series I Savings Bonds are a powerful anchor for the windward, financially speaking. These are low-risk savings bonds issued by the US government that pay a very high interest rate. As of October 2022, they were paying a high 9.62%. You can buy them electronically via TreasuryDirect (up to $10,000) or you can use your IRS tax refund to buy Series I bonds in paper (up to $5,000). By combining electronic and paper purchases, you can purchase up to $15,000 worth of Series I bonds each year. Keep in mind that there is no secondary market for them.

Tips for investing

  • A financial advisor can help you handle the fixed income portion of your portfolio as interest rates rise and inflation rises. SmartAsset’s free tool matches you with up to three financial advisors who serve your field, and you can interview your advisor peers at no cost to decide which one is right for you. If you’re ready to find a consultant who can help you achieve your financial goals, start now.

  • Check out SmartAsset’s free inflation calculator to help you determine the purchasing power of a dollar over time in the United States.

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The post Want 9.62% Guaranteed Income? Seriously, Try This Asset appeared first on the SmartAsset Blog.

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