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Apr. 2022 – U.S. Series I Bonds, Inflation, and Cash Alternatives

We often caution readers to be wary of investment vehicles that seem “too good to be true.” Occasionally, however, attractive opportunities arise with minimal downside. Currently, U.S. Treasury Series I Bonds fit this description for investors in the right circumstances.

I Bonds are U.S. Savings Bonds that earn tax-deferred compound interest adjusted for recent price inflation. Investors earning meager interest in cash equivalent assets should consider this alternative.

Interest on I Bonds compounds based on trailing inflation and resets every six months. Trailing six-month consumer price inflation through March was 4.81 percent – a 40-year high. So, it appears Treasury will announce a rate of 9.62 percent rate on I Bonds on May 1. Meanwhile, the bond market is forecasting price inflation of only 3.19 percent over the next 12 months.

If inflation subsides, I Bond investors will earn an attractive real rate of return. On the other hand, if the Fed’s efforts to restrain monetary expansion prove ineffective, overall inflation could continue to spiral; in that case, investors will at least maintain purchasing power.

Certain restrictions exist. I Bonds cannot be redeemed for one year, redemptions within five years incur a three-month interest penalty, and purchases are limited to $10,000 per individual. The articles that follow provide greater detail regarding features and rules.

For investors who can set aside cash over the short-term, I Bonds are very attractive relative to alternatives. As displayed in the Rates of Interest table nearby, bank savings accounts, money market accounts and 12-month CDs are paying rates of 0.06 percent, 0.08 percent and 0.17 percent, respectively, based on national averages.

Also In This Issue

Quarterly Review Of Capital Markets
Series I Bonds: The Fundamentals
Series I Bonds: The Educational Tax Exclusion
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles