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