'No-brainer' for investors: These inflation-protected bonds may pay 9.6%, but deal won't last
I Bonds have been billed as the safe investment that will soon yield almost 10%, but are they right for you? Here's a look at how to buy I Bonds and key facts on rates and redemption.
One of the sweetest deals going for individual savers – a government-backed, inflation-protected bond -- is about to get sweeter.
But already, there are signs the party won’t last forever.
Next month, the Treasury Department will reset the rate for its I Bonds. Since their rate is tied to the government inflation index which just came in at 8.5%, analysts say I Bonds are likely to rise to about 9.6% for the next six months, up from the current 7.12%.
That’s at a time when the interest on many banks’ checking or short-term savings accounts is unlikely to pass 2%.
“Given the current environment of rising rates and inflation, investors are looking to I Bonds to earn significantly more returns on their savings over time,” said Mychal Campos, head of investing at digital investment advisor Betterment.
“If you purchase an I Bond in April, you're essentially locking in 7.12% annualized return over the next six months and then another 9.6% of annualized returns in the six months after. So that's a very favorable outcome for the growth of your savings," he said.
But even though savers are protected from downsides in several ways, they face the prospect that inflation may fall as gasoline prices taper off. If that happens, I Bond rates will fall.
How I Bonds work
I Bonds are a variety of government savings bond. Since they are sold direct to the public at treasurydirect.gov, not through brokerages, they generally don’t attract much attention. Plus, individuals are limited to $10,000 in purchases of I Bonds a year.
But as inflation has spiked, the investment has taken on a new luster.
Starting next month, the deal that’s already good may only get better. Experts say I Bonds are worth a look.
“This is a no-brainer for everyone,” said Ken Tumin, senior industry analyst at LendingTree and founder of LendingTree’s rate tracker Deposit Accounts. He believes the rate will hit 9.62% based on Treasury's formula.
He is quick, however, to add an exception: Investors who are just starting to build an emergency fund should not sink all their savings into the I Bond because it can’t be redeemed for the first year. After that, there is a withdrawal penalty of three months of interest for the first five years.
“That 3-month penalty isn’t much, but not being able to access your money for 12 months could be an issue if all or most of your emergency fund money is in there,” Tumin said.
Remember, too, that the I Bond’s rate will continue to fluctuate based on inflation. It has been as low as 0% for six months in 2015 -- it can't dip below 0% so investors can never lose any of their principal -- but it has gone as high as 10.85% for those who bought I bonds in 2000 and held them ever since. They were created in 1998.
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Some economists forecast inflation rates to fall from their current 40-year high, which would cause future I Bond rates to drop.
Much of the inflation announced Tuesday is being blamed on record gasoline prices, which rose more than 18% in March. But fuel prices are since starting to ease with President Joe Biden pledging to tap the nation’s Strategic Petroleum Reserve to add to the nation’s oil supply.
Used car prices are down a bit, too, though they remained 35% higher in March than the year before.
Hence, Wells Fargo economist Sam Bullard predicted: “The descent in inflation is going to be painfully slow.”
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Contributing: Paul Davidson