For iBonds issued from May to October in 2023, the current composite interest rate guaranteed by the U.S. Treasury is 4.30%. Investors should keep some limitations and conditions in mind before investing, but as inflation has continued to grow, this could be an attractive option for the fixed-income portion of your portfolio. Consider working with a financial advisor as you seek capital appreciation or capital preservation in a high-inflation environment.
What Are iBonds?
Known as the Series I Savings Bonds, or iBonds for short, the Treasury created them in 1998 as a way to help savers deal with inflation. They come in durations that range 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).
The interest earned every six months is added to the value of the bond’s principal. Also, in May and November, the Treasury adjusts this bond’s inflation rate in line with the latest CPI-U reading. Together the interest rate and the inflation adjustment on the iBonds, which are sold at face value, are called the “composite rate.”
The composite rate on this kind of bond can never fall below zero, even in the rare event that deflation would otherwise drag a bond’s composite rate into negative numbers. This is why many people consider it a “safe” investment.
Pros of iBonds
There are several aspects of these bonds that make them attractive:
Potential Drawbacks of iBonds
These bonds carry a few conditions and limitations that may dampen their appeal to some fixed-income investors. For one thing, their future returns can decline since they are pegged to the CPI-U. Only U.S. citizens, legal residents or civilian employees of the U.S. government (regardless of citizenship or residency) may buy iBonds. There’s no market for your iBond. Finally, iBonds also carry these deadlines:
Why Other High-Yielding Bonds Can Be Less Attractive
A Series I Savings Bond is an exception to the caution currently being voiced by financial experts about other higher-yield bonds.
Charles Schwab, for example, says 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 enterprise that could default. But currently, the difference in rates 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 issues and borrowing costs. “Rising borrowing costs via higher interest payments can eat into corporate profits,” the firm said. “Meanwhile, wage gains are good for consumers, but can be a pain point for corporations, as it’s another input cost on the rise.”
Finally, the yield curve is not looking favorable for high-yield bonds – except iBonds. The yield curve is a curve on a graph that tracks the yield of bonds of various durations. Normally, shorter-duration bonds yield less long-duration bonds, and high-yield bond total returns relative to Treasurys have been strongest when the yield curve is steep (long-duration bonds paying more than short-duration bonds).
Series I Savings Bonds are a powerful anchor to windward, financially speaking. They are low-risk savings bonds issued by the U.S. government that pay a very high-interest rate. Through October 2022 they were paying a lofty 9.62%. However, the rate for bonds being purchased through October 2023 is 4.30%.
You may purchase these either electronically via TreasuryDirect (up to $10,000) or you can use your IRS tax refund to buy paper Series I bonds (up to $5,000). By combining electronic and paper purchases, you can buy up to $15,000 of Series I bonds each year. Keep in mind that there is no secondary market for them.
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