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Tales of a Technician: Series I Bonds Offer 9.62%

June 27, 2022

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Did you know there are bonds whose returns are directly linked to inflation? They’re called Series I Savings Bonds and they offer a variable interest rate that adjusts every six months depending on the latest inflation rate. Given the 40-year highs we’ve seen in the Consumer Price Index, Series I Bonds currently offer an unheard of 9.62% return.

Usually to generate anything close to that you have to invest in the stock market and experience a lot of volatility.

By their nature, Series I bonds don’t exhibit any volatility at all. Instead, they behave more like a savings account where your principal doesn’t fluctuate and you receive consistent interest payments. Normally with risk-free assets like this, you get paltry returns. But we’re in a unique economic environment where Series I bonds suddenly offer a handsome payout.

Here’s how they work.

TreasuryDirect.gov homepage

First, to purchase them you have to set up an account at TreasuryDirect.gov. This is the website used by the public to buy bonds issued by the U.S. Treasury. You can link your bank account to it and easily purchase securities using money from your savings or checking account. Be forewarned, it’s a pain to open an account. Take your time and don’t make a mistake. It’s like the DMV of the ’90s. Fortunately, I set up an account years ago to be able to buy T-bills because they were paying higher interest than online savings accounts. It was an easy process for me, but things have apparently gotten harder given the immense popularity of Series I bonds and the traffic that the website now generates.

Second, each individual can only purchase up to $10k in Series I Savings bonds per year. That said, if you wanted to invest more, your spouse could open an account and invest up to $10k. If you have children, you can open accounts under their name(s) as well. Finally, if you own a business, then you could open up an account under the business to get another $10k invested.

Third, Series I bonds cannot be liquidated for at least one year. And if they’re liquidated within 5 years then you lose 3-months worth of interest. The way the 3-month interest penalty works is that you don’t receive interest payments for the first 3-months of owning the bond. Then, at the 5-year mark, you receive a lump sum of 3 months’ interest.

Fourth, the interest rate is variable and changes every six months. Last November the interest rate was 7.12%. In the Spring of this year, it changed to 9.62%. This November it will adjust again based on whatever change happens to inflation readings. Unless something crazy happens, I suspect we’ve seen peak inflation. With the Fed now hellbent on curbing inflation – even if it means putting the economy into a recession, it’s unlikely that the interest will rise above 9.62%. But even if it declines back to 7% or slightly lower, we’re still talking about an extremely compelling return for a risk-free instrument.

As always, I’m not providing investment advice here. Rather, I wanted to provide some background on how Series I bonds work. Do your own due diligence and if you find them a good complement to your usual investing, great.

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