Treasury I Bonds are estimated to have a 7.1% rate beginning November 1, 2021. This is much better than comparable alternatives.
If you have more than a nominal amount parked in checking & saving accounts or money market funds, you have bemoaned that you are earning 0% (or close to) currently. If you venture out to a 1 year CD, you won’t do much better. We are in a low interest rate environment with the Federal Reserve pegging short-term rates at 0% and there is no way to earn more without taking more risk…..except there is a way to earn a great rate right now that is as low risk (but not low hassle – more on this later) as you can find. I am not peddling some get rich quick scheme – in fact, I am a financial advisor and clients can’t invest in this in accounts we manage. The investment I am talking about is a U.S. Treasury I Bond. They are fully backed by the U.S. Government and recent debt ceiling talks aside; Treasury securities are still considered low risk vehicles.
The great news for I Bonds right now is that inflation is high. That is bad news if you are buying gas, groceries, a used car, etc. but good news for I Bonds whose rate is calculated based on a fixed rate (currently 0% like most safe short-term investments) and a variable rate based on inflation. The variable rate is set to change November 1, 2021 and based on the 6 month inflation rate (CPI) recently announced of 3.56%, the new variable rate is estimated to be 7.12% annualized for the next six months. The last annualized rate was 3.54% (still quite good versus alternatives). This rate exceeds the yield you can earn on even most high yield “junk” bonds currently. If you are worried about inflation remaining elevated, this is a good low risk inflation hedge. The rate does change every 6 months so if inflation would dramatically slow prior to May 2022, the new rate could be significantly lower. Unlike regular treasury securities, the price on I Bonds will never decrease. The rate cannot go below 0%.
There are some tax advantages to I Bonds too. While interest earned is taxed at ordinary federal tax rates, it is tax free for state and local taxes. Furthermore, you can choose to defer recognizing interest until you redeem the bonds (or when they mature).
If this all sounds great and you are thinking there must be a catch, there are a few but most aren’t deal breakers. The first is mechanics – you can’t buy an I Bond with a simple click in your brokerage account. You have to set up an account at Treasury Direct and deal with a government run website where for example, you have to type your password on an on-screen keyboard instead of your computer keyboard. Make sure you note your account number and password – I use a password manager but had to manually add them instead of it happening automatically. You can only buy $10,000/year per person (potentially $15,000 if you use your tax refund). A couple could each have an account and buy a total of $20,000/year. You can’t sell your I Bond during the first 12 months and if you hold less than 5 years, you forfeit 3 months of interest. While I Bonds work best if you keep them 5 years or more, if you cashed out at the end of 12 months you would still significantly beat comparable alternatives. If you might need the funds within 12 months, you should probably stick with a bank account or money market fund.
I am shifting $10,000 of emergency fund savings to I bonds. I hope this article helps someone else who might decide it makes sense for them to do the same.