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The silver lining of surging inflation: I-bond yields should climb above 9%

The silver lining of surging inflation: I-bond yields should climb above 9%

Chapel Hill, NC – Want to generate a return of over 8% with American Treasurys over the next 12 months?

Of course you will, especially given the higher-than-expected inflation numbers reported this week, with the CPI rising 8.5% over the past 12 months. Our absolute minimum goal with the US Treasury is not to lose to inflation.

However, even this modest goal seems elusive. The one-year Treasury yield currently stands at just 1.9%.

The solution is I-Bonds, which are US savings bonds whose yields are adjusted for the prevailing rate of inflation. Specifically, their yield is adjusted twice a year – in May and November – according to the delayed change of the CPI over a 6-month period. The current yield, set last November, was 7.1% (double the CPI change from April to September last year).

Based on this week’s inflation report, this yield should be set at 9.6% on May 1 (double the CPI change from October to March). The Treasury should announce the new rate in the next few weeks.

I’ve written about I-Bonds before, and I’m referring you to this column for many important details. You can’t buy an unlimited amount of I-Bonds, for example, nor can you buy them in an IRA. But you are allowed to purchase $10,000 of these bonds each year ($20,000 per couple) and an additional $5,000 annually with tax refunds. The strategy of buying the maximum amount each year over a long period results in a large fixed income allocation – large enough to meet the asset allocation requirements of all but very high net worth individuals.

Zvi Bodie has done as much, if not more, as anyone for the I-Bonds Championship. Boddy, now retired, was for four decades a finance professor at Boston University. In an interview, he said that buying I-Bonds is a no-brainer, and he implores us all to buy as much as possible each year.

Buy now or in May?

The only real question is whether to buy the I-Bond now or wait until May. It’s tricky because your I-Bond’s inflation adjustment factor will be reset every six months based on the first month of purchase. So if you buy the I-Bond now, the interest you will earn over the next six months will be the rate set by the US Treasury last November – 7.1%. During the six-month period beginning in October, your rate will be the same as the rate the US Treasury will set in May – which I expect will be 9.6%. This averages out to 8.4%.

That’s not half bad, of course. Could you do a better job in the next twelve months by waiting until May to buy? The answer depends on the 6-month delayed inflation rate this fall when the Treasury sets the new I-Bond rate. If the percentage is less than 7.1%, you are better off buying an I-Bond this month. If it is higher, then you have to wait until May.

Your guess is as good as mine which of these two scenarios will turn out. This week, the markets are celebrating with indications that inflation may have peaked with this latest report and is about to decline significantly. For example, the S&P 500 rose more than 1% in spot trading after this report was released.

Buddy suggests that if you don’t want to bet on what inflation will be this fall, you can simply split your I-Bond purchases in two, buying half now and half in May.

It’s hard to go wrong even if you make the “wrong” choice, though. Even if you wait until May to buy an I-Bond and your reset rate for November is as low as 4%, you’ll still earn 6.8% over the 12 months from April 30 of this year to April 30 of next year. This is much better than any alternative saving method that guarantees the return of capital.

In any case, Harry Seit, author of The Finance Buff blog, reminds us that there is no need to focus on just the next 12 months. In an email, he noted, “I-Bonds are good for 30 years.” Unlike TIPS, moreover, I-Bonds are regulated so that their return is never negative.

Sit recommends buying I-Bonds this month rather than waiting until May. It indicates that you earn interest for an entire month even when you buy near the end of the month. So the 8% return I mentioned at the beginning can be considered better, because it has a holding period shorter than a year – up to 11 months and 1 day.

However, Sit warns, since April 30th of this year is a Saturday, you shouldn’t try to cut it too soon. Last day to release [I-Bond] In April it is April 29th. The application must be by April 28th at the latest. I’ll give a few extra days of buffering in case something goes wrong. If you don’t have an account already set up, sometimes [the U.S. Treasury] They require additional identity verification, which takes time to resolve. If you already have an account up and running, you can schedule the purchase now for the 27th. If you fail somehow, you still have another chance on the 28th.”

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert rating tracks investment newsletters that pay a flat fee to review. He can be reached at [email protected].

Read now: Inflation Hedge: TIPS vs. I Bonds

more: Peak inflation? The worst may be over, but Americans will likely continue to pay a heavy price

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