I wanted to bring to your attention a conversation we had just over two years ago when inflation was surging at nearly nine percent. At that time, the finance world was abuzz with concerns about inflation, but there was one area that stood out as a bright spot - government-issued I-Bonds. These bonds adjust interest payments based on inflation, and during that period, they began paying interest to holders exceeding 9%, making them an incredibly attractive investment option for those with extra cash. With unparalleled security and a return that kept up with inflation, I-Bonds provided a sense of reassurance and confidence that no other investment could match at the time.
However, the landscape has significantly shifted since then. I-Bonds issued around that time now only yield 2.96% annually. If you are among those who invested in I-Bonds in 2022 and haven't adjusted your holdings, it's crucial to consider if other options offer better future returns.
We've been exploring various investment options for our clients, tailored to individual needs. Some of these options include CDs, high-yield short-term treasury derivatives, money market funds, bond funds, bond ladders, and tailored exposure to equities. It's important to review your investments annually, especially when new issue I-Bonds are paying nearly 150% more than those issued two to three years ago. The reason why new issue I-Bonds pay more than those issued in prior years is due to how they are structured.
When the Treasury issues an I-Bond, it determines the fixed interest rate that it is willing to pay for the lifetime of that bond. This fixed rate is then added to the current inflation interest rate for I-Bonds, the sum of which equals the total interest rate of the I-Bonds during that given period. During periods of lower inflation, the Treasury must issue I-Bonds with higher fixed interest rates to incentivize people to invest in them. However, during periods like 2021 through 2022, the Treasury can drop the fixed rate component of an I-Bond to 0% since the prevailing inflation interest rate is high enough to attract investors.
The result is that once inflation cools down, investors who purchased I-Bonds during high inflation no longer receive as compelling interest rates as those issued during other periods, which is precisely what has happened in the I-Bond marketplace now.
I Bond Issue Date | Fixed-Rate Component Assigned for Life of the Bond | New Inflation Component | New Composite Rate* | Previous 6-Month Rate |
New purchases May 2024–Oct 2024 | 1.30% | 2.96% | 4.28% | N/A |
Nov 2023–Apr 2024 | 1.30% | 2.96% | 4.28% | 5.27% |
May 2023–Oct 2023 | 0.90% | 2.96% | 3.87% | 4.86% |
Nov 2022–Apr 2023 | 0.40% | 2.96% | 3.37% | 4.35% |
May 2022–Oct 2022 | 0.00% | 2.96% | 2.96% | 3.94% |
Nov 2021–Apr 2022 | 0.00% | 2.96% | 2.96% | 3.94% |
May 2021–Oct 2021 | 0.00% | 2.96% | 2.96% | 3.94% |
Nov 2020–Apr 2021 | 0.00% | 2.96% | 2.96% | 3.94% |
May 2020–Oct 2020 | 0.00% | 2.96% | 2.96% | 3.94% |
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So, if you purchased I-Bonds in 2021 and 2022 but have yet to reallocate these funds, it's essential to review your holdings and develop a plan for the future because opportunities abound. At Lundeen Abrams Advisors, we believe every client is unique and requires their own financial strategy. If you would like assistance in evaluating where to move the funds you previously invested, we are here to help. Please call us to schedule a discussion so we can develop a tailored plan for your financial future.
We are looking forward to having a conversation with you soon!
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