by Barry Brindise, Financial Planning Director, Brightwater Advisory
The Good: Series I bonds are an alternative to TIPS that are worth consideration when seeking a higher rate of return than, for example, short term treasuries, etc. There are two components to the bonds rate of return, the “fixed piece” has recently been 0% (still 0% at 6/28/22) and then the “semi-annual inflation component” comes on top of that each year in May and November. The current I-bonds rates of return is 9.62% annually – which is certainly eye-catching versus other fixed income options.
When comparing I-bonds to TIPS, I-bonds are not subject to the semi-annual rate reductions when DEFLATION rears its head and they are not subject to state and local income taxes. However, few are anticipating deflation in the near term and, as you know, we do not have an income tax in FL.
Those are all positive elements to the I-bond as an option.
However, I–bonds are VERY restrictive.
1) You can only purchase $10k / year – which for many is a prohibitively small amount unless you have a very long horizon. They are commonly purchased as a college savings tool as they are not taxable at the Federal level if used for qualified college tuition / expenses
2) They can only be purchased electronically on the government website – Treasurydirect.gov after establishing an account on that site
3) They are less liquid as they don’t trade on an open market like most other bonds
4) They are a 30-year bond and do not pay current interest – interest accrues to maturity (“Zero Coupon Bond”)
5) You cannot “redeem” them until after the first 12 months and collect accrued interest plus your initial investment but you must hold them for at least five years, otherwise a 3-month interest penalty applies. That may be acceptable if the interest rate they are paying is high enough to offset that penalty vs. other options.
Conclusion, they are interesting for a long-term investor (and college savers) but given lack of liquidity and investment restrictions, they do not appear to be as opportunistic as other long- term investments.
The information in this website blog (“blog”) is for informational purposes only and does not constitute a complete description of our investment services or performance. No part of this site nor the links contained therein is a solicitation or offer to sell securities or investment advisory services, except where applicable in states where we are registered, or where an exemption or exclusion from such registration exists. All investments involve risk of loss, including the possible loss of all amounts invested, and nothing within this blog should be construed as a guarantee of any specific outcome or profit. Past performance should not be construed as an indicator of future performance. Future performance may substantially differ from prior performance. This blog is confidential and is intended solely for the information of the person to whom it was delivered and may not be reproduced or redistributed in whole or in part.