Lecture on I-Bonds

Introduction

• I-Bonds (Series I savings bonds): Inflation-adjusted savings bonds issued by the U.S. government.
• Popularity Surge: Notable in 2022 when inflation hit a 40-year high and I-bonds yielded 9.6%.
• Current Relevance: Still potentially useful for part of a fixed-income portfolio.

Current State of I-Bonds

• Interest Rate: Dropped to 3.11% (from highs of 9.62% in 2022).
• Rate Duration: Applies to bonds issued from November through April 2025.
• Adjustment Cycle: Rates adjusted every 6 months; guarantee period for current rate is 6 months.

Components of I-Bonds Interest Rate

• Two Parts:
  1. Fixed Interest Rate: Remains constant for the bond’s term.
  2. Inflation Adjustment: Adjusts with inflation every 6 months.
• Example: A bond with a 1% fixed rate and 3% inflation adjustment yields ~4%.

Current Breakdown

• Fixed Rate: 1.2% (highest since 2007, except for May-Oct 2024 which had 1.3%).
• Variable Component: 1.9% currently.

Historical Context

• 2022 High: 0% fixed rate but 9.62% inflation adjustment. Potential yield of 10.82% with a higher fixed rate.
• Inflation Trend: Current low inflation (~2% goal by the Fed).

Investment Considerations

• Prospects: Good time to invest due to high fixed rate (1.2%) even in low inflation.
• Comparative Yields: High-yield savings accounts or CDs may offer better yields (>3.1%).
• Yield Environment: I-bonds perform better in inflationary rather than high-rate environments.

Drawbacks and Flexibility

• Purchase Limit: $10,000 per person annually, $5,000 extra via tax refund.
• Liquidity:
  • Can't cash out in the first year.
  • Penalty for cashing out within five years (one year's interest).
• Long-term Strategy: Best as long-term inflation hedges.

Conclusion

• Recommendation: Consider I-bonds for long-term fixed income allocation, especially if young.
• Sponsorship: The Motley Fool provides investing insights and stock picks; sponsored this content.

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