What if I told you that you could earn a safe return in the high single digits in today’s low interest rate environment? You would likely say I have lost my mind, and I wouldn’t blame you. A high yield and safety are things that do not typically occur together, but I want to make you aware of a U.S. savings bond that is giving such a yield. U.S. savings bonds along with other U.S. government debt securities and FDIC insured assets are considered to be the safest investments on the planet.
Some of us are old enough to remember the Series EE savings bonds that grandparents would periodically buy for their grandchildren. A lesser-known cousin to the Series EE bond – at least until now – is the Series I bond. The Series I savings bond earns interest based on combining a fixed rate and an inflation rate which together are referred to as the composite rate. The fixed rate is currently 0% and stays constant for the life of the bond. However, with inflation running the highest it has been in forty years, the inflation rate yield is currently a mouth-watering 7.12% for savings bonds purchased these last two days in April. The interest rate paid by the I bonds resets every 6 months. Savings bonds purchased between May and October are expected to yield even higher, in the neighborhood of 9.6%. Bonds purchased now in April will reset to the higher yield beginning in October. While these lofty yields may be short lived due to their resetting every six months, if we are entering an extended period of higher-than-average inflation, these could be a very attractive investment for years to come. An added benefit for those of us living in states with high income taxes is that the interest is not subject to state and local income taxes.
So, what are the downsides? One is that individuals can only purchase up to $10,000 per calendar year, so $20,000 per calendar year for a married couple. If you own a business, that too can purchase up to $10,000 per year. I bonds earn semi-annually compounding interest for 30 years, but cannot be cashed in within the first year. If you cash them in before five years, you lose the previous three months interest. These savings bonds can only be purchased and held electronically through the Treasury Direct website though it is possible to purchase up to an additional $5,000 of paper I bonds using your federal income tax return refund. For more information, see the TreasuryDirect.gov website. Do not hesitate to call me if you would like to discuss.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President