Skip navigation
dollar-investing-chart.jpg Darren415/iStock/Getty Images

Declining I Bond Rates Make These Alternatives Look More Appealing

With the yield on popular Series I savings bonds expected to fall to 6.47%, some bonds and Treasuries are offering competitive returns.

(Bloomberg) -- Is it time to move beyond I bonds? 

Inflation-linked Series I savings bonds have been one of the few dependable return generators in retail investors’ portfolios this year, with yields since May at a record 9.62%. 

But I bond yields are likely heading down. According to estimates based on inflation figures between March and September, the rate offered for I bonds purchased after the end of October is expected to be 6.47%. 

That’s better than the more than 20% drop in the S&P 500 Index this year and much higher than a standard savings account. But when you take into consideration I bonds’ taxation at the federal level, the notoriously clunky website and declining yields, other somewhat similar options start to look more appealing. That’s a big change from previous years.

“For the better part of the past decade, it was nearly impossible for investors to park in short-term fixed-income vehicles and generate anything more than peanuts,” said Nate Geraci, president of the ETF Store, an investment adviser. “That’s clearly changed this year with rapidly rising rates.”

Bloomberg News interviewed money managers to get their take on alternatives to I bonds. 

Certificates of Deposit 

If you’re willing to lock up your money temporarily, certificates of deposit — also known as CDs — can provide solid returns. The lockup period depends on the product but usually ranges from three months to six years or more, with better rates for longer lockup periods. 

Institutions like Goldman Sachs Group Inc.’s Marcus, Capital One Financial Corp., Barclays Plc and Ally Bank all offer CDs, with rates that are rising alongside the Federal Reserve’s hikes. Marcus now has options ranging from a six-month CD with an annual percentage yield of 2.5% to a six-year CD yielding 3.5%. 

Harris Holzberg, chief investment officer at Holzberg Wealth Management, is implementing a CD “ladder” for his clients who have short-term cash they don’t want to put in the stock market. 

He splits the total amount of cash into four products: a three-month, six-month, nine-month and 12-month CD. Then every three months, a quarter of the client’s money is returned and they can decide what to do with it — put it in the stock market, keep it in cash, or put it in another CD. The strategy yields about 4% annually on average, he said. 

“If interest rates keeps going up, I keep rolling it at higher and higher yields,” Holzberg said. “Eventually, if you determine yields have peaked, you can extend your maturity to lock in those higher yields. It gives you a very nice rate of return with very nice flexibility.”

Muni Bonds 

Holzberg is also recommending municipal bonds to his clients, especially those with a high net worth. These debt securities are issued by state and local governments, and usually aren’t subject to federal or state income taxes — making them appealing to those in the highest tax brackets. 

“Munis are a great solution in taxable accounts,” he said. “We had not been looking at muni bonds for years because rates were so low but now they're attractive.”

Right now, one-year muni bonds with a triple-A credit rating provide a yield of almost 3%, compared to nearly zero last year. If you buy a muni with a lower credit rating and longer duration — more risky because there’s a greater likelihood of default — yields can go even higher. 

Still, Jason Dall’Acqua, president of Crest Wealth Advisors in Maryland, cautions against taking too much risk for a greater return. 

“Like most investments at this time, focusing on high credit quality and strength of the issuer is important,” he said. 

Some investors prefer to invest in muni bonds via exchange-traded funds, which can be easier to buy — they’re available on online brokerages like Vanguard and Fidelity — and are more diversified. Two popular ones are BlackRock’s iShares National Muni Bond ETF (MUB) and the Vanguard Tax-Exempt Bond Index ETF (VTEB). 

Treasury ETFs 

US Treasury yields are rising as the Fed hikes interest rates, making them more attractive as an income-generating investment. Because they’re backed by the federal government, these bonds are considered some of the safest out there.

Buying them individually can be a hassle due to the wonky TreasuryDirect website. It’s often easier to purchase a Treasury ETF that tracks an index of the bills, like the iShares 20+ Year Treasury Bond ETF (TLT). 

You can also buy Treasury ETFs that contains bills with lower remaining maturities like the iShares 1-3 Year Treasury Bond ETF (SHY) or the iShares 7-10 Year Treasury Bond ETF (IEF). 

Erik Baskin, founder of Baskin Financial Planning in Ohio, likes Treasuries as a way to diversify a long-term portfolio. 

“They're often moving in the opposite direction of stocks because they're a safe haven,” he said. “The current yields are incredible.”

Right now, the 20-year yield is about 4.6% and the 30-year is 4.34%. 

Corporate Bond ETFs 

For those looking for a bit more yield than Treasuries, Geraci recommends looking at ultra-short bond ETFs. 

“A combination of meaningful yield and minimal duration risk makes ultra-short bond ETFs a nice place to wait out the current stock and bond market turmoil,” he said. 

Two of his picks are the JPMorgan Ultra-Short Income ETF (JPST) or PIMCO Enhanced Short Maturity Active ETF (MINT), which maintain a duration of less than one year.

Mike Bailey, director of research at FBB Capital Partners, favors higher-quality corporate bonds that mature in four to six years, which can provide yields between 5% and 6%. The Invesco Bulletshares 2027 Corporate Bond ETF (BSCR) is one way to gain exposure to that area without picking individual bonds. 

“If inflation fades and interest rates go back down, these relatively safe bonds will be a nice way to generate income, especially if we hit a recession and stock performance remains choppy,” Bailey said. 

To contact the authors of this story:
Claire Ballentine in New York at [email protected]
Charlie Wells in London at [email protected]

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.