(Bloomberg) -- Their returns are high, their risks almost nil. They perform best during bouts of inflation and to some investors, they may simply sound too good to be true. But there’s a catch: Time to take best advantage of I bonds for the next year may be running short.
Series I savings bonds from the U.S. Treasury have exploded in popularity over the past few months. The Treasury issued $1.4 billion in March, in line with months of surging sales that began late last year.
Inflation explains their appeal. The U.S. consumer price index surged last month by 8.5%, the most since 1981, and I bond yields rise with inflation. So based on March’s price levels relative to September’s, the yield on Series I savings bonds should increase to 9.62% beginning May 1. That’s a big jump from the current rate of 7.12%.
“It’s potentially a rare moment in time,” said David Sterman, president of Huguenot Financial Planning in New Paltz, New York. “You’re just not going to find a guaranteed rate of return like this anywhere else.”
Should investors seeking higher returns wait for that May rate reset? Possibly not. Counterintuitively, locking in the current 7.12% rate now may ensure a higher overall yield for the next 12 months. To explain how that’s possible, Bloomberg News spoke with financial advisers across the U.S. who have been recommending I bonds to their clients.
Here are their strategies:
Mind the Six-Month Cycle
Before dashing into I bonds, it’s important to understand how they work. (Such is the case with any investment, no matter the risk.)
The government has been selling Series I bonds since 1998, up to a maximum limit of $10,000 per person each calendar year. They are considered extremely low risk because they are guaranteed by the U.S. They were intended to help Americans protect their savings from inflation. To this end, their interest rate is made up of two components: a fixed rate of return, and a variable rate which is set twice a year and rises and falls with the headline consumer price index.
The Treasury Department sets this variable rate, on the first business day of May and November. The rate for an investor’s bond changes every six months from the date it was purchased, according to TreasuryDirect, the government’s electronic marketplace.
The Treasury’s schedule shows that a Series I bond purchased at any point in April would maintain that month’s effective rate — which was set on the first business day of last November — until Oct. 1. At that point, the bond would assume the rate set on May 1 for the next six months.
Given that idiosyncrasy, someone who purchased in April at the 7.12% rate would lock that in for around six months. On Oct. 1, the rate set on May 1 — which is likely to be 9.62% — would then take effect for the next six months. That amounts to roughly 12 months of guaranteed, elevated yields.
Contrast that with someone who waits until the 9.62% kicks in. Yes, that buyer would have a higher guaranteed rate until Nov. 1 of 9.62% instead of 7.12%. But the variable rate changes on the first business day of November. If inflation continues to climb, that rate might end up even higher. But if, as some predict, inflation declines by then, that investor runs the risk of clocking in a lower rate for the next six months.
“I would go ahead and sign up for the April rate and get six months at that rate and then get the six months of the May-to-November rate because you’re pretty much guaranteed at least 12 months of seven-plus percent of return,” said John Crumrine, founder of Brunswick Financial in Ocean Isle Beach, North Carolina.
He doesn’t expect inflation to drop dramatically six months from now, but he also doesn’t rule out the possibility that the November adjustment takes the Series I variable rate down to 3% or 4% if suddenly the U.S. Federal Reserve acts more aggressively and does manage to bring inflation under greater control.
Don’t raid your emergency fund
Tempting as it might be — and tight as the timeframe is to lock in that 12-month rate guarantee — advisers say investors should avoid using cash they might need for unexpected expenses to buy I bonds.
“There’s no sense in taking advantage of some of these investments to the point where all of a sudden you’re cash poor, and then you have to start selling things right at the wrong time,” said Sterman of Huguenot Financial Planning.
One reason is that I bonds must be held for at least one year, and cashing them in before five years means you’ll forgo the last three months of interest earned.
“This is money that you really don’t need anytime soon,” said Sterman. “This is really a long-term investment.”
That website? It’s not just you.
A number of investors and advisers who have attempted to purchase I bonds on TreasuryDirect.gov, the department’s website, have made a similar observation.
“The site itself just feels very 1990s,” said Sterman.
The design calls to mind a vintage Lycos or an AltaVista search engine page, with bulleted lists that look a bit like Craigslist.
“I’d say half the people that I recommended [I bonds] to hated the website and got out of them the first chance they got, because the website was so clunky,” says Buz Livingston, founder of Livingston Financial in Santa Rosa Beach, Florida, who has been buying the bonds since 2001.
Livingston says new investors shouldn’t be deterred by the site’s design. He reports sometimes being kicked off after pressing the “back” button, which he thinks may be a security feature. Some of his clients have also reported struggling to link their bank accounts to the website, and are sometimes confused about why they have to do so. But Livingston says this makes buying and later redeeming the bonds easy.
With yields this high, advisers says using the clunky site is a worthwhile price to pay.
To contact the author of this story:
Charlie Wells in London at [email protected]