One Positive of Higher Inflation

Remember those savings bonds that your parents or grandparents bought you as a child? To this day, I’m certain nobody loved anything as much as my grandfather loved bonds backed by the United States Government. Some might even consider it the original cryptocurrency. Fast forward to when you were a bit older, maybe it was time to purchase a car, go to college or buy your first home. You walked into your local bank, proud and looking to cash in on your small fortune. You worried that your bank might not financially recover from your withdrawal but nonetheless, you handed the bank teller your paper bonds, they looked up the value of each and came back with the total amount owed to you. Then reality set in. Like Cinderella’s carriage at midnight, that Mustang quickly turned into a Taurus. The once-proud Series EE bonds that were yielding over 7% in its most recent peak, was now paying less than 0.25%.  I didn’t realize it at the time but that was my introduction to Economics 101.

While those days of high-yielding government bonds may seem like a thing of the past, you might be surprised at what one government-backed bond is paying. New series I savings bonds, also known as inflation bonds or I Bonds, combines two rates: a base rate that is fixed for the life of the bond and an inflation rate measured by the Consumer Price Index for all Urban Consumers (CPI-U). With the latest reading of CPI-U rising to 7%, its highest level since 1982, current issued I bonds are now yielding 7.12%. That rate is set and guaranteed for new purchases through April of 2022 before they re-adjust to current CPI-U data. Once purchased, you are guaranteed your 7.12% for 6 months until the new rate kicks in.

Now before everyone runs to TreasuryDirect.Gov to purchase (and that’s the only place you can purchase them), there are terms and requirements that everyone should read before deciding to invest. For example, you can only invest $10,000 per individual and you must hold the bonds for a minimum of 12 months, which means you will see at least 1 rate adjustment during your holding period. That could be good or bad depending on what inflation continues to do. Also, if you cash in your bonds before holding for 5 years, you will forfeit the previous 3 months’ worth of interest.

Will these bonds continue to yield 7% for the foreseeable future? I hope not as that means we’re facing a prolonged period of high inflation. With that said, maybe the most common question we receive goes something like this: “I’ve saved up enough money for my next car/house/bored ape NFT, but I don’t plan on using it for another 12 months. Should I invest that money or let it sit?”. Although everyone’s situation is different, in those instances we usually look towards very low-risk investments and avoid the volatility that comes with equities. In our current environment where stocks are all over the place and inflation is greatly outpacing minuscule yields on savings accounts, cd rates, and most bonds, it might make sense to look towards I-Bonds as a possible solution for those very short-term investment needs.

If you have any questions in regard to I Bonds or with other investment strategies that you’re considering, please reach out to us at 217-441-8801 or via email at Shane@BGWealthPartners.com.

Posted January 21, 2022 by Shane Adkins, CFP®