Series I Savings Bonds: End-Of-Year Strategies To Take Advantage Of The Current High Interest Rate

Series I Savings Bonds: End-Of-Year Strategies To Take Advantage Of The Current High Interest Rate

Fixed income investments are an important component in a portfolio because of their ability to cushion against equity market losses. However, when it comes to abundant returns, fixed income holdings have not had much luck during the low-interest-rate environment of the past few years. Accordingly, those seeking higher returns from their bond holdings have had to venture into less secure instruments, such as high-yield “junk” bonds and other alternative-fixed income holdings. Making matters worse, the recent spike in inflation means that many fixed income investments are earning a negative real yield. However, this is not bad news for all fixed income instruments, as this increase in inflation has made the rarely used Federal Series I Savings Bond (or, more simply, the “I Bond”) significantly more attractive for investors.

I Bonds are offered via the Treasury Department and are backed by the U.S. government. They can be purchased through the TreasuryDirect website, and such purchases are limited to $10,000 annually per person. What makes I Bonds unique is their interest structure, which consists of a combined “Fixed Rate” and “Inflation Rate” that, together, make a “Composite Rate” – the actual rate of interest that an I Bond will earn over a six-month period.

While the current Fixed Rate for newly purchased I Bonds is 0%, the Inflation Rate for I bonds purchased before May 1, 2022 is an annualized 7.12%, meaning the Composite Rate is also an annualized 7.12% (the highest rate of I Bonds since May 2000!) for the first six months that the I Bond is held (after which a new Composite Rate will be determined by any changes to the Fixed and Inflation rates). While I Bonds have a 30-year maturity, they can be redeemed after being held for at least 12 months. Investors who redeem I Bonds between 12 months and 5 years after issue will forfeit the last 3 months of interest, but I Bonds held for more than 5 years can be redeemed at their current value.

The $10,000 annual limit on I Bond purchases restricts their benefit for those with larger portfolios, but there are several ways investors could increase the amount purchased at the current (very favorable) Composite Rate. For example, because the annual limit is a calendar-year limit, individuals could purchase $10,000 worth of I Bonds before January 1, 2022, and then an additional $10,000 between January 1 and April 30, 2022. Which means a couple could purchase a combined $40,000 worth of I Bonds and receive the annualized 7.12% Composite Rate for the first six months the bond is held. In addition, I Bonds can also be purchased for children or by trusts and estates, which could further increase the amount purchased. Finally, paper I Bonds can be purchased using a tax refund up to a $5,000-per-return limit, which is in addition to the $10,000 annual limit on I Bonds purchased through the TreasuryDirect website.

Ultimately, the key point is that there is a limited amount of time for investors to purchase I Bonds at their very favorable Composite Rate of 7.12%, especially if they want to maximize the amount purchased for the 2021 and 2022 calendar years. In the current environment of low-interest rates and high inflation, I Bonds represent a potential opportunity for investors to increase the yield for a portion of their fixed income portfolio!

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