How to get high risk-free returns despite inflation

It’s a terrible time to be a saver …

Inflation is rising … And interest rates are still close to zero.

In November, the Consumer Price Index (“CPI”) – which measures the average change in the prices that consumers pay for a basket of goods and services – rose 6.8% from November 2020.

This is the largest 12-month increase since the period ending June 1982. And it means your hard-earned savings are losing value.

So today I want to discuss what’s going on with inflation … And I want to share with you a way to earn 7.12% in a risk free government debt instrument.

Yes, I said 7.12%, risk free.

Here’s the deal … Inflation is here.

As the chart below shows, inflation started to soar in April. And for the past seven months, the CPI has increased by 5.6% on average …

The reasons stem from the pandemic … ultra-lax monetary conditions, stimulus controls in the hands of home-confined consumers, and supply and labor shortages.

In other words, the extra money runs after less goods and services. The combination put upward pressure on prices.

After months of saying otherwise, Federal Reserve Chairman Jerome Powell has finally admitted that inflation is no longer “transient.” The Fed is starting to reverse its ultra-accommodative monetary policy. And he plans to start raising interest rates directly – as early as the first half of this year.

But the Fed hasn’t hiked rates for months. And in the meantime, the Fed’s low interest rate policies combined with high inflation rates make it a terrible time to be a saver …

Concretely, savers lose money when they lend it to the government or keep it in the bank.

For example, a 10-year treasury bill earns around 1.7% per year. And the average inflation rate over the first 11 months of 2021 is around 4.5% per year … At this stage, savers are losing nearly 3% per year in real terms (4.5% inflation minus the “10-year risk of 1.7%” “free” is equal to 2.8%).

And people who keep their money in the bank don’t come close to the 1.5% rate. The average interest rate on bank accounts was just 0.06% during the week ending Nov. 24, according to consumer finance company Bankrate.

At this point, savers have terrible options …

They can either keep their money safe in the bank or in cash and gradually lose their purchasing power …

For the most part, investing in risky assets has worked very well since the market lows in March 2020. But when sentiment inevitably changes, losses can become large. It is not an easy choice.

So today I’m sharing one way to use inflation to your advantage … and earn up to 7.12% per year without repayment risk …

I’m talking about the inflation-adjusted Series I savings bonds issued by the US Treasury. Due to the surge in inflation, Series I bonds are now yielding 7.12% …

This rate will apply from November of that year to April 2022. Then it will be adjusted again (every May and November) for another six month period based on the rate of inflation at that time, as measured. by the IPC.

To take advantage of Series I Bonds you will need to go to the TreasuryDirect website and open an account … Under the ‘BuyDirect’ tab you will see an option to purchase Series I Savings Bonds. From there, it’s pretty easy to complete the purchase.

Beware … the site is a bit clunky, so it’s best to create an account when you’re in a good mood and have time. But after using it a few times, you will get used to how it works.

In addition to Series I bonds, TreasuryDirect provides access to other government offerings – such as bonds (due in one year or less), notes (due in two to 10 years), bonds (due in 10 years or more) … among other options.

As an investor or saver, it is worth familiarizing yourself with the site for additional options for managing your cash flow.

The 7.12% Series I Savings Bonds we are talking about are an accumulation type security – meaning that interest is added to principal and subsequent interest is paid on accumulated or increasing principal. It will earn interest for up to 30 years if you don’t cash in sooner.

These bonds also have attractive tax characteristics. You have the option of waiting to cash them before paying federal taxes on the interest. It is also possible to further reduce federal income tax if the interest is used for higher education purposes. And finally … there are no state or local taxes.

Series I bonds have some drawbacks …

There is a limit of $ 10,000 per person per year on purchases of Series I bonds through TreasuryDirect. However, if you make a purchase with a tax refund, you can buy an additional $ 5,000 of bonds per year, per person … and if you are married, you and your spouse can each purchase up to 10,000. $. Plus, you can buy up to $ 10,000 for each child.

An important note … you should buy I Bonds with money that you don’t need to access quickly. You can’t sell them for a year. And if you sell them before five years, you’ll lose the last three months in penalty interest.

Still, if you can park your money for at least a year, I bonds are a good option. For comparison, the average interest rate on a one-year certificate of deposit is 0.14%, according to Bankrate.

It’s a great way to grow your savings without risk … instead of losing purchasing power while your money languishes in the bank.

Good investment,

Bill McGilton

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