Low risk and high returns don’t usually go together when it comes to investing. But one type of government bond currently offers an opportunity that seems almost too good to be true.
The US Treasury Department pays an annual rate of return of 9.62% to investors who purchase Series I bonds. For a $10,000 investment, this represents a capital gain of $962 per year.
“Where are you going to put your money that guarantees you more than 9.5%? said Ashby Daniels, financial adviser at Shorebridge Wealth Management. “Good luck finding something better.”
One-year bank CDs pay interest between 1.9% and 3.1%, according to Bankrate.com.
The record I bond payout is a response to US inflation hitting its highest level in 40 years. New data released by the US Bureau of Labor Statistics this week showed consumer prices rose 9.1% in the 12 months to June, higher than expected.
In a year when everything from stocks to cryptocurrency prices crashed as the Federal Reserve raised interest rates to fight inflation, the Series I government-backed bond could become the best investment of 2022.
I bonds are in a class of their own among savings bonds. Like all savings bonds issued by the US government, they pay a fixed rate set by the Treasury Department. But they also include another variable component that changes with the rate of inflation.
Yields on I bonds are set twice a year, in May and October. At this point, the rate changes based on the Consumer Price Index, which measures a set of commonly purchased goods to determine the rate of inflation.
The current rate of 9.62% is good until October. Then it will adjust up or down for the next six months depending on the direction of inflation.
All savings bonds issued by the US government are guaranteed by the government and have virtually no risk of default.
The biggest drawback to buying I bonds is that investor purchases are limited to a maximum of $10,000 per calendar year, or $20,000 per married couple.
Bonds pay interest for 30 years. Buyers should keep them for at least one year. There is a three-month interest penalty if buyers sell the bonds before holding them for at least five years.
Even with these stipulations, sales of I bonds increase.
Investors bought $3.4 billion worth in June, a 950% jump from the same month last year, according to Treasury data.
“If the Treasury removed the $10,000 cap on I Bonds, I can’t imagine how much money would go into it,” Daniels said.
While the manual suggests that a risk-free investment of 9.62% is a solid strategy to consider, people with substantial investable assets – $1 million or more – won’t get as much bang for the buck as they are able to invest.
“There’s no way you can invest a lot of money as a percentage of your fixed income assets to move the needle on their total net worth significantly,” Daniels said.
A DIY investment
Financial advisors can recommend I bonds to their clients, but this is a financial transaction that they cannot manage for them.
Bonds are only sold on the Treasury Department’s website, www.treasurydirect.gov.
To open an account with Treasury Direct, all you need is a social security number, home address, email account, and bank account.
There is a way to increase the annual purchase limit B from $10,000 to $15,000 if the investor uses all or part of their tax refund to complete the transaction.
I Bonds cannot be held in either a Traditional IRA or a Roth IRA.