fixed income opportunity

Everyone has been talking about how inflation seems here to stay, at least for a while. Here’s an option that actually takes advantage of the elevated rates: Series I Savings Bonds.

Risk on these bonds is low and the return on a 1-year holding period is more than 6% and possibly more if you are willing to hold for longer and if high inflation continues moving forward.

There are a couple limitations. First, investments are limited to $10,000 per person (based on SSN). And second, these bonds are only available for purchase directly from the Treasury. That means this is not something we can purchase through Brixton Capital Wealth Advisors. But would only take about 15 minutes to set up an account at treasurydirect.gov.

Series I bonds are 30-year bonds with a variable interest rate linked to the consumer price index published by the Bureau of Labor Statistics. Essentially the Series I Savings Bond pays interest based on a combination of a Fixed Rate and an Inflation Rate. The Fixed rate is locked in at the time of purchase and never changes for the life of the bond. The Fixed Rate is currently 0%. But the Inflation Rate is reset every 6 months in May and November and is equal to the annualized percentage change in CPI-U over the previous 6 months.

In November of last year the inflation rate was set at 7.12% for these bonds issued from November 2021-April 2022. BLS published the CPI-U for March at an annualized rate of 9.62%, which means beginning May 1, the inflation rate component of the Series I interest rate will be set to 9.62%.

If you purchase a Series I bond in April 2022, you would get the 7.12% rate from April 2022 to September 2022, then the 9.62% rate from October 2022 to March 2023. That means that combined, you would get 8.54% APY over the next year. There are terms to be aware of, like a 3-month interest penalty if the Series I bonds are redeemed before 5 years, (taken out of the most recent 3 months of interest). Or hold it a little longer, maybe 15 months, and you’d be able to capture the full period of high inflation rates. Interest is tax-deferred until you redeem the bond or it reaches maturity (30 years). Interest will be reported as ordinary income on 1099-INT in the year it is redeemed/matures, unless used for higher education.

For details on rates and terms, see this page.

If my bank offered a 12-month certificate of deposit with a 6% APY, I would certainly look into that. Currently the Series I Bond is essentially offering those numbers, depending on how long you wait to redeem it. And after the 1-year minimum holding period, the money is as liquid as a savings account. You can make a partial redemption in any dollar amount of a bond. Now if you are wondering why we would address investment prospects outside of Brixton Capital Wealth Advisors – it’s because we are on your side and want to make you aware of potentially beneficial investment opportunities.

The rate of return quoted are for illustrative purposes only. Your actual return may very different than that shown in this article. Past Performance is not guarantee of future performance. All investments carry risk. You should consult with your financial advisor and or tax advisor to determine if this product is suitable for you based upon your specific goals and objectives.