How to stash cash away and earn 7.12%
Summary:
With interest rates near historic lows and inflation rising at the fastest pace in more than 30 years [1], investors may be challenged to find sufficient real, or inflation-adjusted rates of return in their portfolio.
Investors with a time horizon of at least a year can consider the November 2021 issuance of Series I bonds from the U.S Department of Treasury, which is currently yielding 7.12% annualized, the second-highest rate in their history[2]. These rates are higher relative to 1-year CD’s, which are earning less than 1% APY [3].
What are Series I bonds?
Series I savings bonds were designed to protect your cash from inflation and are issued by the U.S Treasury, meaning they have a very low risk of default.
How do Series I bonds earn interest?
The November 2021 Series I bond interest of 7.12% is calculated as a composite mix of two components:
Fixed-rate: This rate is set upon issuance and investors will earn the fixed rate for the life of the bond. As of November 2021, the fixed rate is currently at 0%.
Variable-rate: This rate resets every May and November and is based on inflation around that time. If inflation goes down (deflation), the variable rate can decline, but the rate will not go below zero, which means at minimum investors will earn back their original investment.
Important factors to note before purchasing the bond:
If you buy the bond in November 2021, the 7.12% rate is technically earned only for 6 months until May 2022. In May 2022, the variable rate will reset based on inflation at that time, so that 7.12% rate can drift lower.
If you sell the bond after the 1-year minimum holding period but before 5 years, you'll forfeit the last 3 months’ worth of interest.
Considerations for your portfolio:
Even if you were to hold the bond just for the 1-year minimum (and lose the last 3 months of interest) and if inflation goes to zero (unlikely, but you won't earn anything from May 2022 on), the bond may earn a rate higher relative to checking/savings/CD rates.
Note that the bond needs to be held for at least 1 year, so ensure you go through the proper planning steps to ensure separate funds are available for emergency and short-term purposes. After 1 year, investors can consider using the I bond holding as part of their emergency funds, potentially freeing up dollars to earn higher returns elsewhere.
For more information: To earn the rates mentioned above, the bond must be purchased between now and the end of April 2022. For more information, check out the Treasury Direct website at www.treasurydirect.gov
[1] Bureau of Economic Analysis
[2] Bloomberg, ‘These Risk Free Inflation Protecting Bonds Earn 7.12% Interest’ (Nov 2021)
[3] Bankrate.com (Nov 2021)
Disclaimer: The article is for informational purposes only and is not intended to be used as a general guide to investing or financial planning, or as a source of any specific recommendations, and makes no implied or express recommendations concerning the manner in which any individual’s investments or assets should or would be handled, as appropriate strategies depend upon each individual’s specific objectives. Opinions expressed in this article are current opinions, which are not reliable as fact, as of the date appearing in this article only and are subject to change. For a comprehensive review of your personal situation, please consult with a financial or tax advisor.