MarketWatch

The silver lining of surging inflation: I-bond yields should climb above 9%

Last Updated: April 12, 2022 at 2:06 p.m. ET
First Published: April 12, 2022 at 1:27 p.m. ET
By Mark Hulbert

Should you buy now or wait until the rate resets in May?

CHAPEL HILL, N.C. –Want to lock in a greater-than-8% return with U.S. Treasurys over the next 12 months? ... Of course you would, especially given the higher-than-expected inflation numbers reported this week, with the Consumer Price Index rising 8.5% over the last 12 months. Our absolute minimum goal with a U.S. Treasury is not to lose to inflation. ... Yet even this modest goal seems impossibly out of reach. The one-year Treasury yield currently stands at just 1.9%.

A solution is I-Bonds, which are U.S. savings bonds whose yields are adjusted by the prevailing inflation rate. Specifically, their yield is adjusted twice a year—in May and November—according to the Consumer Price Index’s trailing 6-month change. Its current yield, set last November, was 7.1% (twice the CPI’s change from April to September last year). ... Based on this week’s inflation report, this yield should be set at 9.6% on May 1 (twice the CPI’s change from October through March). The Treasury Department should announce the new rate in the next few weeks.

I’ve written about I-Bonds before, and I refer you to that column for several important details. You can’t purchase an unlimited quantity of these I-Bonds, for example, and you can’t purchase them in an IRA. But you are allowed to purchase $10,000 of such bonds each year ($20,000 per married couple) and an additional $5,000 per year with your tax refund. A strategy of buying the maximum amount each year over a long period results in a sizable fixed-income allocation—big enough to satisfy the asset allocation requirements of all but those with a very large net worth. ... Zvi Bodie has done as much as anyone, if not more, to champion I-Bonds. Bodie, now retired, was for four decades a finance professor at Boston University. In an interview, he said that buying I-Bonds is a no-brainer, and he implores all of us to purchase as much as we can each and every year.

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In any case, Harry Sit, author of The Finance Buff blog, reminds us that there is no need to focus on just the next 12 months. In an email, he pointed out that “I-Bonds are good for 30 years.” Unlike TIPS, furthermore, I-Bonds are structured so that their yield can never be negative. ... Sit recommends that we buy I-Bonds this month rather than wait until May. He points out that you earn an entire month’s worth of interest even when you buy near the end of the month. So that yield of more than 8% that I mentioned at the start can really be thought of as even better, since it is for a holding period shorter than a year—as short as 11 months and one day. ... Sit cautions, however, that since April 30 this year is a Saturday, you shouldn’t try to cut it too close. “The last day to issue the [I-Bond] for April is April 29. The order has to be in on April 28 at the latest. I would give a few more days of buffer just in case something goes wrong. If you don’t have an account set up already, sometimes they [the U.S. Treasury] require extra ID verification, which takes time to resolve. If you already have an account good to go, you can pre-schedule the purchase now for the 27th. If it fails somehow, you still have another chance on the 28th.”

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.