There’s a Low-Risk Way for Investors to Earn 9.62% Returns Right Now

#Lifestyle Wealth


(Bloomberg) -- Markets are slumping. Crypto has cratered. Yet one corner of the financial world continues to offer investors strong, low-risk returns: Humble I bonds. 

Sales of US Series I savings bonds remained elevated in June at $3.4 billion, surging more than 950% compared to the same month last year, according to Treasury Department data published Thursday. Droves of Americans have snapped up the government bonds that offer inflation-adjusted yields in recent months, with June’s tally dipping slightly from April and May.

“You are currently receiving an annual interest rate of 9.62%, which is very competitive with the long-term S&P 500 returns,” said Elliot Pepper, a financial planner and director of tax at Northbrook Financial in Baltimore. “But unlike the S&P 500, which year-to-date is down 20% or so, you don’t have any sort of downside risk because the I bond is issued by the US government.”  

Low-risk, high-return options are few and far between for investors right now. In June, the Federal Reserve raised interest rates by 75 basis points — the biggest increase since 1994 — on concerns about inflation, which is at a 40-year high. This has hammered both stocks and bonds, and made any asset that rises alongside inflation look particularly attractive.

Here’s what financial advisers say investors should know about I bonds now:

Transitory Appeal

Obscure during times of low inflation, I bonds were created more than two decades ago to help Americans protect their savings from rising prices. Their interest rate is made up of two components: a fixed rate, which remains constant, and a variable rate set twice a year that rises and falls with the consumer price index. 

The Treasury Department sets this variable rate on the first business day of May and November. The rate for an investor’s bond changes every six months from the date it was purchased, according to TreasuryDirect, the government’s online marketplace. Because CPI has surged this year, it’s translated into unusually high rates for I bonds, which currently promise 9.62% returns. Bonds purchased until the end of October will have this rate for the subsequent six months. 

A new rate will go into effect for bonds purchased in November. (That rate will, in turn, be applicable for six months from the purchase date.) If inflation decreases before then ⁠— which is the primary goal of the Federal Reserve right now ⁠— the rate will almost certainly be lower. 

Still, Pepper calculates that in an unlikely worst-case scenario of the government setting the I bond rate for November at 0%, someone who purchased the debt now would still earn 4.8% over the course of a year. 

“You can’t point to a bank account, a CD or any other cash-style investment that’s going to get you returns like that,” he said.

Barriers to Buying 

US citizens, residents and government employees can purchase up to $10,000 in I Bonds per calendar year electronically from the notoriously wonky Treasury website. Those who use their federal income tax refunds may purchase an additional $5,000 in paper form, which would bring the annual limit to $15,000. 

There are ways around the limit, up to a point. The bonds can be purchased for spouses and children too, and Treasury also lets people purchase them for trusts and estates. 

Even so, the limits have made I bonds less compelling to some wealthier clients of Laura Mattia, chief executive of Sarasota, Florida-based Atlas Fiduciary Financial. Clients with million-dollar portfolios and above don’t see much of an appeal, she said. At the same time, Mattia notes that many investors already have a good chunk of their retirement savings stashed away in 401(k)s and IRAs. And those with limited cash shouldn’t use it on I bonds, she said, because purchasers must hold on to their bonds for at least a year. Those who exit before five years lose three months of interest.

Technical Issues Loom

Pepper has been working with many clients to set up I bond strategies, and “part of that strategy is navigating that extremely clunky website,” he said. 

Visitors may be wary of giving financial information (let alone funds) to such a vintage-looking website. It works, but kinks abound. 

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Beyond having a dated look, the website doesn’t work with password managers and requires customers to click in their password with a mouse. Much more time consuming: Some hopeful purchasers receive messages that they need to provide additional identity verification to buy the bonds. 

“I hold my breath every time I’m on the website setting up an account with a client,” Pepper said.

A few clients end up having to fill out and print a paper account authorization form and have it signed at a financial institution with a signature-guaranteed seal or stamp. This can usually happen at a bank or credit union. But Pepper said it can add weeks to the process of buying the bonds. 

The only silver lining for those caught in this limbo: The rate will stay the same through October.

To contact the author of this story:
Charlie Wells in London at [email protected]

https://www.wealthmanagement.com/fixed-income/there-s-low-risk-way-investors-earn-962-returns-right-now

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