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| $10,000 will earn $481 interest in 6 months. Then $10,481 will be re-invested at a projected 6.47% p.a. for the next six. |
The excess return over our bank savings and money market accounts was there for the taking. Though limited to several hundred dollars per year, your humble blogger couldn't pass it up. The long-term project to consolidate and simplify our financial picture would have to be delayed yet again.
Note: after the break, WSJ experts explain I-bonds.
J.R. Whalen: Here's Your Money Briefing for Friday, October 14th. I'm J.R. Whalen for The Wall Street Journal. You may have heard of government-issued I Bonds. They're known for paying out significantly high interest and are considered by many to be one of the safest places to put savings.
Charles Forelle: Done like a regular savings bond, an I Bond will give you an additional return when inflation is high, as it is now. So right now, as we sit here in mid-October, the rate on an I Bond is 9.62% for the next six months, which is crazy high. I mean, that is a super, super high number.
J.R. Whalen: But even as inflation remains high, those crazy high interest rates are expected to fall by a lot next month. Coming up, Wall Street Journal financial editor, Charles Forelle, will join us for a little I Bonds 101 and talk about how you can get in on the action before rates go lower. That's after the break. Americans have pumped billions of dollars into government I Bonds to capitalize on interest rates that have reached nearly 10%, but those rates are about to come back down to Earth. So can you still score some of the highest returns around? Let's bring in Wall Street Journal financial editor Charles Farrell to talk about it. Charles, thank you very much for being with us.
Charles Forelle: Oh, great to be here.
J.R. Whalen: So, Charles, with all the market volatility these days, we hear a lot about bonds, but just to catch everybody up, what are I Bonds? And why are they often seen as a safe investment?
Charles Forelle: An I Bond is a kind of savings bond issued by the US Treasury. And like all savings bonds, there are bonds that are intended in relatively small denominations to be used by individuals to save. These are not things that you trade through your broker or buy in the outside world. You buy them directly from the Treasury, and they're savings bonds meant to do exactly what they say, which is to help American families save. And the special nature of I Bonds is in the letter I. I is for inflation. And I Bonds are indexed for inflation. So unlike a regular savings bond, an I Bond will give you an additional return when inflation is high, as it is now. Part of the reason that I Bonds have become incredibly popular in the last year or so is that, with inflation soaring, the rates on I Bonds have zoomed. So right now, as we sit here in mid-October, the rate on an I Bond is 9.62% for the next six months, which is crazy high. I mean, that is a super, super high number for any kind of bond, and certainly for one that is issued by the US Treasury and is, for all intents and purposes, without any risk at all.
J.R. Whalen: Sounds like a pretty good deal.
Charles Forelle: A lot of people think so. There've been tons of sales, about $20 billion in sales so far this year. Again, these are small products generally for individuals, and so you would often see years were well under $1 billion in sales, but they've really boomed in popularity this year.
J.R. Whalen: But is this too good to be true? Is there a catch here?
Charles Forelle: So there is a limit. It's $10,000 per person. So if you have a giant pile of savings and you're able to deploy that, you can't put it all in I Bonds. But for most families and for most savers, particularly if you have a married couple or a married couple with kids, there's a pretty sizable chunk of savings that you can do if you put into I Bonds. You can also, if you really like I Bonds, there are ways to put some of your tax refund into I Bonds above the $10,000 cap, but it's not a gigantic investment, but it's also pretty sizable for most people. There is some legislation, bipartisan legislation, that would push the limit up to 30,000. It's unclear whether that's going to go anywhere. There's obviously a good bit of demand for it or there has been a good bit of demand for it with rates high. There are some catches. You have to buy them from the Treasury on the Treasury's website, and you have to sign up for an account, and it's not the easiest thing in the universe, and the website looks like it was made in 1998 or something. So you have to do that, you have to jump through some hoops, but the product itself is very high-earning and very safe.
J.R. Whalen: Okay, so let's talk more about what investors need to know about how these work. How is the interest rate set?
Charles Forelle: So there are two components to the interest rate. The first is a fixed rate, and the fixed rate is good for the life of the bond. You can hold them for 30 years. And then there is an inflation adjustment. And the inflation adjustment happens every six months, and every May and every November they set new rates. And those rates apply for six months for any bonds bought in the period between November and May or May and November. So if you buy a bond in January, you get the rate from the last November. That will be good for six months, so from January to June. And then you'll get the new rate, the one that was announced in May. So every six months, your rate changes and the inflation adjustment changes. I Bond interest rates compound semi-annually. So every six months they take the interest, they add it onto the principle, and it compounds. So it's not compounded monthly. It's compounded every six months.
J.R. Whalen: So why are we hearing that the I Bond interest rate could come down by as much as three percentage points as early as November?
Charles Forelle: So inflation is still 8% higher than it was a year ago, but it is not 8% higher than it was six months ago. So what's happened is inflation shot up, and then inflation plateaued for a little while, and since we're in this plateau, it's increasing a little bit month on month, but it's not increasing as massively as it was earlier in the year. We're starting to see that effect roll back. So the reason for that is because it's only looking back six months, not a whole year. This is not financial advice, but if you are thinking about buying an I Bond on November 1st, you'll get a rate of 6.47 or thereabouts. If you buy it on October 31st, you'll get a rate of 9.62 for six months. So think about it.
J.R. Whalen: All right. When people buy I Bonds, how long do they have to hold onto them?
Charles Forelle: You have to hold it for at least 12 months. Between one year and five years, you can redeem the bond at your option, and the Treasury will take a three-month interest penalty. After five years, you can redeem it at any point. This is actually a really interesting and valuable feature of these bonds. You have options with them. If you had bought a 30-year bond, you're stuck with it for 30 years. You could try to sell it to somebody in the secondary market, but if interest rates have changed, that person may not pay you the full amount that you paid for the bond. And the I Bonds have this great feature, which is that as long as you're willing to hold it for at least a year and take a small penalty between year one and year five, you can always redeem them. And that is good for a bunch of reasons. One reason that it's good is that you can use it as a kind of emergency savings vehicle. People talk a lot about what should you do with an emergency fund. Actually, a bunch of I Bonds is a pretty good emergency fund. Now, of course, you have to pre-fund it a year in advance. But if you buy I Bonds regularly and build up an emergency fund, you will have a bunch of I Bonds after one year that are available to be redeemed. It's completely 100% safe. It's a government security. And you can redeem them whenever you want after that first year. Another nice benefit of I Bonds is that you can defer paying taxes on them until you cash them out. So you don't need to pay taxes on the interest every year.
J.R. Whalen: All right. That's Wall Street Journal financial editor Charles Farrell. Charles, thank you very much for taking the time to be with us.
Charles Forelle: It's a pleasure.
J.R. Whalen: And that's Your Money Briefing. I'm J.R. Whalen for The Wall Street Journal.
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