The I-Bond Cometh: Sell or Keep?

The I-Bond is slowly fading into the background to make way for its more popular twin - the Barbie movie.

Not really. But the I-bond did have a Barbie-like popularity back in 2021-2022 when inflation rates were north of 8%. Everyone was talking about them.

What happened?

In this week’s issue, we’ll examine what happened to the I-bond, its place in the investing world and whether or not they still hold their place in the real world. (hint: Barbie sarcasm there.)

The Guts of an I-Bond

An I-bond is similar to other bonds since it’s a fixed-income security that represents a loan made by an investor to a borrower, typically a government or corporation. When an entity issues a bond, it borrows money from investors for a specified period, promising to repay the principal amount at maturity and make periodic interest payments until then.

An I-bond pays interest until 1 of 2 things happen: 1) you sell the security; 2) the bond matures after 30 years.

But the I-bond stood out a couple years ago for one specific reason: the inflation component. I-bonds have 2 components: a fixed rate decided by the issuer, in this case the US government. This fixed rate is as it implies - fixed, so it never changes.

The 2nd component is an inflation rate, which changes every 6 months. The government bases this rate off of the Consumer Price Index (CPI), which is a measure of inflation.

This means your I-bond will likely never stay the same rate for its lifetime.

Inflate Much?

Since inflation was soaring a couple years ago, the inflation-component of I-bonds was soaring too, to more than 9%+!

Now that’s one hell of a high interest rate for a security sold by the US govt.

But remember - the rate CHANGES. So, of course that delicious 9% rate didn’t last longer than 6 months. And when inflation started to decrease, the I-bond rate lowered as well.

So, as any good reality show would ask, where are they now? Are these still suitable investments? Should you sell you I-bond? Hold for its 30 year lifespan?

The I-Bond Cometh

Disclosure: I’m an I-Bond holder. I bought one for $10,000 via the TreasuryDirect website back in Feb 2022 when it was issued. That means for the first 6 months I got the prevailing rate: 7.12%. For the next 6 months, I got that real juicy 9.62%.

But now, just like Barbie, I’m a bit sad by the reality of my I-bond. It’s earning a paltry 3.38%. Current savings account rates are near 5%. My once shining star looks more like Ken with no hair gel and broken rollerblades.

Do I sell? Keep? Buy more?

Well, before I decide, there are a few caveats with the I-bond.

1. You cannot sell it within 1 year. OK - I’m passed that mark.

2. If you sell after Year 1, but before Year 5, you lose the last 3 months of interest. Ugh.

3. If you sell after Year 5, you keep all interest earned.

I like the I-bond because it offers the below:

1. Inflation protection: it safeguards my purchasing power

2. Safety and security: It’s backed by the full faith and credit of the US Treasury (some might not have high faith in this institution at the moment - hello Moody’s!)

3. Tax advantages: I-bond interest is exempt from state and local taxes and is also tax-deferred at the federal level until it’s redeemed

4. Flexibility: I could hold or sell

But my problems are:

1. Illiquidity: Although I-bonds can be redeemed after one year, it is generally recommended to hold them for at least five years to avoid losing the last three months of interest

2. Interest rate risk: the fixed interest rate component is affected by changes in market interest rates. If market rates rise significantly, the fixed rate on I-bonds may become less attractive (what’s happening to me now!)

3. Opportunity cost: As a low-risk investment, the potential returns from I-bonds may be lower compared to higher-risk investments such as stocks

All situations are different and everyone has their own investment profile and style, but I decided to sell. My time horizon is long and I believe I will receive higher rates of return for this money in riskier assets. But I’m waiting until November 1 to sell.

Why?

My rate changed on August 1. If I sell now, I lose my last 3 months of interest, when I was earning 6.48%. If I don’t care about the current 3.38% rate, then I need to sell 3 months from August 1. That’s November 1.

Besides, I need to save up for that Dream House.

Save On,

Chris