Learning From I Bonds

Last year inflation was at historic levels and the humble I bond was paying an interest rate of 9.62%. The catch, of course, was that you could only buy $10,000 per year, the rate resets every 6-months, you had to hold the position for at least a year, and if you cashed out before 5-years, you would lose the last six months of interest.

Fast forward to today. Inflation has come down, and the declared rate on the I bond has dropped to 3.8%.

Why is this important?

1. I Bonds are now paying less than many short-CDs, money markets, and savings accounts. If you own I Bonds, you probably want to keep an eye on your redemption timelines as it will likely make sense to cash-in before you hit the 5-year holding period.

2. This is a good reminder about reinvestment risk. When you buy short-duration bonds of any kind, there is a very real risk that the rate you have today won’t be around forever. If interest rates drop back to 0% when your bonds mature (or the rates reset), do you have a strategy in place for what you will do next?

3. As we discussed in last week’s seminar, staying the course is never easy. It can seem lazy, boring, or even dumb, but it is very often the best thing to do. In the first part of this year, as money flooded into money market funds and other safe assets, the longer fixed-income positions and the S&P 500 outperformed as interest rates on the long end moved lower, and the equity markets moved higher. Investors that continued to execute on their plans were rewarded. Investors that abandoned their long-term strategies in favor of short-term safety were once again disadvantaged.

Every investment decision has risk. Our job is to help you understand which risks you are taking, and help you manage those risks over time.