Are I Bonds A Good Investment Now?

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Is now a good time to look at I Bonds? Some say yes, I say no. Here's why.

  Comments: 12

I Bonds have never made much sense to me.  They generally offer yields that are below the top  certificate of deposit rates and have low maximum investment limits.  Today, I read an article in the Wall Street Journal recommending I Bonds as a safe investment alternative so I decided to take another look.  Here's what I found.

Safety

I Bonds are issued by the US Treasury, presumably making them one of the safest investments in the world.  They are backed by the Federal Government of the United States.  Deposit account at your bank (savings accounts, Certificates of Deposit, money market account) are backed by the FDIC a government chartered and run entity. The FDIC taxes banks based on their risk profiles to fund its insurance.  Right now, the FDIC has approximately $40 billion in deposits.  Even if another big bank failure wipes out the $40 billion, analysts expect the government to step in and provide the FDIC with additional cash.   From Bloomberg:

\"It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue by lending money to the FDIC.

Regardless of who wins control of the White House and Congress in November, no politician is likely to vote in favor of leaving federally insured depositors out in the cold.\"

Both seem pretty safe to me.

Rate

On rate, I Bonds are still not as attractive as a high yield CD.  I Bond yields consist of two parts.  A fixed yield, which is guaranteed for the 30 year life of the bond, and a floating rate which moves up or down depending on inflation.  Right now, the fixed yield of an I Bond is 0%.  So you're starting with a 0% yield.  The variable rate the I Bond pays is 4.84%.  That rate will go up next month to 4.92% based on the last six months of inflation data.  Rising oil and commodity prices  pushed up inflation, raising the yield on I Bonds.  This variable yield is fixed for six months and readjusted twice a year, on May 1 and Nov. 1.  That means if you opened a bond on Nov 1, you are guaranteed the 4.92% yield for six months.  After that, it could be adjusted depending on what happens to inflation.  For more on how this rate is calculated, visit the I Bond page.

My expectation is that with plummeting oil prices and a major recession, inflation is going to moderate, if not disappear.  We are in a recessionary and deflationary environment now, not an inflationary one.  As a result, you can expect I Bond yields will drop after May 1. 

Now, compare that with getting a 5 year CD.  The top 5 Year CD Rates on the BestCashCow rate table are above 5.2% APY.  That's a rate guaranteed forfive years and if you stay below the FDIC minimums the money is virtually backed by the United States government, making it as safe as an I Bond. 

If you really want to get sophisticated, you can ladder a CD portfolio and create some of the inflation adjusted mechanisms of an I Bonds while retaining your flexibility and your higher FDIC insurance limits.

Or, you could park your money in a FDIC insured money market or savings account.  The top savings rate according to the BestCashCow rate tables is 4% APY, very competitive with the I Bond yields.  As another bonus, your funds are liquid.  Yes, your rate will move up or down depending on the Fed Funds rate and the economy, but these changes will just mirror what's happening with the I Bond.  I Bonds respond to inflation and so do money market and savings account rates. 

Investment Limits

There still might be a benefit to I Bonds if you want to invest large amounts of money above FDIC insurance limits.  The problem is that you can only invest $5,000 per social security number in each type of Treasury Bond.  By buying $5,000 in I Bonds from your bank and $5,000 from Treasurydirect.com, you can increase that limit to $10,000 per calendar year, but that's still a far below FDIC insurance limits.

So, unless anyone can present any other reason to invest in I Bonds, I'll stick with FDIC insured deposit account.

Comments


bartee, September 06, 2010


I bonds are a great savings plan and they are secure,, everytime you get a 50 or a 100 from your paycheck or gift ,,drop it in an Ibond and see how much dough you can save ,,,make it a saving game ,,that works ,,, and thats the name of that tune

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john, April 12, 2010


for anyone believing the interest rate is going to be a bust with the recession, my 14 I bonds I'm sittin on are gaining 5.09% interest, thats better than any FDIC insured bank in america right now


cheers

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MD, April 11, 2009


I bonds are tax deffered also, who is this clown ?

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Mel, February 24, 2009


Also, to my knowledge, each spouse can purchase $10K per year (paper and electronic), as well as purchasing for children under their SSNs, up to the same limit. So the $5K limit is not really representative for people with a family, planning for education etc.

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David, February 21, 2009


I-Series bonds aren't the sexiest investment in the world, but that little $1K jewel I bought in 2000 is now paying 8.4% interest, and in this environment that makes me look like Howard Hughes :)

When this stimulus plan has to be financed, and the Fed ends up purchasing a bunch of Treasuries by firing up the dollar printing press, the inevitable backwave of inflation will make those I-Series bonds look even sweeter, will they not?

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worried, February 11, 2009


I have a question. What if a person did buy more than $5,000.00 in one calendar year per one social security number, and was allowed to do so. What happens to the extra money spent on the I bonds?

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Nebraska, November 19, 2008


I-Bonds are a great deal for saving for a child's education fund. The reason is, you do not pay any taxes at all when you cash them in. Not even Federal Taxes. I wish I would have invested more in them in retrospect of what has happened to my son's college savings plan. And don't forget, what was invested in the stock market has all been lost and then some if you account for inflation.

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kcalif, October 31, 2008


I bonds are, unlike a CD, tax deferred with interest added to the principal every 6 months and that effectively increases the yield. This makes them, depending on individual circumstances and tax bracket, a possibly better investment than a CD. They can also be cashed at any time after one year(with 3 month penalty) like a CD in the event that interest rates rise dramatically.

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kcalif, October 30, 2008


Often overlooked is using I bonds for "delayed gifting". I gift my children and grandchildren through Treasury Direct but hold bonds indefinitely in the gift portion of my account without their knowledge. This removes money from my estate and holds it secure for their future to be received outside of probate at my demise. Some of these bonds are now paying upwards of 8 1/2% which in this current environment is very nice indeed.

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tightwad, October 29, 2008


Just goes to show the government doesn't want people to save. The $5,000 dollar max is a joke hardly suitable for a kid saving money from his paper route.

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