With inflation fears now making front-page news, many investors are seeking out investments that can provide a hedge against rising inflation rates. One of the more popular inflation-protected investments we receive a lot of questions about are Series I Bonds issued by the United States Treasury. While there may be benefits to including Series I Bonds in your portfolio, there are also some drawbacks you should be aware of before investing in these products. To help, we’ve put together a list of pros and cons that you should consider:
Pro: Interest rate rises with inflation
Series I bond interest rates are based on a fixed rate, plus an interest rate that varies based on the semiannual inflation rate, which is set twice a year.
Currently, the Series I bond fixed rate is 0%, meaning the total rate is based on the inflation portion of the calculation. Given the high inflation rates we’ve been experiencing, investors recently have benefited from higher than average interest rates. The current rate is 9.62% from May 2022 to October 2022. This has also led to a significant increase in demand from investors for the Series I bond.
Pro: Tax benefits for education
There are also tax benefits when Series I bond interest is used for higher education. The bond owner can exclude all or part of the interest paid from their gross income when paying for qualified higher education expenses.
Con: Interest rates are variable and can fall
Given the variable nature of the inflation rate, the risk over the long term is that the inflation rates can decline, which would lower the interest payments of Series I Bonds. On the plus side, the interest rate would never fall below 0% for these savings bonds.
Con: The yearly purchase limitation
Another con of the Series I bond is a yearly purchase limitation. Individuals can only invest $10,000 annually in Series I bonds, plus an additional $5,000 if purchased from an individual’s tax refund.
While there are some strategies to increase that amount (by purchasing at the end of the year and then again at the start of the new year), this can be a limiting factor for those with more significant short-term savings balances and be a pain point for investors operationally.
Con: Minimum holding period
Series I savings bonds have a total lifespan of 30 years. The bonds must be held for a minimum of one year. After one year, the bond can be redeemed before maturity but will be penalized for three months’ interest if redeemed within the first five years. Investors with a short-term timeframe should know the minimum one-year holding period and interest rate penalty if redeemed within five years.
Are you interested in learning more about Series I savings bonds?
Please contact us if you’re interested in learning more about Series I savings bonds and whether they would be a good option. As always, we are here to help!
DISCLAIMER: Series I Bond are not available through the Broker-Dealer.