Clock is ticking on 9.62% I bond yields

With inflation still hovering near a 40-year high and far from tamed by a Federal Reserve that is promising more interest rate hikes, I bonds have become a pleasant distraction for financial advisers and investors looking for a silver lining amidst the current economic malaise.

While the Fed tightening has awakened some rate-dependent income streams, the 9.62% yield from I bonds has been tough to beat. But the clock is ticking on that rate, as it is set to drop down to 6.48% for anyone buying in starting Nov. 1  

The I bond yields, which adjust every six months, represent just one of several catches to these 30-year government bonds. But for now, at least, the teaser rate is worth the hassles for some advisers.

“We have been suggesting I bonds for clients since last spring,” said Daniel Galli, principal at Daniel J. Galli & Associates.

“The relatively short one-year commitment, coupled with a modest penalty, make I bonds a worthwhile cash alternative,” he added. “This is one way to make lemonade out of lemons.”

The lemonade analogy is appropriate because, as investments go, this one does require a bit of effort to execute and maintain.

For starters, I bonds must be purchased by each investor through TreasuryDirect.gov, a clunky website that has been overwhelmed by the sudden demand and operates pretty much the way one might expect an obscure corner of the federal government to operate.

“The site keeps crashing because of all the demand,” said Shane Sideris, managing partner at Synchronous Advisors.

Once on the site, individual investments are capped at $10,000 per person, per year, which can be a frustratingly small amount for financial advisers dealing with wealthy clients.

“You have to look at why you’re using I bonds and what else you could get instead,” said Sideris, who even as a fan of I bonds admits it is easy to get caught up in the hype and overlook the various associated obstacles.

A week ago, Sideris found himself in the middle of an enthusiastic dustup on Twitter when he charged that I bonds are the meme stocks of 2022.

He believes I bonds are “way overhyped” and too often described as “good long-term investments.”

Too many investors and advisers are not running the numbers on the impact of an initial one-year lockup from the date of purchase and the forfeiture of three-months’ worth of interest income if the bonds are redeemed within the first five years, Sideris said.

For example, anyone hoping for a nice pay day a year from now on their $10,000 investment should be factoring in the adjusting yields and the penalty.

While anyone buying before Nov. 1 will get a 9.62% yield for the next six months, the yield for the six months after that drops to 6.48%. Averaging those two rates and subtracting the three-month yield penalty results in about $600 worth of income on a $10,000 investment.

The I bond has a 30-year maturity and offers penalty-free liquidity after five years, but longer term benefits will depend on inflation, which, prior to 2021, lingered below 2% for decades.

“They are a very specific use case and beyond that they are not very good,” Sideris said. “If you’re using I bonds as an investment vehicle, it’s terrible unless inflation is running in the high single digits like it is now. If inflation goes back to 2%, your I bond will pay 2%, as well.”

Cody Garrett, founder of Measure Twice Financial, also worries about the potential for investors to become blinded by the 9.62% yield I bonds offer for the first six months.

“Numerous investors falsely believe they are locking in a 9.62% annualized long-term investment return for decades to come, viewing I bonds as a long-term investment rather than a short-term savings strategy tied to a variable inflation rate,” he said. “It is surprising to see I bonds become the new craze, with similar intensity to Bitcoin just a few years ago, although entirely different in terms of risk.”

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