Mitch's Mailbox

April 21st, 2022

A U.S. Treasury Bond with a 9.6% yield? It’s true!

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Susie M. from Lake Charles, LA asks: Hello Mitch, I saw in the newspaper last week that there is a type of U.S. Treasury bond that will offer a 10% yield. Is this true? I’ve grown so accustomed to savings accounts and CDs paying less than 1% that I couldn’t believe my eyes! Thank you for your response.

Mitch’s Response:

Thanks for sending in your question! The story you saw in the newspaper about a 10% yield on a Treasury bond is indeed real and true. The U.S. Treasury Series I Bonds is what is being referenced, also known as “I Bonds.” They were introduced in 1998 by Vice President Al Gore and Treasury Secretary Robert Rubin to provide savers some protection from future inflation.

The base rates paid by the bonds are fixed and set by the U.S. Treasury, but here’s the kicker: the yield is increased by an inflation-adjusted rate that is determined by the change in CPI over the previous six months. Before 2021 and 2022, I-bonds did not offer very attractive yields – there was not a whole lot of inflation in the economy. Fast forward to today, and the latest CPI print was north of 8%.

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That means the U.S. Treasury Series I Bonds are set to offer annual interest payments of 9.6%, with the interest compounded every March and November. This yield makes I Bonds the most attractive, risk-free U.S. asset. There are also some tax benefits to be aware of, namely, that I Bondholders can defer claiming I Bond interest until maturity or redemption. Lower- and middle-income families could also possibly be exempt from taxes if the bonds are used to pay for college tuition.

I realize that risk-free, 9.6% yielding U.S. Treasury I Bonds sounds like a no-brainer, but there are some caveats. The first is that the maximum I Bond purchase is $10,000, so it is not really substantial enough to impact a retirement plan, for instance. Using the bond for college tuition would be helpful but again, not necessarily a massive difference-maker in terms of interest earned.

Another issue with the I Bond is that it is illiquid. The bonds cannot be redeemed for at least a year, and any I Bond redeemed earlier than five years will be penalized for three months of interest. The bonds are also not tradeable and must be purchased directly from the U.S. Treasury, which can be a bit of a clunky process.

At the end of the day, if you’ve got $10,000 you know you won’t need for a few years that you’d like to see earn some interest, looking into I Bonds may be worthwhile. Otherwise, I think the liquidity and holding period issues combined to make other options for earning a return more attractive.

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Disclosure

1 April 12, 2022. https://www.wsj.com/articles/the-safe-investment-that-will-soon-yield-almost-10-11649769505?siteid=yhoof2

2 ZIM may amend or rescind the guide “How to Build Your Ultimate Retirement Portfolio” for any reason and at ZIM’s discretion.

3 ZIM may amend or rescind the guide “How to Build Your Ultimate Retirement Portfolio” for any reason and at ZIM’s discretion.

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