Should I Be Buying I Bonds in 2022?
Bond investing has not been sexy for the last 12- 15 years. There's a good reason for that.
The effective interest rate that the Fed has sat has been zero for over a decade. And that's a big difference from the 1980s when literally bond investors were being made into millionaires.
So why are bonds suddenly sexy again?
Well, it's not because of the nice new lingerie that they bought. It's because literally everything is down in 2022.
And so, as inflation and spiking interest rates have been decimating the stock market, crypto market, and real estate market…
There was one shiny new asset that was promising to earn you monthly interest and a 9.62% annualized return (for most of 2022). Rain or shine. No matter what was happening in the market or economy.
Even better, these promised payments were guaranteed by law, backed by the U.S. Treasury, and didn’t require any trading or complicated strategies.
Not only did this investment pay better than the market, it seemed as close to “risk free” as an asset can get.
No wonder everybody and their grandmother have been talking about this “prized” asset in 2022.
I’m talking, of course, about I Bonds.
But hold up.
I Bonds are not the investment that everybody is making them out to be.
It's time that we talk about the thing that nobody else is talking about when it comes to this supposedly good investment.
Because there’s a big problem.
And if you’re someone who bought I Bonds in 2022… or are considering buying I Bonds now… on the promise of ultra-high yields… I hate to burst your bubble. But you’ve been conned.
I want you to read this report carefully. And watch the video below.
I’m about reveal how the government and mainstream financial media just got millions of people to sink billions of dollars into a very problematic investment.
A Quick Primer on How Bond Investing Works
A bond is ultimately just a contract. And those 6.89% or 9.62% teaser rates? That's the large print of the contract. The fine print that you’re not being told is actually the reason why these are not a good investment right now.
So let's back up.
I’m going to give you a quick primer on bond investing, why this particular type of bond is so attractive right now, and I’ll explain how they work…
I’ll tell you the true downsides to owning them, the current yield, and much more.
After reading this report, I hope you comprehensively understand I Bonds… and most importantly, when they make a good investment and when they don’t (like right now).
This one insight could prove crucial in the times ahead.
If you haven’t heard of I Bonds before, you might wonder about the exact benefits of owning them.
You might even ask yourself, “What is a bond, anyway?”
To explain, you’ve heard of a loan, right?
When you visit a bank and request a loan, the bank is the lender. Since you are borrowing the banks money, you have to repay that money over time… in addition to paying interest.
On the other hand, when you buy a bond, you become the lender. You lend your money to the U.S. government. In exchange, the government issues you a bond with the legally binding promise of repaying you in the future… with interest!
This is why U.S. government bonds are considered to be among the safest investments in the world.
There’s a lot to know about bonds. But for the purposes of this report, here are a few characteristics about bonds you should know first, in order to understand how I Bonds specifically work.
There are basically four types of bonds you can invest in, categorized by the entities that issue them. The U.S. government issues Treasury bonds. States, cities, counties, and other government entities issue municipal bonds. And private and public corporations issue corporate bonds. A riskier class of corporate bonds are issued by companies with a greater chance of default. These bonds pay out higher interest to investors willing to take that risk, so they’re called high-yield corporate bonds. (Note, within this universe, there are even more subcategories of types of bonds.)
Typically, federal and corporate bonds pay out interest payments (the actual payments are known as coupons) every six months or annually… and then returns the money at the end of the term of the loan, known as the maturity date. (Most bond funds, however, pay regular monthly income. A topic for another report.)
Bonds have a term, typically short (mature in 1-3 years), medium (mature after 10 years), or long (20, 30 years and beyond).
Bonds may compound your investment… or they may not. Meaning: Typically, a bond will accumulate interest over time. As the bond earns interest, that interest gets added back to the value of bond, compounding the overall value of the bond. Moving forward, interest will occur on this “new value” of bond… and so on and so forth. Some bonds do not offer compounding. And other bonds do not offer coupon payments at all, known as zero-coupon bonds.
What Are the Benefits to Investing in I Bonds?
Here are some of the benefits to buying bonds — specifically I Bonds — that you might have been sold:
Series I savings bonds or I Bonds can protect you from inflation. The U.S. Treasury specifically issues them for that reason. The general rule is: When inflation goes up, you earn more. (More on this later.)
As a “creditor” of the U.S. government, you are effectively guaranteed to get your money back, plus interest — very attractive interest because inflation is high! What safer investment is there than one backed by the U.S. Treasury?
Unlike a savings account, which yields close to 0% in interest and often costs you money because of negative interest, I Bonds have been earning investors a return of 9.62% for most of 2022… and 6.89% as of November 1, 2022 until April 30, 2023! Again, more on this below…
A quick clarification on this…
I Bonds earn interest monthly within the bond. But that interest is compounded semiannually. This means that every six months from the date your bond was issued to you, the government “applies the bond's interest rate to a new principal value.” (Remember, the “new principal” is the sum of the prior principal and the interest earned in the previous 6 months.)
Keep this thought in your mind. It’s going to be important later on.
A common misunderstanding about I Bonds, however, is that investors can earn monthly coupon payments. That’s not the case. The full sum of the investment plus interest earned in returned to investors only once — on the maturity date of the bond.
Moving on to more perceived benefits of holding I Bonds…
You have the choice to report your earnings every year to the IRS. (You’ll have to talk to your accountant or CPA about whether or not this would be advantageous to you.) Or all at once when you “cash in” your bonds.
And that means… You can hold I Bonds for up to 30 years and pay ZERO taxes on the earnings you make from your I Bond investments until you cash in your bonds (which you can do at any time after Year 1 and up to Year 30). (There are other options for them, like rolling them over into a 529 college savings plan, avoiding taxes altogether. Another conversation for your accountant.)Regardless of when you decide to pay taxes, I Bonds are NEVER taxed on the local and state level, only at the federal level. With stocks, you don’t have that advantage because on top of your federal capital gains tax, you might also have to pay 3-13% in state-level taxes.
And perhaps the biggest perceived benefit of all: I Bonds “protect your purchasing power.” What is purchasing power? As I’m sure you’ve noticed, inflation makes your money lose value. You can’t buy as much for $5 as you used to.
When you apply this principal to the average person’s retirement savings, it can paint a very scary picture. No one wants to see the value of their nest egg — the money they literally require to live in retirement — literally melting away at no fault of their own.
The only way to prevent that is to grow your money at a rate that outpaces the eroding effects of inflation at that time. This is what it means to protect your purchasing power. It’s as if your money’s worth stays the same, no matter how high inflation grows.
And this has been the proposed promise of I Bonds: The higher the inflation, the higher the interest supposed grows on I Bonds. They’ve been sold as the ultimate protection from inflation…
There’s just one HUGE problem with that. And it has everything to do with the I Bonds supposedly high interest rate. (Hint: It’s a variable rate… which is a big problem in the current environment, as I’m about to explain.)
Meanwhile, there are other drawbacks to I Bonds we need to cover first.
What Are the Downsides to Investing in I Bonds
Here are a few of the most significant downsides to investing in I Bonds, in general. I’ll save the biggest one for last.
If you want “easy,” I Bonds may not be for you. You can’t buy I Bonds on the stock market. For some people, this is a problem if they don’t want to create an account on the U.S. Treasury site.
If you have an appetite for risk and are relatively unbothered by market volatility, inflationary risk, and the looming recession, I Bonds may be a bit too “boring” for you. For those who can stomach big potential market movements, then the stock market “could” provide greater returns — if you bet on the right stocks and if the market doesn’t tank… (two big ifs).
I Bonds are long-term investments by design and they are not immediately liquid. As a result, you cannot “withdraw” your investment until you’ve held your bonds for at least 12 months. Typical traders hate this because they feel their money is “locked up” rather than protected.
You should only invest money “you don’t need” in the short term. I Bonds really work their magic in the worst of inflationary times. But inflation doesn’t just happen in a vacuum. It can correspond with recessions, unemployment, market drawdowns, and other factors that could cause you to face future liquidity problems. Should you need the money you invested in bonds for an emergency, you will not be able to withdraw your investment because of the mandatory 12-months holding period. No exceptions.
Moreover, if you redeem your bonds before the five-year mark, you forfeit interest from the last three months that you held the bond. However, with the protection and current yields I Bonds provide, most investors would consider that loss insignificant.
The profits from your investments are taxed as ordinary income. That means if you’re already earning more than $182,100 per year, you will pay more taxes than those who earn less.
I want you to remember points 3-6. They’re very important… and we’ll return to them in a moment to discuss why I Bonds are a terrible investment right now.
What is the Current Yield that I Bonds are Paying Now?
Up until now, those who invested in I Bonds between May 1 and until the October 31, 2022 have enjoyed a yield of 9.62%.
Had you invested 12 months ago, like on November 1, 2021, you would’ve earned a 7.12% annualized yield until May 1, 2022. And then a 9.62% yield until October 31st.
In just 12 months, a $10,000 invested would have turned into $10,854.
On one hand, it’s more than your bank is paying you. The average interest rate on a savings account has been 0.21% as of this writing. With an I Bond investment, you could have earned 45-times as much these last six months of 2022.
However, as of November 1, 2022, the government has reset the rate of I Bonds to 6.89%. This rate is good until April 30, 2023. The current inflation rate as of this writing is 8.2%.
So the current yield is dropping…
But this is just the tip of the iceberg when it comes to the Great Big I Bond Problem.
And to explain this, you need to understand what exactly is meant by those big headline interest rates: 9.62%... 6.89%... that you’ve seen on every mainstream financial outlet in 2022.
The Deceptive Allure and Perhaps Misleading Nature of Variable Interest Rates and Why You Should Always Be Cautious When Investing in Products With Variable Interest Rates Because They Might Not Reveal Everything That You Need to Know About That Investment and What Your Future Returns Are Going to Be (*Deep Breath*)
The rate of the I Bond is partially set by a formula based on changes to the Consumer Price Index, the primary measuring metric of inflation.
Savvy readers who have been following along closely know that I’ve been predicting a “return to normal” for inflation in 2023, at an unexpected rate.
I’ve written a lot about what “unexpected drops in inflation” tend to mean for the stock market… (Hint: They experience a surge.)) So you might already see where this is going to go…
I Bonds have both a “fixed” and “variable” component. You can read all about it here, though I’ll be the first to tell you it’s very confusing.
Essentially how it works is…
You own a piece of paper.
That piece of paper's fixed rate, as set by the Treasury at the time you bought it (fixed rates can go as low as 0% but not below). This fixed rate will never change so long as you hold the bond. You are guaranteed these earnings. Think of it as the interest “floor” of your bond. (The Treasury has the opportunity to set a new fixed rate every May 1 and November 1. Once a new rate is set, anyone who buys I Bonds thereafter until the next rate set date will buy bonds with the new fixed rate.)
Your piece of paper also has a variable rate. This rate is based on what’s happening with inflation, as measured by the CPI. The higher inflation, the higher the variable rate. (It, too, is subject to change on May 1 and November 1 per the Treasury.)
Together, the fixed and variable rates combine to form the composite rate. Think of your composite rate as your earnings rate — it’s the specific amount of interest earned and compounded within your bond.
Now, in inflationary times, the composite rate can be high, as it is at the time of this report. But in deflationary times, the opposite can happen: The treasury might take fixed rates down to 0%. And overall deflation might take the variable rate to 0%... or even negative.
So what happens with your bond?
The government has promised that composite rates will stop at 0%. So it’ll never be the case that I Bonds are offered for less than 0%.
Moreover, if we look at actual I Bond earnings rate tables, we can see your actual earnings you’ll experience on your I Bonds is the composite rate of the given six month period + your guaranteed fix rate.
In other words, you will never earn less than your guaranteed fixed rate locked in on your purchase date, even if the composite rate (comprised of the fixed rate du jour plus the variable inflation rate) is 0%.
Worst-case scenario, you will always earn your fixed rate.
But… guess what fixed rates have been for most of 2022?
Zero. A big, fat 0%.
You see the problem with this now, right?
0% Fixed Rate + 0% Variable Interest Rate = 0% Composite Rate
This all sort of begs the question: When should you not buy I Bonds?
Presumably, you might not want to buy I Bonds when the following conditions are in place:
Fixed rates are set near 0%.
You are expecting sudden and rapid drops in inflation, thereby the CPI, taking the variable interest rate down to 0% or negative.
You are expecting the above scenario in the next 12 months to 5 years, when your money will be locked up in I Bonds or with early withdrawal penalties. Because this would lead to you earning next to nothing in your bonds… without liquidity… and even losing out on the opportunity to invest elsewhere (like in amazing companies with stocks selling at wildly undervalued prices!).
We have to wonder: Why were all the talking heads on TV pumping these investments in 2022… with these exact conditions in place?
How Everyday Americans Got Tricked by the Gubmint into Fighting Inflation For Them
It’s no secret at this point: The U.S. government is actively trying to squash inflation. What’s a great way to do that?
I’ll give you an idea!
Sap a lot of money out of the economy by locking it up in government-controlled assets. Make it impossible for investors to withdraw that money within a year… and add steep withdrawal penalties within the first few years.
And that is the great big insidious aspect of all the I Bond pumping of 2022: When inflation goes negative or to zero, as the government is trying to do, the U.S. Treasury doesn't pay you a variable interest rate at all. Because remember, the variable interest rate is based on inflation. The rate of inflation is negative. So guess what. Your interest rate? they set it at zero.
And guess what they also do? They set the fixed rate at zero too. So even if you thought you had that protection, that safety net, that floor for your I Bond investment, forget it. You get a big fat 0% whenever deflation happens.
This actually happened. The bonds issued after May of 2009? The fixed rate and the variable rate were 0%. And even for the bonds issued with the high fixed rate, guess what? They earned 0% too.
Yep — the government literally paid no money for six months if you held bonds during that time. During one of the great financial upsets in history, mind you, when people were panicking as their assets melted before their eyes.
That's the most insidious thing about pumping I Bonds right now that I haven't heard anybody talking about. It’s as if the mainstream financial complex is actively trying to woo people into an investment that’s about to pay out nothing… all while trying make inflation go down.
And the best part of all? The government got a lot of what will be, in the future, interest free loans...
Why would you buy an asset that doesn't offer you any floor? It has a 0% fixed rate and the Fed is actively trying to make the rate that you earn on your bonds go down. You're literally buying into something that a government is trying to sabotage.
That’s the worst case. And meanwhile, while you wait for that to happen, your variable inflation rate will keep trending lower and lower, and you’ll make less and less money while your liquidity is all locked up.
Do you see it now? Do you see the problem?
Alright, now that you’ve seen the big dirty monster up close and looked it in the eye, it’s time to step back and ask…
Is there ever a time where an investment in I Bonds makes sense?
When Should You Buy I Bonds?
To recap: The actual I Bond interest rate that is marketed to you is this big flashy composite number. But the most important number is not the big flashy number. It's actually the fixed rate that gets combined with the inflation rate.
The higher your fixed rate, the higher the floor of your future returns with I Bonds.
If inflation is low in a given six month period, you're still going to at least get that fixed rate. The higher your fixed rate for your I Bonds, the higher your ultimate return is going to be.
The adjustable rate — the inflation rate — is what gives you some protection from inflation.
That's why I Bonds issued in 1998 paid 13% in 2022, while your I Bonds from 2022 only got 9.62%. The 1998 I Bonds had a floor, a fixed rate of 3.4%. But inflation at that time? It was only around 1%.
But guess what? I Bonds did not seem attractive if you bought then, relative to other investments. However, they were hella attractive if you were still holding those I Bonds in 2022.
And that's the strategy for investing in I Bonds for long term: Wait for that fixed rate to be high, because this will afford you the ultimate inflation protection in the long-term… even if you buy when inflation is low.