Time is running out to get one of the highest… and safest… returns in the market on your cash. And if you don’t act soon, the window will close.
This safe play comes from a little-known corner of the bond market.
Over the past year, rising interest rates have crushed bond prices. That’s because bond prices move inversely to interest rates.
So with interest rates starting to peak, now’s an opportune time get exposure to the bond market.
If you play your cards right, you can lock in some of the highest interest rates on bonds in decades… And when rates begin to drop, sell them for potential capital gains. (Of course, you can also hold bonds to maturity and recoup your entire principal.)
If you’re really looking to supercharge the yield on your cash savings, I’ll tell you about a government bond that’s designed to give you an inflation-beating payout.
That payout moves lower at the end of the month. So you have five days to act to lock in the higher rate.
A Higher Yield Without Higher Risk
In my April 11 essay, I wrote that investors are barely earning interest with savings in a bank.
And with recent bank failures, it’s no surprise that investors have moved into short-term Treasury bills (T-bills) for a higher payout and lower risk.
The U.S. Treasury reports that 189,823 people visited TreasuryDirect in February, a 10-fold increase from the same month in 2022. That doesn’t include investments made in brokerage accounts, or rising demand for money market funds, which invest in T-bills.
Right now, short-term T-bills yield nearly 4%. That’s the highest rate in almost 15 years. It’s also 4–40x more than the yield you can earn by simply keeping your cash in the bank.
Of course… There’s a snag. Inflation is running at 5% based on the March data.
That means your “real” return – the interest you earn minus the inflation rate – is negative 1% on T-bills. But that’s much better than the negative 4–5% return you’ll earn by parking your cash in a savings account.
Fortunately, there’s a bond backed by the full faith and credit of the United States that is beating inflation right now…
It’s the I bond, or as the government calls it, the Series I savings bond.
The Treasury launched them in 1998. They’re virtually guaranteed to keep pace with rising prices as measured by the Consumer Price Index (CPI).
The interest comes from two components that are adjusted every six months. The first is a baseline interest rate. It’s largely been 0% for more than a decade.
The other component is the inflation-pegged interest rate. It varies over time depending on the Consumer Price Index for All Urban Consumers (CPI-U).
Right now, the CPI-U stands around 5%.
If you don’t need your cash back within one year, you can lock in inflation-beating yields of nearly 7% on I bonds now through November 1. Your rate will then reset after six months.
But you need to act fast. The new rate is announced every six months, on May 1 and November 1. So a lower rate could be coming soon.
You Need to Act Fast
Currently, I bonds yield 6.89%, down from 9.62% from May through October 2022.
Inflation peaked in June 2022 at 9.1%. So even during the peak of inflation, I bonds preserved your capital.
That’s what I mean by safety.
You’re allowed to buy $10,000 in I bonds annually.
In dollar terms, if you put the maximum in an I bond at its peak yield last year, you’d be sitting on $962 in annual income, if the return had stayed the same.
At today’s rate, your dollar return would be $689. That’s still a positive return after accounting for inflation.
Here’s why you need to act now…
The Treasury Department will reset the I bond rate on May 1.
With inflation trending lower – it’s down from 6.4% in January to 5% in March – the new I bond rate will likely drop to the 4–5% range, just slightly better than a standard T-bill.
So you have until April 30 to lock in the current rate of 6.89%.
That would be a difference of earning $689 on every $10,000 and $400–500 on every $10,000.
Even at a reset yield 4–5%, the I bond can still beat inflation as it comes down.
Plus, that return could be nearly 1.2 times higher than the 10-year yield of 4.13%. And 1.7 times higher than the 1.82% dividend yield of the S&P 500.
The downside? If you sell your I bond between years 2 and 5, you’ll incur a three-month interest penalty.
However, if you have cash sitting in a savings account, this could be an optimal place to park it.
Again, the rate will likely drop again in May. So you have until April 30 to hit the maximum limit and lock in the higher rate.
Good investing,
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Andrew Packer
Analyst, Palm Beach Daily
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