As interest rates continue to remain low individual investors looking to maximize yields should consider Treasury Inflation-Indexed Savings Bonds, known as “I bonds.”
These instruments are only available to individuals and present an opportunity to enhance fixed-income returns.
In a low-rate environment that offers few choices available for those seeking high yields, Treasury inflation-indexed savings bonds are worthy of consideration.
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Indexed savings bonds currently yield 0.5% plus the inflation-protection feature equal to the change in the CPI, which is adjusted every six month. That equates currently to 1.9% — a rate that exceeds all but the longest Treasury bonds.
Inflation is slowly rising
Inflation is creeping upwards. Based on the consumer price index (CPI), prices jumped at an annual rate of 3.6% in July. Even using the Fed’s preferred “core” measure, which excludes food and energy prices, the annual inflation increase was 2.2%, higher than the current yield on any Treasury security.
For those who have maxed-out their 401(k) contribution ceilings at $19,000, plus an additional $6,000 catch-up for those over 50, I bonds can provide a suitable complement to a tax-deferred retirement savings plan. The benefits of adding an I bond component applies to those with Roth and traditional IRA plans.
A cushion when stocks decline
Even bull markets experience periods of decline. A fixed-income vehicle such as I bonds helps provide a buffer against market turmoil and the higher-risk assets in an investor’s portfolio. Having an investment component whose value remains fixed helps investors ride out bear markets.
Limitations and benefits
Although inflation-indexed savings bonds have surpassed the current yield on most Treasury securities, regardless of maturity individuals are limited to purchasing $10,000 annually. There is a benefit, however: I bonds are taxable only at maturity and are free from state and local taxes.
This article originally appeared in Real Daily