US Treasury Series I Bonds

Our insight articles and conference calls have talked a lot about inflation over the past year or so. We’re seeing the effects of it everywhere from the gas pump to food costs to interest rates, etc. While most of the effects of inflation are negative, we wanted to make you aware of an opportunity that inflation has created; U.S. Treasury Series I Bonds.

U.S. Treasury Series I Bonds, or I Bonds, will offer annual interest payments of 9.6%, based on the bond’s latest inflation rate calculation, which is tied to March’s consumer-price index. That’s 9.6% annualized for bonds backed by the full faith of the U.S. government. Considering a 10-year US Gov’t Bond is yielding 2.86% as I’m writing this, it’s hard to imagine a better deal in fixed income right now.

Here’s how they work:

• You buy these bonds straight from the government at Treasury Direct. We cannot buy them for you.

• The yield is computed every 6 months (in May and November) and compounds semi-annually.

• There is a fixed component (which is currently 0%) and an inflation-indexed component tied to CPI that resets semi-annually.

• There is an annual $10,000 limit per person (you can buy them for your kids too).

• You don’t pay any state taxes and federal income tax can be deferred until redemption.

• If you use these bonds to pay for education expenses they are tax-free.

• You cannot cash in these bonds in the first 12 months.

• If you cash in before 5 years is up, you pay a penalty of 3 months’ worth of interest.

• After 5 years you can redeem penalty-free.

The downsides are as follows: