Eye-bonds yield a mouthful of water – but there is room for some arbitration

With the release of the March Consumer Price Index, we now know that 9.62% risk-free investment is available as of May 2nd. I’m definitely talking about the Series I Savings Bond from the US Treasury, which to take advantage of all the rage recently, all you have to do is open an account at TreasuryDirect.gov. Last year, it took me 10 minutes to open my account.

I first wrote about i-Bond in October 2021. Since November last year, these bonds have yielded just over 7.1%, which is great for risk-free investing. Unlike traditional bonds, which have been pushed back this year, Series I savings bonds are much safer — because you are guaranteed to maintain inflation and have no interest rate risk, meaning they do not lose value as interest rates rise.

If you bought i-Bond in April, you will be able to lock the previous 7.1% interest rate for the next six months. After that, you get a new rate of 9.6% for the next six months. Because of the interest earned on i-bond compounds every six months, your total return in 12 months will be 8.5%.

Read: Silver Coating of Rising Inflation: Y-Bond Yield Should Rise Above 9%

Thanks to this mouth watering crop, there are some interesting arbitration opportunities for investors. The strategies exploit the large interest rate difference between i-bonds and other investments. The most obvious opportunity: Buy an i-bond with cash in your bank account and Money Market Mutual Fund, assuming you don’t need to access that cash for at least a year. But here are five other strategies to consider:

1. Harvest taxes in your bond funds.

Given the horrendous dredging bonds that have gone through this year — and the worst is yet to come ভাল you are likely to lose a lot of your bond funds. If these bond funds are kept in a taxable account, you can take advantage of tax-loss collection. By selling up to $ 10,000 of these bond funds and using the proceeds to purchase an I-bond, you can use the capital loss to reduce your 2022 tax bill and at the same time deduct a guaranteed return of 8.5% over the next 12 months – assuming you bought in April.

2. Withdraw cash from existing CDs and invest in income I-bonds.

It is very understandable to sell a certificate of deposit to buy an i-bond, even if it means paying a fine for cashing out your CD quickly. For example, if you have $ 5,000 on a 12-month CD with 1% interest, you will earn only $ 50 in interest. Investing the same cash today in an I-bond with a potential yield of 8.5% will earn you $ 425 or more $ 375 in interest. Even after paying any hasty penalty on CD, you will come a long way. Just keep in mind that i-bonds cannot be sold until one year after the date of purchase.

3. Buy i-bonds instead of paying your mortgage in advance.

If you have a mortgage, chances are your interest rate is below 8%. In 2000, interest rates on 30-year fixed-rate mortgages were above 8%. This presents an arbitration opportunity for homeowners. If you can buy I-bonds at 8% or 9% profit, there is no reason to pay off your mortgage early by paying extra principal — at least until you make the maximum annual investment in I-bonds, which is $ 10,000 per person. , $ 20,000 for a married couple and $ 30,000 for a married couple with trust. The interest you earn on that i-bond will surpass the interest you save on your mortgage prepaid.

The same argument applies to a Home Equity Line of Credit (HELOC). I generally oppose using leverage, but it may be understandable to borrow cash from your HELOC and then invest the money in an i-bond. According to Bankrate.com, many HELOC rates are still below 4%. If your HELOC interest rate is higher than your I-bond, simply sell the I-bond and use the income to pay off your home loan.

Although this strategy requires some effort – including paying attention to interest rates – the payoff is not insignificant. If your HELOC interest rate is 3% and you earn 8.5% on I-bonds in the next 12 months, you will be ahead of $ 1,650 in $ 30,000 I-bond investments, and for only one year.

4. Run maths on student loans.

The average interest rate on student loans, both federal and private, is 5.8%. The average for federal student loans is 4.12%. The math that applies to mortgages and HELOCs also applies to student loans. In terms of juicy yields on i-bonds, it may be worthwhile to pay the minimum of your student loan and invest the rest in i-bonds. Again, this strategy can be reversed if the interest rate on i-bonds is lower than your student loan.

5. Consider creating an i-bond ‘war chest’ for retirement.

If we enter a new era of high inflation – say 4% to 5% per year – it could be worth raising an I-Bond war book. Unless the i-bond purchase limit is increased, it will take time to build a significant i-bond portfolio. But such a portfolio can have many advantages, especially for retirees.

Inflation is a big risk for retirees, and the longer the retirement, the greater the risk. The 5% annual inflation rate in 13 years, for example, will reduce the purchasing power of the dollar by almost half. Stock inflation provides some amount of protection, but at a price of order-of-return risk. I-Bond protects against both inflation and rising risk. A large i-bond portfolio can provide income in critical years just before and after one’s retirement, when the sequence risk is highest. Also, a significant i-bond allocation could allow retirees to keep more stock for the rest of their portfolio without losing too much sleep. Furthermore, an i-bond can serve as a ready source of liquidity to cut down on shock during retirement.

How to go about building an i-bond war chest? Say you are married and 10 years from retirement. If you set up a trust, you can buy-30,000 a year in I-bonds for the next 10 years. With some tax plans, you can increase that limit to $ 35,000 per year, as your tax refund can be used to purchase an additional $ 5,000 per year on paper i-bonds.

This means that, as everyone has said, you and your spouse can buy up to $ 350,000 in I-bonds in 10 years, confident that those dollars will maintain their inflation-adjusted value. If you retire with stocks at all-time highs, you can hold on to your i-bonds and sell stocks for earnings. But if stocks are in the dump, you can start liquidating your i-bonds, giving your stock portfolio time to recover.

(This column has been updated with i-bond interest rates.)

This article was first published in Humble Dollar and is republished with permission.

John Lim is a physician and author of “How to Increase Your Child’s Financial IQ”, which is available in both a free PDF and a Kindle version. Follow John on Twitter OJohnTLim And see his earlier articles.

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