How to Use I Bonds John Lim | Apr 19, 2022
WITH THE RELEASE of March’s Consumer Price Index, we now know that a risk-free investment yielding 9.6% will be available as of May 2. I’m speaking, of course, about Series I savings bonds from the U.S. Treasury, which have lately been all the rage.
To take advantage, all you need to do is open an account at TreasuryDirect.gov.
Last year, it took me all of 10 minutes to open my account. I first wrote about I bonds back in October 2021. Since November of last year, these bonds have yielded just over 7.1%, which is pretty terrific for a risk-free investment. Unlike traditional bonds, which have been absolutely pummeled this year, Series I savings bonds are far safer—because you’re guaranteed to keep up with inflation and there’s no interest rate risk, meaning they don’t lose value as interest rates rise.
A unique window of opportunity exists this month. By purchasing I bonds in April, you can lock in the current 7.1% interest rate for the next six months. After that, you’ll receive the new rate of 9.6% for the six months that follow. Because the interest earned on I bonds compounds every six months, your total return over the next 12 months will be 8.5%. Thanks to these mouth-watering yields, there are some intriguing arbitrage opportunities available to investors.
The strategies exploit the large difference in interest rate between I bonds and other investments. The most obvious opportunity: Buy an I bond with cash you have in bank accounts and money market mutual funds, assuming you don’t need to access that cash for at least one year. But here are five other strategies to consider:
1. Harvest tax losses among your bond funds. Given the horrible drubbing bonds have undergone this year—and the worst may be yet to come—chances are good that you have sizable losses in many of your bond funds. If these bond funds are held in a taxable account, you can take advantage of tax-loss harvesting. 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 lower your 2022 tax bill while simultaneously reaping a guaranteed return of 8.5% over the next 12 months—assuming you buy in April.
Read more here.