Investors, especially those with large amounts of cash in their portfolios, may be wondering where to put money to work in an environment where the Federal Reserve is raising interest rates and the stock market and real estate are falling.
At its September meeting, the Fed raised a key interest rate another 0.75%, sending stock prices swooning. But as the price of assets like stocks and real estate goes down, the interest rate investors can get on their money has been going up.
After the Fed’s latest rate hike the yield on the Treasury Department’s two-year bond rose past 4% and, as of this writing, is still climbing. Savers, who have received almost nothing on their cash for nearly two decades, can invest in these bonds, which are backed by the full faith and credit of the U.S. government, and are guaranteed to get their money back in two years – along with a 4% profit.
I Bonds now pay 9.6%
An even higher-paying alternative is the Treasury Department’s I Bond, which is keyed to the inflation rate and currently pays an eye-popping 9.6%. Officially called the Series I Savings Bond, this savings instrument pays a fixed rate of return, along with a higher rate that is calculated on the rate of inflation and reset every six months.
“A combination of a fixed rate that stays the same for the life of the bond and an inflation rate that is set twice a year,” the Treasury Department said on its website. “For bonds issued from May 2022 through October 2022, the combined rate is 9.62%.”
According to Investors Business Daily, when the rate adjusts at the beginning of November, it’s expected to fall to 6% – still higher than most regular bonds. But before considering investing in an I Bond, here are some things to know:
Things to know
Individuals can purchase up to $10,000 in I Bonds each calendar year
You must hold the bond at least 12 months before cashing in. You will receive the original purchase price plus interest earnings
If you redeem an I Bond within the first 5 years, you'll lose your last 3 months of interest. For example, if you redeem an I Bond after 18 months, you'll receive the first 15 months of interest
I Bonds can't be purchased and held in a traditional or Roth IRA. The I bonds have to be held in a taxable account
The interest and principal are paid to you when you cash the bond.
Before undertaking any kind of financial investment, it is always wise to carefully research the investment before acting. In this case, a good place to start is Treasury Direct, a U.S. government website.
In most cases, it will be helpful to seek the counsel of a knowledgeable and objective financial adviser.