Investing in Inflation

Virtually nonexistent for decades, rising inflation has dominated economic and market headlines this year. Inflationary concerns have been top of mind as the team actively rebalances and monitors your portfolio.

Though high inflation can be unnerving, we do not want to make portfolio changes based on fear or other emotions; we want to remain data-driven and diversified. With interest rates still at historical lows, Series I Savings Bonds (I Bonds) are gaining popularity as investors look for inflation protecting investments and a higher yield. We are all familiar with inflation because, from eggs to electricity, costs have risen across the board. No one can say for certain how long the surge in prices will continue. I bond interest rates right now are fairly compelling and may be attractive for some investors.

What are I Bonds?

I Bonds are savings bonds issued by the U.S. Government that pay variable interest based on the inflation rate, as measured by the Consumer Price Index, and a fixed rate of interest. The inflation adjustment changes every six months, in May and November. Inflation is at a 40-year high, and therefore the yield on I-bonds has increased in lockstep with their attractiveness and popularity. They are currently yielding just over 7%; the next change is linked to March CPI data and is expected to increase to approximately 9.6%.

Critical Points

• They cannot be purchased in a brokerage account and must be purchased through the U.S. Treasury on its Treasury Direct website.

• I-bonds cannot be redeemed for at least one year, and I-Bonds redeemed after less than five years are penalized for the previous three months of earned interest.

• Series I-bonds are sold in $25 increments. An individual or entity with a Social Security Number can purchase a maximum of $10,000 per year, with an additional $5,000 purchased through a tax return.

• I-bonds do not make regular interest payments and instead pay the income when sold.

Taxation

• Federal taxes are paid on the earned interest income you earn. You can report the interest yearly or defer it until the bonds are sold or if held to the 30-year maturity.

• There are no state or local taxes collected.

• A special exemption in the tax code allows qualified taxpayers to avoid taxes when using I-bonds to pay for qualified higher education expenses. Additionally, these bonds can be sold and rolled into a 529 plan.

Where appropriate, rebalancing movements have already been made in portfolios to defend against a loss in purchasing power and mitigate the threat of inflation. If you’re an investor who prioritizes safety and does not need near-term access to the money, I-bonds could be a great complement to your current diversified portfolio. Clients will have to decide if the current $10,000 maximum investment will make enough of an impact to balance the hassle of opening and tracking an additional account. The Aevitas team welcomes the opportunity to have a conversation with you to determine if I-bonds are a good fit for your portfolio. Please call or email us to discuss your unique situation; we appreciate hearing from you.