US Treasury iBonds
Taking a break from our credit card segment to talk about "iBonds" that Caitlin and Aunt Tina were asking about. No, this is not a new Apple product. Although, I'm sure if Apple ever launched the "iBond," it would be sleek and fabulous and expensive. Government iBonds are sold by the US treasury and adjust with inflation. Historically, they pay something like 2% a year. Not too impressive, but with federal treasury backing, it's a guaranteed return. With inflation super high right now, the iBond rate is 9.62%. That, of course, sounds great, but keep in mind this investment is literally designed to preserve the value of your money against inflation, plus a tiny return. So $1000 invested is designed to still be worth $1000 (plus a small bit more) in 10, 20, or even 30 years from now in terms of value. With stocks, funds, and crypto, all trading sideways, keeping $1000 worth about $1000 may sound pretty good to you. Let's dig in.
iBonds in Detail
The iBond interest rate adjusts with inflation and is set twice each year. Interest is compounded. Remember, compound interest is the money you make, making more money. We are big fans of compound interest here at Poppy Seeds. The iBond investment term is technically 30 years, but you can sell at any time before that. However, if you sell within the first 5 years, you sacrifice the most recent 3 months of interest as a penalty.
Through October 2022, you can buy iBonds at the 9.62% interest rate. You will get paid that rate for the first 6 months you hold the iBond; the rate will be adjusted to whatever the next interest rate is from the Treasury for the next 6 months. When inflation drops (as it will likely do) and the Treasury adjusts the iBond interest rate, the new rate will probably be something like 6-7% on the iBond. You are not getting 9.62% guaranteed for 30 years.
As an individual, if I buy $10,000 (the individual annual maximum) anytime through Oct 2022, the interest rate for the first 6 months after my purchase is still 9.62%. It would be foolish to sell before a year because of the 3-month penalty, so a good plan is to figure on 1+ years. Selling before the 5-year mark will sacrifice the last 3 months of interest, but if inflation gets back to the 2% level, we're not talking about a big sacrifice, $300 or so. So basically, plan for a 1 year time horizon at a minimum, and plan to sell at any point inflation is back at normal levels.
Here's an illustration of what to expect when the Treasury sets the new interest rate on the iBond every 6 months on $10k invested:
- 0-6 months: 9.62% rate ($10,000 becomes $10,481)
- 7-12 months: ??? rate, my guess is 6.5% ($10,481 becomes $11,162)
- 13-18 months: ??? rate, my guess is 5% ($11,162 becomes $11,702)
etc., based on whatever the rates get set to every 6 months based on the inflation rate.
Government iBond Conclusion
www.Treasurydirect.gov is the website for the Treasury where you can purchase all sorts of bonds, securities, and whatever else the Treasury wants to sell directly to people. The website is total crap, god awful to use. Think 1999 internet standards... or even worse. Unfortunately, this is the only place to buy iBonds - you cannot buy iBonds from your regular brokerage account. Because this is a government investment, there are many annoying special cases and carve-outs to consider. For example, using iBond gains for education exempts you from federal taxes on the gains (!), and you can buy a 'paper' version of iBonds via your tax return. You can read more about these and other special cases on the Treasury Direct website.
My conclusion is that if you think inflation will remain high for the next 2+ years, then iBonds are a good way to prevent some money from losing value, and probably making 1 or 2% return. They are similar to a CD (certificate of deposit) that adjusts twice a year with inflation. With everything else dropping like a brick, iBonds may be an attractive investment.
- Nick sold all of his Coinbase (COIN) shares to cash.
- Lindsay, Chloe, Antonio, and Garrett are still sitting on the additional $1000 in cash.
Please remember to update the google sheet detail tab when you buy/sell something. I look at the revision history each month so I can include your trade in this newsletter. The summary tab is at the bottom of this email as a picture and the live link to it is here.