Description

Pitch upfront: In an investing environment where the federal government has endeavored to deny any returns to investors requiring stable value, they have nonetheless spilled a dollop of slop in the trough. All investors should fully partake!

Advertisement upfront: I have been a VIC member since 2001. I have attempted to write well-researched investment ideas in which I am willing to put my own money and which I believe promise attractive to extraordinary returns. This investment is not one of those. One day, the investment environment will change, and I will post more scintillating ideas. In the meantime, I would appreciate your “vote” to remain part of this community.

Analysis: With the current investment environment being very expensive/speculative (VIC bargain meter at 72% “finding few” investment ideas), we are led to holding a higher percentage of cash than normal. But in a ZIRP world, it is very difficult to find a good home to hold one’s cash. The Series I Bond is a great product (although limited to $10,000 per year plus an additional $5,000 if in conjunction with a federal income tax refund) that everyone should maximize.

The Series I is a 30-year bond with a fixed rate component and an inflation-adjusted variable rate component. The composite rate (fixed + variable) is currently 3.54% for bonds issued from May 2021 to October 2021. The inflation-adjusted portion of the rate changes every six months and is based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy. In the event of deflation, the bond yield floor is set at 0% (won’t go negative).

The interest accrues until the bond reaches 30 years (or one redeems the bond), and one can defer reporting the interest income to the IRS until the year of maturity/redemption. The bond is exempt from state or local income taxes. For the few of us who are humble enough to qualify (married annual income of less than $120,000), the federal taxes can be completely avoided if the proceeds are spent on education expenses. 3.54% risk-free, after-tax return! Maybe Jim Grant is wrong that these aren’t the lowest yields in 4,000 years.

One can redeem the bond after twelve months, although there is a small penalty (previous three months interest) if redeemed in the first five years. The bonds can only be purchased from TreasuryDirect (unless purchased when filing a federal income tax return): https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm. The website is like navigating Citigroup’s internal systems for those who don’t feel like they have earned their return without a little elbow grease.

Catalyst

Inflation protection