Post
by jhogue » Thu Aug 02, 2018 8:47 am
As a longer-term investor in I bonds (ie., over 5 and hopefully up to 30 years), I doubt that it will make much difference when I buy I bonds in 2019. At present, I buy-and-hold I bonds primarily for their guaranteed inflation protection, 30 year tax deferral, and state tax exemption. The I bond yield is important, but secondary in terms of a long term Cash in the PP strategy. To be sure, the I bond yield has consistently beaten yields on 1- 5 year T-bills/notes over the past 5 years. But that has been in the midst of a historically abnormal and artificially induced low interest rate environment.
Going forward, I think that it is a pretty safe bet that I bond rates will rise over the next year. In the past 12 months the 1 year T- bill / I bond spread has narrowed from 71 basis points to just 4 basis points while the I bond fixed rate has risen from 0.1% to 0.3%. Should the FOMC raise the Fed funds rates another two times in 2018 (as Chairman Powell has publicly promised to do) a rise in the I bond fixed rate will almost certainly follow. But, whether these Fed rate hikes definitely continue into 2019—or whether inflation as measured by the CPI-U continues to rise in response-- is not something that can be known for certain in advance.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"