By David Wilkening, Contributing writer
Photo/submitted
region – The news about inflation is almost always gloomy. But I bonds, a low-risk investment that flies under the radar for many, offer an opportunity in which high inflation is a positive thing.
On Monday, May 1, I bonds were responsible for a rare bit of good inflation news. On that day, it was announced that I bonds would yield a record 9.62% interest for the next six months. That was no surprise to the founder of a Lexington-based financial advisory firm. Not only had he recommended that his clients buy I bonds a few months earlier, he had brought it closer to home by suggesting it to his 92-year-old father.
He is George Gagliardi, founder of Coromandel Wealth Management, a financial advisor and certified financial planner.
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Gagliardi has been repeatedly quoted in the media as I bonds in recent months have been identified as something of a Superman to help meet growing concerns of persistent inflation. And not that he praised them unreservedly.
Among their downsides is that you can’t redeem them for at least a year. And if you cash them in within five years, you’ll lose the previous three months of interest right before the sale, he repeatedly said.
“I think it’s good, but like anything else, nothing is free,” he said of those drawbacks.
Gagliardi recommended the government-issued bonds, technically known as Series I savings bonds, to his clients in March in his quarterly letter to them. They can’t be bought through a brokerage account, so brokerage firms don’t talk much about I-bonds. You have to buy them directly from the US Treasury Department’s website IN https://www.treasurydirect.gov/.
As for his father, “He was looking for production, and these have the added benefit of safety,” he said. He had not recommended them in the past because inflation was not an issue before the end of the year. “And with low overall interest rates and low inflation, they weren’t paying as much,” he said.
“I bond rates consist of a fixed base rate, currently 0%, and an inflation rate that changes every 6 months,” explained Gagliardi. “I bonds have very little risk because they are backed by the US Treasury, so the only risk is currency risk (the value of the US dollar against other global currencies).
Who should buy them?
So is this an obvious case where most people of various circumstances and situations might want to buy bonds, especially during these times of rising inflation? “An I bond is not for short-term cash because it has limited liquidity,” Gagliardi said. “You have to hold it for a year, after which you can sell it back to the U.S. Treasury even though you would forgo three months of interest payments.”
What impact do I bonds have on seniors facing inflation? “Given that you can buy $10,000 worth of bonds a year ($20,000 for a couple), there’s a limit to how much they can help seniors fight inflation,” Gagliardi noted. “For medium-term money, it is a good investment. For example, if a couple is using what is known as the ‘Bucket System’ for managing their retirement funds – the money needed in the next one to three years in very low volatility assets, three to eight years in low to moderate volatility and beyond. eight years with higher volatility (such as stocks) – I-bonds perform well in the first and second ‘buckets’.
While I bonds are not a total answer to inflation, they can play a role in at least reducing it or solving it. “I bonds give you the ability to at least have a portion of your low-risk assets that face inflation,” Gagliardi said, “certainly better than money market funds or savings accounts these days. Right now , you get low risk and high returns, but it’s unlikely to continue. A lot depends on what the Fed does or doesn’t do.”
Are bonds really, as some people say, almost risk-free? “As long as the US dollar stays strong against other currencies and the US government doesn’t default on its debt, they are as close to risk-free as you can get,” Gagliardi asserted. “There is risk in any asset, and with I bonds there is some interest rate risk, but that’s it. They are a good investment for a small part of your portfolio, at least for now.”
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