Should I, when investing in bonds, “twist” again, like they did last summer?

Last year’s Series I bond frenzy was reminiscent of the early 1960s dance craze to Chubby Checker’s “The Twist.”

In other words, everyone did it.

The burning questions now facing those same investors and their advisers are almost identical to those Chubby asked a year after twist fever swept the country: Should they buy Series I bonds again, as they did last summer? Should they buy the maximum amount like last year?

For those who may have already forgotten or switched to the latest investment fad, Series I bonds are savings-type inflation-linked bonds that the Treasury first introduced in 1998. The bonds are issued at par value with a 30-year final maturity. consists of a 20-year initial repayment period immediately followed by a 10-year extended repayment period. The rate of return includes the fixed rate and the inflation rate, and while the fixed rate remains the same over the life of the bond, the inflation rate can change every six months.

Making the deal even more attractive, I exempt the proceeds of the bonds from both state and local income tax. Federal income taxes may be deferred until maturity, final maturity, or other taxable decision, whichever comes first.

Those are the basics of Series I bonds, a financial instrument that was largely ignored until last year, when all hell and inflation broke loose. For example, the Treasury Department’s announcement last May that inflation-protected I bonds would pay an interest rate of 9.62% through October brought down the TreasuryDirect.gov website, the only place people can buy bonds.

Fast forward to late October, when a similar stream of investors crashed onto the site again as they attempted to buy bonds before they reset to a lower but still firm rate of 6.89%, which will remain in effect until April.

How big was the demand?

The Treasury said it issued $1.95 billion of I bonds in the last week of October, more than the total for fiscal year 2021. Yes, that’s a lot.

Now that the I-bond mania has abated along with the rate of inflation, last year’s investors must decide whether they want to continue their I-bond obligations, increase them, or invest and look for yield elsewhere. The January consumer price index fell to 6.4% year on year, compared with 6.5% in December.

“I bonds have certainly been in the spotlight ever since the Federal Reserve began raising interest rates in March 2022,” said David Scranton, CEO and founder of the Sound Income Group. “For investors with a long investment horizon and low risk tolerance, it may make sense to reinvest the proceeds, but be aware that the rate of return will drop when interest rates fall.”

However, even if the I bond rate falls in April, most advisers acknowledge that it will be difficult to find a replacement that offers the same level of security as such a high yield.

“If you buy them before the end of March, they will not be as high as they were from April to October, but it will be difficult to find investments with a guaranteed rate of around 7%. And those considering buying tax-refundable I-bonds should keep in mind that redemption cannot be made until the bonds have been held for a full year,” said Robert Patti, private wealth manager at Patti Wealth Management, part of Stratos Wealth Partners.

As for the idea of ​​using tax refunds to buy more I-bonds, Scranton said it should be decided “on a case-by-case basis with the opinion of a professional financial advisor.”

DO I LINK THE LAST DANCE?

Some advisers see potential pitfalls for I bond investors in the coming months as a result of last year’s hysteria. Many of these problems are related to the outdated and easily broken website of the Ministry of Finance.

“In April 2022, I accidentally transferred $20,000 to my Treasury Direct account. At that time, I received an email informing me that the funds would be returned to me in 8-10 weeks. A year is approaching and my funds have not been returned,” said John Robinson, founder of Financial Planning Hawaii.

Robinson recalls that after many attempts and long hours of waiting, he was finally able to speak to a Treasury Department official on the phone last August, only to find that the Treasury Department was overwhelmed with refunds. In December, he again suffered hours of waiting only to get the same response from another representative who also told him that the Treasury needed to process more than 800,000 refunds.

“I was informed that my excessive contributions were earning interest, but it is now February and the money has not yet been returned,” Robinson said. “I can only imagine what will happen when millions of consumers decide to cash out their savings bonds, when inflation is lower, or if they need the cash for something else, like paying off a mortgage, paying off a credit card, or student loan debt. “.

Robinson’s ordeal may have fed him up with I bonds, but Chris Bravender, manager of fixed income at Prospera Financial Services, advises holding on to them just yet.

“The key things to remember about I bonds are that you can only invest $10,000 a year and must hold the bond for at least five years to avoid paying a three-month penalty. With that in mind, we expect the big redemption to come mostly five years after the high set in 2022,” Bravender said, adding that the yield remains attractive.

What’s more, even if most investors agree to pay a fine to get their money back, Bravender believes an annual investment cap will prevent this from having a material impact on the Treasury’s operations.

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