Fixed Income Options: How I-Bonds and Cash Fit in Your Portfolio
With the number of interest rate hikes since 2022, investing in fixed income has become an attractive option. While inflation has cooled down since then, there are investment opportunities available in the market to take advantage of (though one should remember the primary focus being long-term returns). Here we will discuss two viable options: I-Bonds and Cash.
Those unfamiliar with an I-Bond’s rate structure should understand the rate is comprised of two parts: a fixed rate that stays the same for the life of the bond + a floating rate based on inflation that is adjusted twice per year on May 1st and November 1st. (More info on I-Bonds can be found in our earlier blog).
While I-Bonds have been around since 1998, they made recent headlines back in Nov 2021 announcing a 7.12% rate, then 9.62% in May 2022, and 6.89% in Nov 2022. Recently, the US Treasury announced a new rate of 4.3% for I-Bonds purchased through 10/31/2023. While obviously not as high as earlier rates due to inflation cooling down, the advantage of this new rate lies in its composition – 0.9% fixed rate + 3.38% floating rate (US Treasury rounds this figure up to total 4.3%. See below for a breakdown of how they arrived at this figure.)
This means that through the life of the bond, the rate will pay out a minimum of 0.9% regardless of inflation adjustments. Individuals who purchased an I-Bond at the 9.62% rate will find that their fixed rate is 0% while their floating rate has come down to 3.38%.
An investor looking to make an I-Bond purchase at this new rate can foreseeably take advantage of the 0.9% fixed rate should inflation go down even further in the near future. As noted in our previous blog there are restrictions with regards to when you can cash out an I-Bond, so if you need to maintain a high degree of liquidity for your money, I-Bonds may not be right for you.
The recent wave of interest rate hikes has certainly made cash an attractive option to hold in high-yielding savings accounts. (Many online savings banks are offering rates of 4.00% or higher.) Individuals with reserve funds will especially find this beneficial as cash on the sidelines can actually generate a decent rate of return unlike in times of low interest rates.
One of major concerns recently has been about the solvency of banks and FDIC-insured deposits. The good news is that federal regulators have stated they will fully back uninsured deposits of these banks recently in the news. As such, individuals can continue to rely on the FDIC’s deposit insurance.
One institution has augmented the FDIC’s deposit insurance – Flourish Cash. While the platform is not by definition a bank, they operate by setting up an account and automatically depositing client funds into FDIC-member Program Banks that are able to offer competitive interest rates. Because of this partnership with multiple banks, individuals can take advantage of much higher FDIC-insured limits: $1.5M for individual accounts, $3.0M for joint accounts (essentially up to $6.0M in total for a married couple). As mentioned, their competitive rates have become attractive, especially now in this high interest rate environment. As of 5/8/23, you can earn up to 4.55%. (Rate has been 4.40% in recent weeks.) Establishing an account is simple, though an invitation is required by a financial advisor to take advantage of this service. If you are interested, you can reach out to Weingarten Associates and request an invitation.
Fixed income options for investors have not been this attractive for quite some time. Depending on your financial goals, you may want to consider I-Bonds or a higher-yielding cash management option. Consulting with a fee-only financial advisor can determine what is right for you.
Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.