I bonds are an investment that profits from inflation

By David Wilkening, Contributing writer

“I bonds give you the ability to at least some of your low-risk assets keep up with inflation,” says Lexington-based financial adviser George Gagliardi.
Photo/submitted

REGION – Inflation news is almost always grim. But I bonds, a low-risk investment that flies under the radar for many people, provide an opportunity where high inflation is a positive thing.

On Monday, May 1, I bonds were responsible for a rare good news inflation story. On that day it was announced that the I bonds would deliver a record 9.62% interest for the next six months. That came as no surprise to the founder of a Lexington-based financial consulting firm. Not only had he recommended that his clients buy I bonds a few months before, he had brought it even closer to home by offering it to his own 92-year-old father.

He is George Gagliardi, founder of Coromandel Wealth Management, financial advisor and certified financial planner.

How I Bonds Work

Gagliardi has been repeatedly quoted in the media since I bonds were identified in recent months as something of a Superman to help address growing fears of continued inflation. And not that he praised them unreservedly.

Among their drawbacks is that you cannot redeem them for at least a year. And if you cash them out within five years, you lose the previous three months of interest directly before the sale, he has repeatedly said.

“I think it’s decent, but like anything else, nothing is free,” he said of those flaws.

Gagliardi recommended government-issued bonds, technically known as Series I savings bonds, to his clients back in March in his quarterly letter to them. They cannot be purchased through a brokerage account, which is why brokerage firms do not talk much about I bonds. You must purchase them directly from the US Treasury website at https://www.treasurydirect.gov/.

As for his father, “He was looking for mining, and they 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 that much,” he said.

Bond interest rates consist of a fixed prime rate, which is currently 0%, and an inflation rate that changes every 6 months,” explained Gagliardi. “Bonds have very little risk because they are backed by the US Treasury, so really the only risk is currency risk (the value of the US dollar against other global currencies).”

Who should buy them?

Although I bonds are not a complete answer to inflation, they can play a role in at least reducing it or helping to resolve it.
Although I bonds are not a complete answer to inflation, they can play a role in at least reducing it or helping to resolve it.

So is this an obvious case where most people in different circumstances and situations would want to buy the bonds, especially in these times of escalating inflation? “Bond I is not for short-term cash because it has limited liquidity,” Gagliardi said. “You have to hold it for a year, then you can sell it back to the U.S. Treasury, although you’ll forgo the interest payments for three months.”

What impact do bonds have on seniors coping with inflation? “Given that a person can buy only $10,000 worth of I bonds per year ($20,000 for a couple), there is a limit to how much they can help seniors fight inflation,” Gagliardi noted. “For medium-term money, they are a good investment. For example, if a couple uses what is known as a ‘Bucket System’ to manage their retirement funds – money is needed over the next one to three years in very low volatility assets, three to eight years in low to moderate volatility and then that eight years in higher volatility (like equities) – I-bonds do well in the first and second ‘bucket’.”

While I bonds are not a complete answer to inflation, they can play a role in at least reducing it or helping to resolve it. security better than money market funds or savings accounts these days. You’re getting low risk and high return right now, but that’s unlikely to last. A lot depends on what the Fed does or doesn’t do.

Are I bonds really almost risk free as some people say? “As long as the US dollar remains strong against other currencies and the US government does not default on its debt, they are as close to risk-free as possible, Galliardi confirmed. “There’s risk in every asset, and with I bonds there’s some interest rate risk, but that’s about it. They’re a good investment for a small part of your portfolio, at least right now.”

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