The best inflation hedge in the world, or how to make 7% interest with no risk of loss of capital*
*a few strings attached, mostly just that you can't size it up. Please allow me to introduce you to the beautiful, almost perfect I-Bond.
My twitter buddy @SpenglerCapital posted this a few days ago and it was too good not to share with the world (not that the world of Spudstack readers isn’t a perfectly overlapping venn diagram of people who already follow me on twitter and have probably already seen this). Anyway, it’s been a while since a post so why not write this up. No need for a life story, lets get into what this is.
Allow me to (re) introduce you to Series I Savings Bonds (“i-bonds” for purposes of shorthand here).
Here is pretty much all you need to know, straight from the Treasury’s direct-to-consumer purchasing website:
First, there are some holding period considerations. One must hold the bonds for one year. If one cashes in within the first five years from purchase, there is a penalty of forfeiting the prior three months’ interest, but if inflation goes back to zero you’re not going to be forfeiting much interest, so personally I only care about the 1 year consideration.
Second, the determination of the rate of interest. The bonds pay out at what is essentially 2x CPI, which is evaluated in May and November of each year for these instruments. As inflation ticked up this fall, a healthy CPI resulted in a 2x healthy rate of interest on i-bonds - currently 7.12%. A bit more information and detail is shown in the information below from the Treasury website. There are some further nuances based on exactly when you buy your bond but that is not materially important here.
So, the upshot is shown in the following Treasury graphic. A bond purchased tomorrow yields 7.12% for at least until April 2022, at which point the interest rate will reset. As noted below, the real limitation to this trade/investment/hoeing for yield is that one can only purchase $10,000 per year in i-bonds, plus an additional $5k if they are owed a tax refund and elect to receive that tax refund in an i-bond (which I would totally do this year except that my beautiful wife and I are going to owe money to Uncle Sam - which is I guess an alright problem to have). The interest also compounds semi-annually, so during these periods of higher inflation (however long it lasts) you’re not just getting 7% on the original $10,000, it’ll add up. Just like the boomers enjoyed in the 70s and 80s.
So how to play this?
If you have money in a savings account that is not needed for a year, slap that bid* (*there isn’t actually a bid it’s just the government selling them endlessly). Best of all, thanks to the timeliness of SpenglerCapital’s tip, this is the time of year when one can essentially double dip as the $10,000/year is determined on a calendar basis - pump $10k in now and another $10k on January 3rd and you’ve got $20k earning 7% for at least 6 months.
As I see it, the worst case scenario is that inflation ends (good for everyone in general) and one collects 7.2% for 5 months and something less than that for the remaining 7 months before cashing out after the 12 month holding period, which is still a far better blended rate than one would get in a savings account or CDs. Or, if inflation is here to stay, 7.2% becomes 15% at the next reset, and you’re all of a sudden earning a semi-annually compounded 15% on $20k with no risk of loss of principle.
Here is the Treasury website to buy these beautiful securities. As always, never advice, but if you keep cash/have a savings account earning nil right now and don’t need the money for a year, this is the safest idea that provides a guaranteed positive return that I’ll ever share on the Spudstack.
Yours,
Elmer