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Would appreciate opinions on the future of I-bonds when interest rates rise. All of ours are over 5 years old and about 25% of our savings. they took a small hit in September, I am 82 yrs of age and wife is 79 years young highest regards to all BILL circa33
I-bonds yield is based on inflation, not interest rates. If interest rates go up BECAUSE of inflation, I-bonds will pay more. But if rates move up in anticipation of-- and choke off -- inflation, I-bond yields may not increase much.
Essentially, your question is: "what kind of inflation is expected?" I think you must know, that here and now, the market has low inflation expectations. Market expectations will of course change. But when, and to what degree is anyone's guess.
The good thing about I-bonds, is that unlike marketable bonds, their principal value does not decline when rates go up. So when marketable bonds decline (at some point), a hypothetical I-bond investor could sell his I-bonds and invest in marketable bonds at a lower price (offering a higher yield) , assuming he was so inclined --- and was in a position to pay taxes on the accumulated interest included in the proceeds from the I-bonds. The lower your combined federal/state tax rate is, the less of a factor the tax consequence would be.
The lower your federal (not combined) rate is, the less of a factor the tax consequence would be. I-bonds, like other US debt, is not subject to state income tax.
In the long run, if you believe the Fisher hypothesis (that nominal interest rates and inflation move in tandem), market rates won't have a significant effect on your real return. IMHO that's what really matters - when you cash out, will you be able to purchase more (and how much more) than when you started?
Comments
I-bonds yield is based on inflation, not interest rates. If interest rates go up BECAUSE of inflation, I-bonds will pay more. But if rates move up in anticipation of-- and choke off -- inflation, I-bond yields may not increase much.
Essentially, your question is: "what kind of inflation is expected?" I think you must know, that here and now, the market has low inflation expectations. Market expectations will of course change. But when, and to what degree is anyone's guess.
The good thing about I-bonds, is that unlike marketable bonds, their principal value does not decline when rates go up. So when marketable bonds decline (at some point), a hypothetical I-bond investor could sell his I-bonds and invest in marketable bonds at a lower price (offering a higher yield) , assuming he was so inclined --- and was in a position to pay taxes on the accumulated interest included in the proceeds from the I-bonds. The lower your combined federal/state tax rate is, the less of a factor the tax consequence would be.
Good luck.
In the long run, if you believe the Fisher hypothesis (that nominal interest rates and inflation move in tandem), market rates won't have a significant effect on your real return. IMHO that's what really matters - when you cash out, will you be able to purchase more (and how much more) than when you started?