The Treasury is offering a 5-year TIPS Thursday that will have zero appeal for small investors. CUSIP 912828SQ4 will auction with a coupon rate of 0.125%, but buyers will have to pay up – way up – to get the likely yield to maturity of around -1.10%. That means buyers will accept 1.10% less than the rate of inflation for 5 years.
Absolutely no appeal.
At the same time, this week offers a very attractive buying opportunity, but you need to act fast. Through April 30, you can go to TreasuryDirect.gov to buy I Savings Bonds, up to an annual limit of $10,000 (or $20,000 for a couple), and get an annual rate of 3.06% for six months, and then 2.20% for the next six months.
That is a combined annual interest rate of 2.63%. This assumes you won’t sell the I Bond after a year, but even if you did, and paid a three-month interest penalty, you’d get an annual return of 2.08%.
The reason you need to act fast? The inflation-adjusted interest rates on I Bonds will readjust on May 1, so all I Bonds purchased after May 1 will earn 2.20% for six months. If you act before May 1, you can lock in the higher rate of 3.06% for six months, then the 2.20% rate for the next six months.
Buy I Bonds up to the limit before May 1. Let me be clear: Do NOT procrastinate.
There is no better super-safe investment out there. An I Bond compares directly with a 5-year TIPS, because you can sell the I Bond after five years with no penalty.
Would you rather earn the rate of inflation for five years (I Bond), or the rate of inflation minus 1.1% for five years (TIPS)?
Plus, I Bonds have tax advantages over TIPS, since interest isn’t reported until you sell them. With TIPS, you pay interest now, even though you don’t get all the money until maturity.
One more thing … I Bonds have a dual interest rate, the base rate (currently zero) and the inflation-adjusted rate (currently 3.06%). We know the inflation-adjusted rate will drop to 2.20% on May 1, but what about the base rate? Is there any possibility it could tick up? No, it will not tick up. It will be zero.