Lately inflation has edged up. Some are saying it is temporary, due to supply disruptions caused maybe by Covid shutdowns. Others say inflation is back. Meanwhile Mom was looking for a way to get a better return on some money she had in a money market drawing less than 1% return. We started looking at bond funds. I like Vanguard’s short term corporate bond fund, VFSTX (or its ETF equivalent, VCSH) which I use like a savings account, but also a place to put money in reserve if I feel like the stock market is due for a correction. But Mom already had some money in some USAA mutual funds, a short term corporate bond fund similar to VFSTX called USSBX, and a junk bond fund called USHYX. So we just added her money to those existing holdings. USSBX actually seems to have a slightly higher yield than VFSTX (1.8% vs. 1.7%), so I put some money into that too. One way it does this is by having slightly higher risk bonds which pay higher interest. USHYX, the junk bond fund, buys all lower quality bonds, so it is yielding around 5%, but there is more risk there plus the bonds are longer term, meaning the value of the bonds will go down more if interest rates rise, which they seem to be doing.
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Putting money in bond funds right now will give a higher yield, but the value of the bonds could go down by more than that amount as rates rise, meaning you don’t get much of a return. I recently closed out my investment in a Pimco corporate bond fund (PBDAX) that had a better yield than VFSTX and a good Morningstar rating (originally, now 3 stars). Somehow, despite having a yield of between 2.6% to 3.6% over the last five years, I only made about 1% per year on that investment as the price of the fund went up and down as I bought and sold shares. I like the idea of buying a bond and holding it so that you don’t worry whether its value goes up or down, you just enjoy whatever interest rate you locked into, but bonds are kind of a pain to buy and sell. I try to avoid bond funds except for the short term ones. And Pimco wasn’t really a short term bond fund either, so the price was never as steady as VFSTX, which is why I finally got out of it. Plus its expense ratio was pretty high despite the high yield and you couldn’t sell shares for 60 days after buying them or else you’d pay a 3.75% fee. And because it was an external fund from Fidelity, the money would take a couple of days to be available. Anyway, the yield isn’t always the best measure of how your money will do if the price of the shares goes down.<\/p>\n
For the moment, whether you get 2% or 3% or even 4%, you are still getting less than inflation. So you are losing purchasing power even if you aren’t losing it nearly as fast as in a money market. That got me thinking back to I Series Savings bonds<\/a>, which I had invested in back in April of 2008 when I was able to get a 6% return for a little while. I bonds give a fixed rate of return plus inflation and can never lose value even if inflation wipes out the fixed rate. My old bonds had a fixed rate of 1.2% which was boosted to 6.1% by 4.9% inflation when I bought them, but later completely wiped out by 2% deflation around the time I sold them two years later when they were earning 0%. I still wound up making an annual average of 3.8% on the investment, which was about what I could have been making on VFSTX at the time.<\/p>\n Right now I bonds are yielding 3.54% due to the inflation component, based on the 6-month inflation rate calculated through March. The fixed rate portion is 0%, which is pretty common, having never gone back up to the 1.2% I got back in 2008. The new I bond yield starting in November (for the 6-month period through September) will be 7.1%. Due to the way it works, if I buy a bond in November it will get 7.1%, but if I buy now I will get 3.54% for six months and then it will reset to the 7.1% after six months for the next six months. You can’t sell the bonds for a year and if you sell them sooner than 5 years, you pay a penalty of 3 months interest. It could very well be that the high inflation right now is followed by some deflation if prices settle down. The maximum purchase of I bonds per year is $10,000, so if you have a ton of money this doesn’t really help out much.<\/p>\n The US Treasury also sells inflation adjusted treasury bonds called TIPS. These bonds go up in value with inflation, so instead of the yield fluctuating with inflation like with the I bonds, the principle goes up with inflation. The yield is set by the markets in auctions and with inflation up around 5.4% right now and regular treasury bonds yielding only 1.5%, the markets have bid the yield on TIPS to -0.9%, meaning they are going to pay the government to take their money since the government is going to give them more money back when the bond matures. So that yield determined by the markets is kind of like the fixed portion of the I bonds and it is negative. Therefore, maybe the 0% fixed portion of the I bonds doesn’t look that bad. The fixed portion of I bonds has never gone below 0% and I kind of wonder if it might do that when rates reset November 1. In the meantime, maybe I should get some I bonds.<\/p>\n You can buy Series I Savings Bonds online at Treasury Direct. My old account had been deleted so I had to open a new one. Back in 2008<\/a>, I had to wait for them to mail me a code card before I could log on, but now you can open an account in minutes, though their security is still higher and more confusing than any private company. They still use Site Key<\/a> to verify to you the website is really Treasury Direct and they give you a numeric account number to log in. So I think that is all set up and now I just need to put some money in my bank account by selling some VFSTX.<\/p>\n If inflation sticks around, I suspect bond rates will have to go up meaning better future yields, but only after the value of my holdings in bond funds goes down. Also the I bonds should continue to have a very good yield, maybe more than bonds which seem to be lagging inflation. If inflation does go back down, the I bonds could yield much less or even 0%. The silver lining to 0% yield is the 3-month interest penalty can be $0. If I buy now and start getting 3.54% followed by 7.1% for the next six months, I will have a pretty good average return for 12 months and if I am getting 0% a year from now, I can start thinking about selling them without a penalty. If I wait and buy in November and start getting 7.1% right away, the second six months could have a much lower rate that I will have to endure until I am allowed to sell after a year. If inflation is going to stay high, then getting in now is still good and then I can keep the bonds for as long as they are yielding more than the bond funds.<\/p>\n","protected":false},"excerpt":{"rendered":" Lately inflation has edged up. Some are saying it is temporary, due to supply disruptions caused maybe by Covid shutdowns. Others say inflation is back. Meanwhile Mom was looking for a way to get a better return on some money she had in a money market drawing less than 1% return. We started looking at … Continue reading “I Bonds Again?”<\/span><\/a><\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-4327","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/posts\/4327","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/comments?post=4327"}],"version-history":[{"count":5,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/posts\/4327\/revisions"}],"predecessor-version":[{"id":4370,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/posts\/4327\/revisions\/4370"}],"wp:attachment":[{"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/media?parent=4327"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/categories?post=4327"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.fiveforks.com\/ted\/wp-json\/wp\/v2\/tags?post=4327"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}