I Bonds Offer Opportunity As A Short-Term Investment

Mar. 30, 2020 6:18 AM ETVUSXX, TIP24 Comments
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  • A unique feature of I Bonds is that yields are set for six-month periods and won't change. Investors can now lock in the current yield of 2.22% for six months.
  • Deflation is coming, but shouldn't be reflected harshly in the I Bond's next variable rate, to be reset on May 1 based on inflation from October 2019 to March 2020.
  • Ideally, I Bonds are a long-term investment, part of a strategy of building inflation-protected cash. But a short-term option now opens up.

With the Federal Reserve slashing its key short-term interest rate to nearly zero on March 15, investors are going to see their return on safe short-term investments fall to zero in coming months.

Say goodbye to Treasury Money Market Funds paying interest of 1.5% or higher. We may not see those rates again for many months, possibly years.

I've been rolling over 13-week Treasury bills since May 2017, when I recommended taking a look at this super-safe investment. It's been a nice run, with the yield gradually climbing from about 0.89% in May 2017 to a high of about 2.50% in March 2019. But things have changed. I noticed this week that the latest 13-week Treasury auction, on March 23, got an investment rate of 0.00%, the lowest it can go. Here's how the trend looks for these 13-week Treasury auctions:

  • March 23: 0.00%
  • March 16: 0.29%
  • March 9: 0.40%
  • March 2: 1.17%
  • February 24: 1.54%

Similarly, this week's 4-week Treasury bill auction got an investment rate of 0.00%, down from 1.55% on February 27. What this means: You give the Treasury $10,000 and in four weeks (or 13 weeks) you get back $10,000. It's time to get out of short-term Treasurys.

Here is how the 4-week Treasury tracks the return of the Federal Funds Rate:

4-week Treasury vs. Federal Funds RateAt the same time, investors are going to see yields plummet for top-performing Treasury money market funds, which track returns of the 4-week and 13-week Treasurys. For example, the Vanguard Treasury Money Market Fund (VUSXX), currently lists its 7-day SEC yield as 0.95%, but you can expect to see that drop to near zero in coming weeks, as its return catches up to the current return of 4-week Treasurys.

I Bonds as an alternative?

U.S. Series I Savings BondA U.S. Series I Savings Bond is a Treasury investment

This article was written by

Tipswatch profile picture
I am no longer writing for this site. More details. I will continue to post updates at my site, TipsWatch.com.-----David Enna is a long-time journalist based in Charlotte, N.C. A past recipient of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website. The Tipswatch blog, which launched in April 2011, explores ideas, benefits and cautions about U.S. Series I Bonds and Treasury Inflation-Protected Securities, which David believes are an under-appreciated and under-used investments. David has been investing in TIPS and I Bonds since 1998.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he recommends can purchased through the Treasury or other providers without fees, commissions or carrying charges.

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