What is the downside of government I bonds?
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
Securities purchased through TreasuryDirect cannot be sold in the secondary market before they mature. This lack of liquidity could be a disadvantage for investors who may need to access their investment capital before the securities' maturity.
Yes, you can lose half your money in government guaranteed bonds. The iShares index ETF “TLT TLT -1.4% ” of 20-year Treasury bonds shown below has lost half its value in the last 3 years. Some bonds, 30-year Treasuries for example, have been impacted even worse.
Despite the expected rate decline, I bonds are “still a good deal” for long-term investors, according to Ken Tumin, founder and editor of DepositAccounts.com, which closely tracks these assets.
However, when buying corporate bonds, the initial investment is not guaranteed. As a result, corporate bondholders have default risk, which is the risk that the company may not repay its investors their initial investment.
| Pros | Cons |
|---|---|
| Interest rate adjusts every six months based on current inflation rates | Cannot redeem I Bonds during the first 12 months |
| No State or Local income tax on interest earned | Three months interest penalty if cashed out during the first five years |
Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.
"Long-term Treasury bonds may have no default risk, but they have liquidity risk and interest rate risk — when selling the bond prior to maturity, the sales price is sometimes uncertain, especially in times of financial market stress," it said.
Even if the stock market crashes, you aren't likely to see your bond investments take large hits. However, businesses that have been hard hit by the crash may have a difficult time repaying their bonds.
So, if the bond market declines or crashes, your investment account will likely feel it in some way. This can be especially concerning for investors with portfolios heavily weighted toward bonds, such as those in or near retirement.
What is a better investment than I bonds?
TIPS offer greater liquidity and the higher yearly limit allows you to stash far more cash in TIPS than I-bonds.
If you're investing for the long term, a U.S. savings bond is a good choice. The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. If you're saving for the short term, a CD offers greater flexibility than a savings bond.
You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest.
Holding bond funds for shorter periods than that opens you to the risk of further, short-term gyrations in your fund's value, without sufficient time for recovery. And if you buy longer-term individual bonds and have to sell them, you risk the kinds of losses that investors have been experiencing lately.
Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.
By contrast, if you buy individual bonds and hold them to maturity, you won't see those daily price moves. And you'll collect your interest payments and get the bond's face value when it comes due (assuming no credit problems), even if rates go up. So you never lose your principal.
One increasingly popular pick are I Bonds, savings bonds issued by the U.S. government. These bonds are virtually risk free and have a robust fixed interest rate. There is generally a $10,000 limit per year for purchasing I Bonds, but there are a few ways to get around this limit.
| Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
|---|---|---|
| $50 Bond | $100 | $109.52 |
| $100 Bond | $200 | $219.04 |
| $500 Bond | $400 | $547.60 |
| $1,000 Bond | $800 | $1,095.20 |
A series I bond is a non-marketable, interest-bearing U.S. government savings bond. Series I bonds give investors a return plus inflation protection on their purchasing power and are considered a low-risk investment.
Interest rate risks: As are all bonds, Treasury bonds are subject to price volatility as a result of changes in market interest rates. Inflation risk: The interest earned on Treasury securities may not keep pace with inflation (with the exception of Treasury inflation-protected securities, or TIPS).
Are I bonds a good investment in 2024?
You would know, with your I Bond, that if you purchase in April 2024 you will get at least 1.3% above inflation. That fixed rate, giving you a return above inflation, is the big value in I Bonds right now.
These are U.S. government bonds that offer a unique combination of safety and steady income. But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered.
Cash and Cash Equivalents
Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit. Money market funds and high-yield savings are also places to salt away cash in a downturn.
What causes bond prices to fall? Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
While Treasury bonds don't have a serious risk that the government won't pay you back, they do have two other risks that are typical of bonds: inflation risk and interest rate risk. While Treasury bonds are relatively safe investments, one key risk is that inflation will erode your returns over the years.
