VTIP - A Fond Goodbye To I Bonds While Examining The Role They Actually Play In A Portfolio

2024-04-21 08:00:00 ET

Summary

• Purchasing an I Bond before the May 1 reset assures a 4.77% return based on a combined fixed rate of 1.3% and the known inflation contribution.
• I Bonds have served me well since my first purchases in 2000, which have quadrupled in value thanks to a 6% yield.
• I Bonds offer both more and less than inflation protection. They also offer deflation protection, a solid return when the Fed suppresses all other rates, and a chance to defer taxes.
• Quirky advantages like avoiding "phantom" taxes and paying future taxes in depreciated dollars make I Bonds superior to TIPS.
• I Bonds are in essence a separate asset class that diversifies and serves a portfolio in many ways.

After much thought, I'm going to buy one more I Bond before the end of the month. That will be it for me. I'm not selling, never have, but no more buying either. I'm standing pat. In 2030, my first I Bond purchases will start rolling off. I'll turn 86 that year. The last to roll off will be in 2054, and I will probably have to leave it to others to handle it. My future heirs will get a one-page set of instructions, while there is plenty of time for them to ask me follow-up questions and for me to respond with answers which still make sense. Over the next two years, I will have my stepson "Deliver" the two $10K Gift Box Bonds I had him buy for me. At the same time, I will "Deliver" the Gift Box Bonds I bought for him. It feels a bit like saying a fond goodbye to old friends.

What tipped the scales for one more I Bond buy was the present 1.3% permanent fixed rate as well as the assured one-year inflation numbers, 3.94% for April through September 2023 and 2.94% for October 2023. through March 2024. March, the last of six monthly CPI numbers, was just reported on Wednesday, April 10. Combining the fixed rate of 1.3%, the first six months of an April purchase produces a 5.27% annualized return (the small difference from the inflation number being due to monthly compounding). The next six months will produce a 4.27% annualized return. The combined annualized return is 4.77% for the full-year ending in March 2025. That's a bit less than the one year T-Bill yield of 5.18%, but it comes with other virtues. Having all the above information is like being able to buy (or not buy) an ETF or stock index at its year-ago price with assurance of receiving its return for the past year. This 100% visibility of the first year's return is one of several quirks in the way I Bonds work which set them apart from other investments. All the small details in the way I Bonds operate are very favorable to the investor. Before deciding whether to buy or not buy, you should make a strong effort to understand the workings of these quirky little details....

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