A Stronger Bond

Mike Zaccardi

SERIES I SAVINGS bonds might be the best-performing investment in folks’ portfolios this year. With steep losses in both the stock and bond markets, I bond’s 9.62% current yield looks like a home run. But the playing field could be shifting.

How so? Yields on the federal government’s other inflation-linked bond—Treasury Inflation-Protected Securities (TIPS)—are up sharply in 2022. Result: TIPS aren’t such a bad buy today and perhaps better than Series I savings bonds.

According to Bloomberg, as of last Friday, TIPS yields across the maturity spectrum, from five to 30 years, were solidly in the black, generally in the 1.3% to 1.6% range. These are so-called real yields, meaning they’re yields over and above inflation. Simply put: We can now earn a positive inflation-adjusted rate of return on TIPS.

Meanwhile, today’s buyers of Series I savings bonds will earn a yield that merely equals the inflation rate. Remember, that 9.62% yield is only good for the first six months. Thereafter, the annualized yield for each six-month stretch will bounce up and down with the inflation rate. Series I savings bonds may start looking much less attractive as early as May of next year, when rates on I bonds are reset.

In fact, if you have a short time horizon and want safety, you might want to check out very short-term TIPS. The Wall Street Journal reports that real yields are above 2% on TIPS maturing within 18 months. Gone are the days of your cash losing out big time to inflation. Based on the difference in yield between TIPS and conventional Treasurys, investors expect inflation over the next year will be muted at a little more than 2%, while the expected 10-year average inflation rate is just 2.37%.

Investors’ conviction that the economy will slow and inflation will cool can also be seen elsewhere in the Treasury market. Something that’s discussed frequently in the financial press is the dreaded inverted yield curve. The conventional two-year Treasury note finished last week at 4.2%—the highest yield since 2007—as the Federal Reserve continues down its aggressive rate-hiking path. Meanwhile, the rate on the 10-year Treasury note is just 3.69%.

That unusual situation, where you can earn a higher yield by buying shorter-term Treasurys, might not last long. The bond market seems to think the Federal Reserve will soon reverse course and start cutting short-term interest rates. That, of course, is what stock investors are hoping for. To be sure, today’s slowing economy may cause a temporary hit to corporate profits, potentially hurting stocks. But falling bond yields will have the opposite effect, making stocks more appealing relative to bonds—and heralding a revival of economic growth.

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