Series I Bonds are special inflation-adjusted bonds issued by the government. Any US citizen can buy them to earn a fat yield of 9.6% currently.
They’ve been around since 1999. But they’ve never paid as much as they do today, thanks to inflation.
As I mentioned, the current rate is 9.6%, which is locked in for the next six months if you buy today.
On a $10,000 investment, you’ll receive at least $481 in interest for the next six months.
Not bad when you consider the current rate for a 1-year CD is 1.72% while the average APY for a money market account is a measly 0.08%.
Now, it’s important to note that the rate on the Series I Bond will change in October based on where inflation is. That’s why you’ll want to lock in your 9.6% yield soon if you’re interested.
The biggest “catch” is you can only invest up to $10,000 each calendar year.
However, you can invest an additional $10,000 for your spouse. So, you can put in $20,000 right now. Then $20K more on January 1, 2023.
Of course, you don’t need that much money to get started. You can buy an I Bond from the US Treasury website with as little as $25.
I Bonds are also tax friendly. You don’t owe taxes on the interest until you sell the bonds. And the interest income is exempt from state and local taxes. That’s a major bonus if you’re in a high-tax state like New York, California, or New Jersey.
Lastly, and perhaps most important:
There’s a minimum holding period of one year.
After one year, you can cash in your I Bonds at any time. But if you cash them in before five years, you lose the previous three months of interest.
I Bonds are the best way to grow your money essentially risk-free and beat inflation today.
You can buy the bonds directly at TreasuryDirect.gov. The website will walk you through the steps to get started.
It’s easy, but fair warning: TreasuryDirect is an old, clunky government website. So, expect to deal with some minor annoyances.
US Economy
Consumer spending growth is below the pre-COVID trend but is not crashing. Households continue to spend despite deteriorating sentiment.
- Incomes (excluding government payments) declined in June.
- Savings as a share of disposable income continue to fall.
- Employment costs continue to surge. Companies have been able to pass higher costs to their customers, but many are getting pushback these days. Margins are coming under pressure.
- The Cleveland Fed’s CPI estimate for July shows inflation cooling.
The updated University of Michigan consumer sentiment index showed a divergence: an improvement in current conditions but further deterioration in expectations.
- Business sentiment among US public companies is deteriorating as well.
- The MNI Chicago PMI surprised to the downside, pointing to softer Midwest business activity.
- US financial conditions are easing again. That’s not what the Fed wants to see.
- By the way, the St. Louis Fed Financial Stress Index, which could be viewed as a measure of financial conditions, hit the lowest level on record (no stress).
- The ISM Manufacturing PMI report was a bit better than expected, showing factory activity still expanding in July.
- Manufacturing employment is no longer shrinking.
- However, forward-looking indicators show trouble ahead for manufacturing growth.
- Demand is shrinking.
- And falling new orders usually signal slower production ahead.
- Growth in the backlog of orders has slowed further.
- Inventories are rising quickly.
- The headline ISM index vs. the spread between ISM orders and inventories:
- Job openings declined at a faster pace in June, but the labor market remains tight. The Fed would like to see this indicator come off some more.
- Job vacancies in retail registered a record decline.
- Construction openings are down sharply as well.
- The real money supply (M2) is down sharply on a year-over-year basis.
- This trend does not bode well for GDP growth.
- Initial jobless claims are now firmly above the 2018/19 levels.
- As a result, JP Morgan now sees a gain of only 200k payrolls for July (vs. consensus of 250k).
- Continuing claims are still at multi-year lows.
- Layoffs are also quite low
- US exports growth has been robust this year, but it’s expected to slow (driven by weaker global demand and a strong US dollar)
- Job growth is good news but more people working while GDP is falling means the average worker’s productivity is declining. That’s a bad sign for future growth. We aren’t getting more workers so the economy needs each one as productive as possible.
The Fed
Austin Kimson compares the current downturn to past recessions and sees risk it could be more serious than many analysts expect, for two specific reasons.
Key Points:
- Every instance of two consecutive quarters of declining GDP has marked a recession. We are likely in one now, even without a formal declaration.
- In the past, monetary tightening into the start of a recession clearly exacerbated the contraction.
- The 2007-2009 recession was the major exception to this pattern.
- Monetary policy effects have long lags, so tightening causes downward pressure to persist.
- Today’s extraordinarily large financial economy relative to the “real” economy appears to require ever-larger monetary interventions.
- A 1990-like scenario, featuring a 1-2% contraction lasting less than a year, is now the most plausible path.
- Nevertheless, companies and investors should prepare for the possibility of a deeper downturn.
The fact that leading indicators like PMI are just now starting to point downward suggests the US economy may contract more in 2022’s second half than it did in the first. However, fiscal and monetary responses will help shape the path – for better or worse.
The pace of rate hikes in this cycle has been unusually steep.
Source: The Economist Read full article
- But the real fed funds rate is still deep in negative territory.
Source: @RBAdvisors
Market Data
- Industrial metals are rebounding.
- COMEX gold futures held support around $1,675.
- US fracking activity continues to recover
- Energy companies’ earnings are hitting record highs.
- The global oil supply outlook remains tight as OPEC+ underproduction deepens and geopolitical risks remain elevated.
- Russian crude oil exports continue to hold above pre-war levels.
- July was a good month for stocks
- Over 55% of S&P 500 members closed at new 20-day highs.
- The spread between the 10-year Treasury yield and the fed funds rate is rapidly tightening.
- The 10-year Treasury yield tends to decline in August. One reason is that bond supply drops in the summer, especially in corporates, leaving investors to park cash in Treasurys while they wait for issuance to pick up, according to Deutsche Bank.
- Brent dipped below $100 again.
- The third-quarter earnings expectations are moving lower.
- US lumber futures are trending lower amid weakness in the housing market.
- Companies are preparing the market for an earnings recession.
- Downward adjustments to earnings expectations continue (EPS = earnings per share).
- The McClellan Summation Indexes on both the NYSE and Nasdaq exchanges have turned positive. This is the first time in more than six months that both of them have been above zero, ending a near-record streak below zero. Recoveries have tended to precede positive returns, especially on the Nasdaq.
- The Nasdaq 100 is at resistance.
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All content is the opinion of Brian J. Decker