I bonds still in a trough

I bonds still look good

Despite a nonexistent return after inflation, I bonds are looking pretty good to a lot of fixed-income investors right now, says Cynthia Petzold, CFP and principle of CommonWealth Financial Planning in Roanoke, Va.

"You go to your bank and your savings account is earning 0.1 percent. And your certificates of deposit? You lock them up for five years at a magnificent 2.4 percent. There just haven't been a lot of places to go to put your cash lately," she says.

Even with a zero percent fixed-rate component, "these I bonds do play a part in the portfolio, simply because there's not a whole lot out there that can give you at least a hope of capturing some of the inflation increases without taking on additional risk," Petzold says.

McBride concedes 4.6 percent looks attractive at first blush but cautions that settling for a real return of zero percent over the long term ultimately means getting shortchanged. If you have your heart set on a nearly risk-free return, McBride recommends a short CD ladder instead. It gives investors more flexibility to reach for a positive real return as rates improve.

What's ahead for I bonds the next time their rates change on Nov. 1? If history is any indication, very little will happen. Even if yields on other government securities, such as Treasuries, go up, the fixed component likely will remain uncompetitive, McBride says.

"Until that fixed-rate component becomes meaningful, I bonds become an also-ran," McBride says. "It's not an appealing investment until you start to see a compelling return on that fixed-return component, and there's no assurance that you will."

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