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Investors seeking safety from last year’s market chaos rushed to Uncle Sam — meaning they opened more than 3 million accounts to buy Treasuries and other bonds directly from the US government.
In 2022, savers created 3.6 million accounts on TreasuryDirect.gov, a website where investors can buy a range of US government savings bonds and Treasury bonds. That’s about five times what it was in 2021, when investors opened 689,369 accounts on the site.
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The surge in investor interest in the site coincides with some important market events.
First, savers turned to Series I savings bonds, an inflation-protected and largely risk-free asset issued by the federal government. The interest rate on these bonds has two components: a fixed rate and a rate that varies with inflation.
In May 2022, the Bureau of Fiscal Service announced that I-Bonds purchased from then until October 28 of that year would earn a compound interest rate of 9.62% for the first six months after the issue date. Bonds issued between November 1, 2022 and April 30, 2023 have an interest rate of 6.89% — which is still attractive, even if it’s lower than last year’s bonanza.
Note that individuals purchasing I-Bonds through TreasuryDirect are limited to purchases of $10,000 per calendar year. You can use your tax refund to buy up to $5,000 worth of Paper I Bonds.
Make sure you agree to tying up some of your money in an I-Bond. Although you can redeem it after 12 months, if you redeem it in less than 5 years, you will lose the interest of the last 3 months.
Rising Treasury yields
The Federal Reserve’s rate hike campaign, which began a year ago, caused bond yields to rise. While this was bad news for people with diversified portfolios — they saw both fixed income and equities fall — it was good news for income investors looking to buy government bonds cheaply.
In fact, the 10-year Treasury yield was around 1.5% at the start of 2022, but rose to 4% by this fall. The inversion of the yield curve – an event in which yields on short-dated bonds are higher than long-dated issues – has also made Treasury bills particularly promising. Consider that a 6 months T bill has a yield of 4.91%.
Investors can top up T-bills to get a little more yield from otherwise idle cash.
Aside from buying Treasuries through a brokerage firm, you can go directly to TreasuryDirect.gov.
There you set up an account, link your bank and participate in an auction for treasuries. Four-week, 8-week, 13-week and 26-week Treasury bills are auctioned each week. Two-year bonds are auctioned monthly and 10-year government bonds are auctioned quarterly.
Although these bonds offer attractive yields and are considered risk-free, investors should be aware that their yields may not keep pace with inflation. You could also miss out on investment opportunities in stocks, so be careful how much you put into those government bonds.
– CNBC’s Michelle Fox contributed to this story.