Jason P. Tank: Series I bonds and debt ceiling

·3 min read

May 14—A year ago, I wrote about a rare, shining moment for Series I savings bonds. It's time for a quick update to help you decide to either hold them or cash them in.

Last May, new Series I savings bonds investors were offered a guaranteed rate of almost 10%. The catch was, that amazing teaser rate was for just the first six months. After that short period, subsequent declared rates were at the mercy of inflation. Last November, the new rate came in at about 6.5%. In combination, as planned, the full first year return worked out to a healthy 8% or so.

The burning question is, what should you do now?

As widely predicted, the inflation fever has broken. Since Series I bonds are explicitly tied to inflation, so too is their interest rate. The just-announced next six month window for Series I bonds promises an annualized rate of only about 3.5%. That now sits below rates offered in safe money market funds at most brokerage firms.

It's probably time to remind yourself of your TreasuryDirect login credentials and plot your next move for your excess cash savings. The U.S. Treasury's website is pretty awful to navigate, as you might remember.

Speaking of the U.S. Treasury, a small group of politicians is playing a very expensive and serious game of chicken. By not automatically raising the debt ceiling, they are purposely calling into question our federal government's willingness to pay its bills. One might see it as just political gamesmanship, but economically speaking it's far more than that. It has real financial ramifications that could be long lasting.

To begin, we all know the government will ultimately pay its bills. The only question is, when and how will those bills be financed? If, through their political stunt, the US Treasury goes into technical default on its debt, forevermore investors across the globe will wisely demand just a bit higher interest rate when lending to our federal government in the future. After all, if you lend money and don't get paid back on time, even just once, you don't easily forget it.

Let's do some math. On about $30 trillion of federal debt outstanding, how much more would it cost the American people if we had to pay a measly 0.1% more per year on our debt over the next 20 years? This works out to at least $600 billion of wasted interest expense. With that potential price tag, these politicians are clearly playing a very irresponsible game. How about using the official budget process to steer our nation's spending priorities?

Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com.