Bob’s Journal for 10/20/22
Last Chance for I-Bonds at 9+%
You have only a few more days to lock in a yield of 9.62% on Series I U.S. savings bonds, known generally as I-bonds.
The interest rate on I-bonds is variable and changes on the first day of every May and November. The interest rate is a combination of a fixed rate and the rate of change in the Consumer Price Index (CPI) over the previous six months.
The May 2022 adjustment in the rate caught the rapid rise in the CPI over the previous six months and locked in a yield of 9.62% for the next six months.
The next adjustment will be November 1 and the yield is expected to drop to between 6.4% and 6.5% for the next six months.
Here are some things you should know about I-bonds.
When you buy an I-bond at any time during the month, you earn that month’s interest as though you invested on the first of the month.
The yield is locked in for the next six months. After that, the yield will switch to the current yield.
The yield changes every six months as long as you own the bond. The fixed yield stays the same, but the inflation adjustment changes.
You have to own the bond for at least five years to capture all the interest. Redeem it early and you’ll lose the last three months of interest. You have to own an I-bond for at least one year before redeeming it.
I-bond interest is subject to federal income taxes but not state and local income taxes.
I-bonds can be purchased and redeemed only through the U.S. Treasury, primarily through the web site www.treasurydirect.gov.
They also can be purchased through the mail if you complete a paper application (available through the Treasury Direct web site). But be aware that because of high demand for the bonds there’s a substantial delay in processing paper applications.
You can purchase only $10,000 worth of I-bonds each year if you buy online and $5,000 through a paper application.
There are ways to get around the limit. If you have one or more trusts, each trust has its own limit that is in addition to your personal limit. The bonds also can be purchased in the name of a business, which will have its own limit.
You also can purchase I-bonds through your Treasury Direct account as gifts for family members. If you purchase bonds under the Social Security number of each recipient, each recipient has a separate $10,000 limit.
You can keep the bonds in your account and transfer them or the redemption proceeds to the recipient in the future.
Details of the gift-giving strategies are on the Treasury Direct web site, or you can watch this video that isn’t an official Treasury Department video.
China’s Changing Policies Will Affect Your Portfolio
China’s leader, Xi Jinping, is expected to secure another five-year term this week in China’s version of an election, the five-year Communist Party Congress.
In a speech to the Congress, Xi made clear that China is changing some key policies. These changes became apparent over the last couple of years and now appear to be official and long lasting.
Perhaps most important to investors is economic growth will be a lower priority than it was for most of the last few decades.
The rate of economic growth in China steadily declined the last few years, and that’s going to continue. The country will maintain its zero Covid policy, which hampers growth.
The government also will no longer support and encourage the overbuilt and overleveraged real estate sector that recently accounted for as much as 30% of the country’s gross domestic product (GDP).
China’s focus will shift from economic growth to increasing its security and becoming a more dominant global political power.
Ensuring the dominance of the Community Party and its policies also is a major goal. The country will continue its recent policies of restricting companies and economic sectors that become dominant. Individual wealth will be limited while “common prosperity” will be encouraged.
These changes matter to individual investors in the United States because China’s economy has substantial effects on the global economy. China has been a major buyer of commodities, both industrial commodities and food and other soft commodities.
Many companies sell a significant portion of their products and services to China and base a range of business decisions on estimates of the country’s growth and economic policies. Growth in China has a significant impact on the revenues and earnings of many companies.
China also has been a major buyer of global bonds, especially U.S. Treasury bonds.
A reduction in China’s growth rate will have widespread follow-through effects. Investors need to factor the likelihood of an extended period of lower growth in China into its investment choices and estimates of future investment returns.
Lock in High Yields on Cash with a Couple of Clicks
Interest rates rose rapidly in 2022 but yields on many savings vehicles haven’t kept pace.
Yields still are less than 1% for many checking and savings plans and brokerage sweep accounts.
Many people don’t realize that cash in their brokerage accounts can be repositioned quickly and easily to grab higher yields.
For example, on TD Ameritrade’s website, after logging in you can roll the cursor over “Trade” and then click on “Bonds and CDs.”
The next page will show you a table of the yields available on different fixed income investments, and the first line will have a sample of certificate of deposit (CD) yields.
Click on the investment period that fits your goals. The next page will list CDs from banks around the country that offer competitive yields, listing their maturity dates and yield information. You can move your cash into one or more of these CDs with another click or two.
This week, there are one-month CDs with annualized yields of 2.90%, and three-month CDs with annualized yields exceeding 3%. Why earn less than 1% on a broker’s or a bank’s cash account when these yields are available and easy to access?
Many bank websites let you reposition cash into their CDs, but most banks have been slow to raise yields on their CDs and savings accounts. A brokerage firm shops the country and offers you a range of yields from different FDIC-insured banks. Brokered CDs are a good place to hold cash.
The Data
The Consumer Price Index (CPI) increased 0.4% in September, the highest level in three months.
The core CPI (which excluded food and energy prices) increased 0.6% in September, the same level as August.
Over 12 months, the CPI increased 8.2%, as of September, which is lower than August’s 8.3% level. But the core CPI increased 6.6% as of September. That’s the highest 12-month rate since 1982.
Retail sales in September were the same level as in August, which followed a 0.4% increase in August from July’s level. Over 12 months, retail sales increased 8.2% as of September, and that’s a five-month low.
Core retail sales (excluding automobiles, gasoline, building materials and food services) increased 0.4% in September.
Keep in mind that the retail sales numbers aren’t adjusted for inflation, so some changes in retail sales reflect price shifts instead of different volumes of goods and services purchased.
The Consumer Sentiment Index from the University of Michigan increased a little from the end of September to mid-October. The index, as of mid-October, was 59.8, the highest level in six months and above the 59.6 level registered at the end of September.
The Empire State Manufacturing Index declined to negative 9.1 in October from negative 1.5 in September. That’s the third consecutive decline in the index. Businesses responding to the survey indicated they don’t expect business conditions to improve in the next six months.
Industrial production increased 0.4% in September, bouncing back from a 0.1% decline in August. Over 12 months, industrial production increased 5.3%.
Manufacturing production increased 0.4% in September and 4.7% over 12 months.
Pessimism continues to increase among home builders. The Housing Market Index from the National Association of Home Builders (NAHB) declined for the 10th consecutive month in October to 38. It was 43 in August and was twice the October level six months ago.
The October level is the lowest since August 2012, except for the months early in the pandemic.
The increase in mortgage rates to around 7% is the major factor in the latest decline in the index. Also hurting the new home market are high home prices and continuing supply issues.
The latest data on housing starts shows the home builders’ pessimism is warranted. Housing starts declined 8.10% in September from August’s level. Starts in September were 8.10% lower than they were 12 months earlier. In August, starts were 13.7% higher than 12 months earlier.
New unemployment claims increased by 9,000 to 228,000, a six-week high. A five-month low in new claims was registered only two weeks earlier. Some of the increase was a result of Hurricane Ian’s impact on Florida.
Continuing unemployment claims increased to 1.368 million from 1.365 million.
The Markets
The S&P 500 rose 3.74% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 4.51%. The Russell 2000 increased 3.85%. The All-Country World Index (excluding U.S. stocks) added 2.81%. Emerging market equities advanced 1.65%.
Long-term treasuries lost 1.54% for the week. Investment-grade bonds increased 0.17%. Treasury Inflation-Protected Securities (TIPS) added 0.18%. High-yield bonds gained 2.02%.
On the currency front, the U.S. dollar declined 1.05%.
Energy-based commodities fell 2.59%. Broader-based commodities declined 2.96%. Gold dipped 0.89%.
Bob’s News & Updates
My next book will be “Retirement Watch: The Essential Guide to Retiring in the 2020s.” The official publication date is Jan. 3, 2023. You can make a pre-publication order or learn more about the book by clicking here and here.
My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It’s received mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.
The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.
A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”
If you’re interested in my books, check my Amazon.com author’s page.
I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.
