As Yields Soared, Government Bond Accounts Rose Fivefold

During last year's market turmoil, investors sought safety from Uncle Sam - that is, they purchased Treasury bonds directly from the government through more than 3 million accounts.

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The U.S. government offers savings bonds and Treasury securities through TreasuryDirect.gov, which was created by 3.6 million savers in 2022. About five times more accounts have been opened than in 2021, when 689,369 were opened.

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There are a couple of events in the market that coincide with the spike in investor interest in the website.

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A federal government-issued inflation-protected asset, Series I savings bonds are largely risk-free and inflation-protected. Often, these bonds come with a fixed interest rate as well as an inflation-linked interest rate.

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A composite rate of 9.62% was announced by the Bureau of Fiscal Service for the first six months after I bonds were issued in May 2022. It's still a great deal to issue bonds between November 1, 2022, and April 30, 2023, even if they have a low interest rate compared to last year's bonanza.

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TreasuryDirect limits I bond purchases to $10,000 per calendar year for individuals buying I bonds. Paper I bonds can be purchased with your tax refund up to $5,000.

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If you decide to take out an I bond, make sure you are comfortable with the idea. The last 3 months of interest will be lost if you redeem it before five years despite being able to cash it in after 12 months.

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Yields on Treasury bonds are rising

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Rate hikes by the Federal Reserve, which started a year ago, caused bond yields to rise. Income-focused investors who wanted to buy Treasury securities were able to buy them at a low cost, even though these declines were bad news for people with diversified portfolios.

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As a matter of fact, the yield on the 10-year bond surged to 4% in the fall of 2022, from around 1.5% at the beginning of the year. Inversions of the yield curve, characterized by higher yields on near-dated bonds than long-dated bonds, have also made Treasury bills particularly attractive. T-bills with a 6-month maturity yield 4.91%.

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Laddering T-bills can provide investors with a little more yield than otherwise idle cash.

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You can also buy Treasurys directly from TreasuryDirect.gov rather than through a brokerage firm.

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A Treasury auction takes place there, and you set up an account, link your bank, and participate. Every week, T-bills for four weeks, eight weeks, thirteen weeks, and 26 weeks are auctioned. A quarterly auction is held for 10-year Treasury securities and a monthly auction for two-year notes.

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Bonds with attractive yields and regarded as risk-free may not keep pace with inflation, even though they offer attractive yields. Be careful about how much you stash in these government bonds as you may miss out on investment opportunities in stocks.