Buy U.S. Series I Savings Bonds with a portion or all of your tax refund for yourself or anyone. Issued by the Department of the Treasury, Series I bonds are low-risk bonds that grow in value for up to 30 years. While you own them they earn interest and protect you from inflation.
Just tell your tax preparer you want to buy savings bonds with part or all of your refund! If you prepare your own return using tax software, the computer program will guide you. If you file a paper return, use Form 8888, Allocation of Refund (Including Bond Purchases)PDF. The instructions explain what you need to do.
Part 2: The IRS will forward your request for savings bonds to the Treasury Retail Securities Site. It will take them up to three weeks to send your bonds to you at the address on your tax return. You can call the Treasury Retail Securities Site at 844-284-2676 to check on the status of your bond issuance.
The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.
Bonds are generally considered a less-risky asset than stocks. Still, they haven't been immune to the selloff investors experienced this year that has sent all three major stock market indexes tumbling into bear markets. The Federal Reserve has been raising interest rates to battle high inflation and most recently hiked rates by three-quarters of a percentage point for the third time in a row. The Bloomberg Global Aggregate Index of government and corporate bonds is down more than 20% since the beginning of the year, signaling the global bond market has entered a bear market for the first time in around three decades.
There is a wide variety of types of bonds, with different payment timelines and minimum investments. Most bonds offer fixed coupon rates. But the interest on the Series I Savings Bond or I bond, for example, is made up of both a fixed rate and an inflation rate, which can change every six months. The duration on bonds vary, too, with most falling between one year and 30 years.
But when bond prices move down, bond yields move up. The reasoning comes down to supply and demand within the bond market. When there is less demand for bonds, new bond issuers have to offer higher yields to attract buyers. Meanwhile, bonds with lower yields that are already on the market become less valuable by comparison.
\"It's a bad year if you held bonds starting on January 1st,\" explains James J. Burns, certified financial planner and president of JJ Burns & Company. \"It's a great year for someone who's got cash to invest.\"
And actually moderating how much risk you take is much easier in bonds than in stocks: If you want to have a low-volatility bond portfolio, you buy bonds with shorter durations and higher credit quality, Plecha explains. (Credit quality refers to how likely a borrower is to repay their debt. Shorter-term bonds are less volatile because you're not locking up your money as long.)
Typically when you're young, financial advisors tend to say you shouldn't have a lot of money invested in fixed income. Instead, you may want to establish an emergency fund first, and then invest money you won't need in the near future in stocks. But as you get closer to retirement, you likely want to invest in bonds because they allow you to preserve capital and have more predictability.
If you're far from retirement but have short-term goals, bonds may also make sense, she adds. For example, if you're planning to pay for a child's education, you might want to buy some bonds that mature during that child's school year so you can use that money to help with the bill. The same goes for plans to buy a home anytime soon.
\"If someone is really trying to stretch for something high yielding really because it looks shiny, that may be where there could be a bit more trouble,\" says Adam Shealy, senior investment analyst at Homrich Berg. While higher-yield bonds may also see higher returns, there is greater risk that the issuer will default on the debt.
There are many different ways to buy bonds, and the process is sometimes (but not always) as easy as buying stocks or ETFs. You can head to TreasuryDirect.gov to buy bonds directly from the federal government. Money has a whole guide to buying I bonds this way.
The table below summarizes what I found when dividing all months over the past four decades into four groups, according to their real interest rates. Regardless of whether I focused on bond returns over the subsequent 1-, 5- or 10-year periods, bonds earned higher inflation-adjusted returns when real rates at the start of those periods were higher. This pattern is significant at the 95% confidence level that statisticians often use when determining if a pattern is genuine.
Yields on high-grade corporate bonds appear compelling. However, from a credit-spread perspective, we see too little compensation above risk-free Treasuries given the late-cycle risks in the market.Spreads do have room to widen, but a renewed investor appetite for higher-quality bonds may put a ceiling on how wide spreads could drift.
We expect tighter financial conditions to crimp corporate finances broadly. Rising stars (company upgrades from high yield to investment grade) outpaced fallen angels (downgrades from investment grade) by a wide margin over the past two years. Still, we expect more downgrades in 2023, especially in lower-quality cyclical segments. The depth and duration of any market downturn would determine the impact, but we see that most companies are prepared for a normal recession.Within a more modest allocation to investment grade, we see value in higher-quality issues within financials, utilities, and noncyclical industries. We prefer noncyclical companies because they tend to retain earnings resilience during economic downturns. Though bonds of cyclical companies can have higher spreads at challenging times, they currently trade in line with noncyclicals, another reason we see noncyclicals as the better bet.
Some stabilization in U.S. Treasury rates could be a catalyst for emerging markets (EM) inflows. We saw that occur over the last few months of 2022 during a period of light EM bond issuance, and historical data suggest an improving trend. That should bolster the supply/demand picture for EM, as we see another year of net negative supply.Our more favorable view on the sector late last year benefited from the 125 bps rally in spreads, but it leaves us less constructive today with valuations no longer cheap.Country fundamentals are broadly stable, but we anticipate significant credit differentiation as the global economy slows down in 2023. This will create opportunities for relative value and active management.Our preference for higher-quality bonds is balanced by the fact that spreads in investment-grade EM are very tight and additional borrowing is likely. The high-yield segment of EM offers much more compelling valuations but is also the most vulnerable to further economic disruption.We see 2023 as a market where the best strategy is to be defensive but agile, with enough liquidity to act on new opportunities that arise.
Note: Chart represents change in yields above U.S. Treasuries of similar duration for U.S. corporate bonds, and the difference in yields between AAA and BBB rated segments of the municipal market.
And I understand the sentiment. If we compare the starting yield on 10-Year U.S. Treasury Bonds to the real return on U.S. bonds over the next decade, you can see that there is a positive relationship:
Though expected bond returns are likely to be low for the next decade, during periods of market turbulence bonds tend to do quite well. For example, U.S. bonds were up 2% while the S&P 500 was down 23% on April 1, 2020:
In addition to providing a counterbalance to the stocks in your portfolio, bonds can also provide added return through periodic rebalancing. Rebalancing improves returns because it forces you to sell assets that are doing well and buy assets that may be temporarily depressed. As long as those temporarily depressed assets recover in price, then this method can be quite profitable.
This is evidence that holding and rebalancing with bonds can boost your portfolio returns, but only during periods of major market turbulence. More importantly, as you increase your bond exposure (10%, 20%, 30%, etc.) the improvement in returns during these periods increases as well.
So, if you want to take risk off the table, bonds are really your only option. You could hold cash, but you are likely to lose even more of your purchasing power with cash than with bonds. Yes, you could add other kinds of bonds (with higher yields) to your portfolio, but these kinds of bonds usually come with increased risk. There is nothing wrong with chasing after yield, but you should consider the tradeoffs before doing so.
It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors. After years of low yields followed by a brutal drop in prices during 2022, returns in the fixed income markets appear poised to rebound. It's likely to be a bumpy ride due to the cross currents created by global central banks' tightening policies, a volatile global economy, and ongoing political uncertainty here and abroad. Despite these challenges, we see opportunities in 2023 for the bond market to provide investors with attractive yields at lower risk than we've seen for several years.
With starting yields low and the rate of change in tightening so fast, nearly every segment of the fixed income markets experienced declines, especially bonds with long durations. In fact, performance in 2022 year to date has been an anomaly. Even in past periods of sharply rising interest rates, bonds have usually delivered positive returns since the income from a bond's coupon offset price declines. However, during 2022, without the