With inflation falling, the popular bond trades of the past few years are no longer attractive anymore.
Kerry Hannon from Yahoo Finance reports:
It’s a good time to sell those bonds you bought when they became popular two years ago amid sweltering inflation, which pushed the annual rate to 7.12% in November 2021, and a record high of 9.62% in May 2022.
The lofty annual rate has since stabilized as inflation has declined, and I bonds raised during those heady days pay about a third of those ungodly rates, or 3.97%.
this is the reason. The bond rate I consists of a fixed rate, which applies to the 30-year life of the bond, and a semi-annual variable inflation rate calculated from the six-month change in the consumer price index.
The most recent I bond has an annualized yield of 5.27% — a whopping 1.30% fixed rate, plus a variable rate of 3.97% that will reset again in May.
By contrast, the fixed bond rate in November 2021 and May 2022 – when inflation was rising – was 0%. This means that those old bonds are now earning the current variable rate, period.
Takeaway? Recover and reinvest.
“I personally have sold my own products and advise clients to do the same,” Danielle Howard, a certified financial planner with Wealth By Design in Glenwood Springs, Colorado, told Yahoo Finance. “Depending on individual cash flow considerations, we look at money markets, ladder CDs, and corporate bond issuances.”